Barclays - Global top Picks 2011

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December 2010


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Barclays Capital | Global Top Picks 2011


                                     Our inaugural Barclays Capital Global Macro Survey of more than 2,000 institutional
                                     investors found 40% of respondents favoring equities as the asset class of choice in 2011.
                                     Our equity strategists share clients’ sentiment, and expect robust corporate profitability
                                     going into 2011, even if they caution investors to expect bouts of volatility and potential
                                     weakness, as markets react to continued signs of sovereign debt pressures and central
                                     banks signal their readiness to pull back from easy monetary policy.

                                     Although investors (and our strategists) expect a favorable environment for equities, 86%
                                     of clients surveyed said the U.S. is set to experience a period of below-trend growth and
                                     46% cited a slowdown in China as a key risk to EM economic performance. In this context,
                                     to help our readers better assess the risk-adjusted return potential of our global top picks,
                                     we have asked our analysts this year to quantify the range of realistic upside and downside
                                     scenarios that could play out over the next 12 months.

                                     In the past year, we have continued to grow our global equity franchise – we are continuing
                                     to expand our coverage in EMEA, Japan, Canada and Latin America, and have launched
                                     coverage in Asia and South Africa. Over the past 18 months, our coverage universe has
                                     increased by 70 percent and we have also greatly expanded our global macro offerings.
                                     Against this backdrop, and consistent with our commitment to providing clients with
                                     insightful research, we have asked our fundamental analysts to identify alpha-generating
                                     stock ideas. In this publication, we present 122 top picks for 2011, reflecting our analysts’
                                     strongest conviction calls across the Americas, EMEA and Asia-Pacific.

                                     We thank you for the continued opportunity to help you achieve your investment goals, and
                                     look forward to another year of sharing our global industry expertise, access to corporate
                                     management and fundamental stock views.

                                     Stuart Linde
                                     Head of Equity Research
                                     Barclays Capital

Barclays Capital | Global Top Picks 2011

                   KEY FORECASTS                                                    KEY RECOMMENDATIONS
Equities              In the US, with earnings likely to rise smartly, an              In the US, we recommend a more aggressive sector stance
                      improving macro outlook and ultra-easy Fed policy,               entering 2011. Pare back exposure to the developing world in
                      our base case for the S&P 500 at year-end 2011 is                favor of developed world companies with significant exposure
                      1,420 (the product of $91 operating EPS and a 15.6x              to emerging economies. We recommend US industrials,
                      multiple).                                                       technology, and energy, which benefit from an improving
                      European equities continue to benefit from low valuation         domestic growth outlook.
                      levels and moderate economic improvement, reflected in           In Europe, we prefer the emerging markets-leveraged basic
                      improving profitability and free cash flow generation. We        resources, industrials and personal & household goods, the
                      re-emphasize our 2011 year-end target of 325 for the             high-beta financial services, and the inflation-exposed food
                      STOXX 600 and 3350 for the Euro STOXX 50.                        retail.
                      In Japan, we believe that the continued earnings recovery        In Japan, exporters with a large percentage of sales in Asia
                      among Japanese exporters, combined with the                      have posted substantial improvements in capital efficiency,
                      expectation for depreciation of the yen against the dollar,      which we expect to continue through 2011, particularly in
                      will enable the Nikkei Average to test 12,000 at the end of      the automobile and machinery sectors.
Bonds                 After the recent large sell-off, rates should stay range-        Near term, neutral on US rates, but we expect a sell-off to pick up
                      bound for a few months before resuming their rise                pace in H2 11. We look for wider swap spreads medium term
                      next year. A continued economic recovery and the                 (on the still deteriorating fiscal situation).
                      gradual removal of policy accommodation should                   We recommend closing short duration positions in the euro
                      pressure yields higher, but that will likely be offset by        area and being long 10y versus 2y and 30y in euro rates.
                      strong Fed buying and the recent trend in inflation              Cross market, we do not have very strong views anymore: we
                      data.                                                            are biased long EUR vs US in 10s but are now broadly neutral
                      The euro area peripheral problems will likely continue           on UK vs EUR (from long).
                      to have a modest effect on the level of rates. We                We like being long Gilt and Bund ASW and in 10/30 ASW box in
                      expect the US rate outlook, as well as the ECB stance,           EUR. On peripherals, we keep positions small, but expect Spain
                      to remain the key drivers. Rates are not looking                 to tighten over the next few quarters.
                      obviously rich anymore: we expect a stabilisation. Over
                      the year, peripheral spreads should tighten.
Commodities           Demand fundamentals continue to improve, with various            Long crude oil, as demand continues to grow strongly,
                      commodities on track to set new highs this year and next.        inventories contract fast and spare capacity is eroded.
                      This is already reflected in tighter price spreads in            Long copper, as global demand continues to outperform
                      various markets, with crude oil and copper stocks                expectations, against a backdrop of tight raw material
                      falling rapidly and moving into backwardation.                   availability.
                      The global cycle is still very positive for commodities,         Long gold in the near term, as macroeconomic uncertainties,
                      which usually perform best later in it. In the short term,       including sovereign debt risk, remain.
                      seasonal factors, especially cold weather, also pose             Long corn, which is aided by extremely tight stocks, lower US
                      upside risk to various commodity market balances.                production and higher Chinese demand.
Inflation             While longer-dated breakevens in most markets reflect            Value in 2-5y breakevens in US, euro and UK. Despite
                      expansionary policy stances, sub-5y breakevens                   negative real yields, outright short-end exposures appear
                      remain uncomfortably low versus central bank                     attractive as low volatility allocations in broad portfolios.
                      inflation aims.
Credit                We expect investment grade spreads to tighten                    The deleveraging cycle has largely come to an end, and event
                      moderately in 2011, driven by financials compressing             risk will be an increasingly important factor in the
                      further versus industrials and outperformance of the long        performance of single names.
                      end.                                                             BBs are still attractive relative to BBBs. We prefer selective
                      High yield should generate attractive excess and total           investing in CCCs, where specific situations have the
                      returns. But the double-digit returns earned over the past       potential to generate outsized returns.
                      two years will be difficult to replicate.
Emerging              We believe the global recovery is on solid ground,               High-quality external debt should outperform US rates, but earn
                      monetary policy is at depression-fighting levels, and            bond-like returns; we favour high-yielders such as Argentina and
                      EM economies are generally in a good spot.                       Venezuela. Equities should outperform bonds.
                      Investors should note the possibility that this widely           In some markets, FX valuations are becoming stretched, and EM
                      shared consensus drives valuations and positioning to            policy authorities are likely to continue intervening to resist
                      levels that increase market vulnerability to events              appreciation. Be selective and look for protection from tail risks.
                      outside the benign base case. We adopt a positive                We like the PHP, MYR, and CLP and find interesting tail-risk
                      directional view, but look for efficient hedges for tail         trades in the IDR, KRW, and Turkish rates.
Foreign               Peripheral euro area issues will likely pull the EUR lower in    Sell NOK/SEK.
                      the next quarter, but monetary policy will weigh on the          Short AUD/CAD.
                      USD.                                                             Long GBP/JPY.
                      Monetary policy in the major economies and robust
                      global growth will be supportive of EM and commodity
                      GBP still the most attractive G4 currency.
Extracted from the Global Outlook: Don’t fight the reflation trade, 9 December 2010.

Barclays Capital | Global Top Picks 2011


   MACRO & STRATEGY OUTLOOKS               92    UnitedHealth Group                   EMEA
   6   Economic Outlook                    93    Universal Health Services            BASIC INDUSTRIES
  20   Equity Strategy                                                          125   Clariant
  38   Quantitative Strategy                     INDUSTRIALS                    126   Israel Chemicals Ltd.
  45   Convertibles Strategy                94   AMR Corp.                      127   Xstrata plc
  50   Derivatives Strategy                 95   Crown Holdings Inc.
                                            96   Dana Holding Corp.                   CONSUMER
       TOP PICKS 2011                       97   FedEx Corp.                    128   Anheuser-Busch InBev NV
       AMERICAS                             98   Fluor Corp.                    129   Reckitt Benckiser
       BASIC INDUSTRIES                     99   Illinois Tool Works Inc.       130   Richemont
                                           100   Rockwell Automation            131   Whitbread PLC
  59   Freeport-McMoRan C&G
                                           101   United Technologies
  60   Potash Corporation of
       Saskatchewan Inc.                                                              ENERGY & POWER
  61   Vale                                      INTERNET & MEDIA               132   Afren Plc
  62   Weyerhaeuser Co.                    102   DIRECTV                        133   BG Group
                                           103   Walt Disney Co.                134   Motor Oil
       CONSUMER                            104   Yahoo! Inc.                    135   Rosneft
  63   Gafisa                                                                   136   Tecnicas Reunidas
  64   Grupo Modelo                              POWER & UTILITIES
  65   Kraft Foods                         105   AES Corp.                            FINANCIAL SERVICES
  66   Lennar Corp.                        106   ITC Holdings                   137   HSBC Holdings PLC
  67   Newell Rubbermaid Inc.              107   Sabesp                         138   ICAP PLC
  68   PepsiCo Inc.
  69   Royal Caribbean                           REAL ESTATE                          HEALTHCARE
                                           108   CB Richard Ellis Group, Inc.   139   Shire
  70   Apache Corp.                              RETAIL                               INDUSTRIALS
  71   El Paso Corp.                       109   Coach, Inc.                    140   BMW
  72   Hess Corp.                          110   Darden Restaurants             141   British Airways PLC
  73   National Oilwell Varco              111   Kohl’s Corp.                   142   Outotec Oyj
  74   Sunoco, Inc.                        112   PetSmart                       143   Rolls-Royce PLC
  75   Whiting Petroleum
                                                 SERVICES                             INTERNET & MEDIA
       FINANCIAL SERVICES                  113   DeVry Inc.                     144   Lagardere SCA
  76   ACE Limited                         114   Manpower Inc.
  77   CI Financial Corp.                  115   The Geo Group                        POWER & UTILITIES
  78   Hartford Financial                                                       145   E.ON
  79   Invesco Limited                           TECHNOLOGY                     146   Vinci SA
  80   Itaúsa                              116   Apple, Inc.
  81   JPMorgan Chase & Co.                117   Corning Inc.                         REAL ESTATE
  82   MasterCard Inc.                     118   Juniper Networks               147   SEGRO
  83   Porto Seguro                        119   MEMC Electronic Materials
  84   TCF Financial                       120   Oracle Corp.                         RETAIL
                                           121   QUALCOMM, Inc.                 148   Carphone Warehouse Group PLC
       HEALTHCARE                          122   Western Union Co.              149   Tesco
  85   Agilent Technologies
  86   Cardinal Health                           TELECOMMUNICATIONS                   TECHNOLOGY
  87   Covidien Plc                        123   Brasil Telecom SA              150   ASML Holding NV
  88   Merck & Co.                                                              151   Temenos
  89   Onyx Pharmaceuticals
  90   QIAGEN N.V.
  91   Teva Pharmaceutical

Barclays Capital | Global Top Picks 2011

       TELECOMMUNICATIONS                             INTERNET & MEDIA                              TECHNOLOGY
 152   Telenor ASA                              165   Rakuten Inc.                            173   Asahi Glass Co., Ltd.
                                                                                              174   Hitachi High-Technologies Corp.
       ASIA-PACIFIC                                   POWER & UTILITIES                       175   HTC Corp.
       BASIC INDUSTRIES                         166   Tokyo Electric Power Co., Inc.          176   Konami Corp.
 154   AIR WATER Inc.                                                                         177   Lenovo Group Ltd.
                                                      REAL ESTATE                             178   Nidec Corp.
       FINANCIAL SERVICES                       167   Frontier Real Estate Investment         179   Sony Corporation
 155   Bank of China Limited                          Corp.                                   180   TPK Holdings Co. Ltd.
 156   Bank of Kyoto Ltd.                       168   Sekisui Chemical Co., Ltd.              181   TSMC
 157   Hang Seng Bank Ltd.                      169   Sumitomo Realty & Development
                                                      Co., Ltd.                                     TELECOMMUNICATIONS
 158   Mizuho Financial Group Inc.
                                                170   Sun Hung Kai Properties Ltd.            182   NTT
 159   Ping An Insurance

                                                171   ABC-Mart
 160   Chugai Pharmaceutical Co., Ltd.
                                                172   Esprit Holdings Limited

 162   East Japan Railway Co.
 163   Minebea Co., Ltd.
 164   Yangzijiang Shipbuilding
       (Holdings) Ltd.

                     All data, including ratings, estimates and price targets are as of December 9, 2010, unless otherwise specified.

                                                                                                     Printed on December 14, 2010.

Barclays Capital | Global Top Picks 2011

                                           MACRO & STRATEGY OUTLOOKS

Barclays Capital | Global Top Picks 2011


                                          Recovery on track, despite slower growth in EM
                           Piero Ghezzi      We expect a moderate slowdown in the global economy, due mainly to a decline in
             +44 (0) 20 3134 2190            export growth and fiscal consolidation in Asia.
                                             Risks in Europe are still significant. However, we do not think Spain needs a loan
                                             programme, and we believe Ireland is more sustainable than Greece. The ECB will
                             Luca Ricci
                                             need to keep stepping up its measures.
                   +1 212 526 9039
              Asia’s contribution to global imbalances is expected to contract, but not because of
                                             currency appreciation.
Reprinted from the Global Outlook,
      Don’t fight the reflation trade        Easy money in advanced economies is generating policy dilemmas in emerging markets.
                (9 December 2010)

                                          Global economic performance
       We expect global growth to         We expect global growth to slow moderately, to about 4.25% in 2011 from 4.9% in 2010
      slow, mainly because of Asia        (Figure 1). The slowdown is mainly the result of softening emerging world growth
                                          (particularly Asia and Latin America), which we expect to decrease to about 6.5% in 2011
                                          from 7.8% in 2010. EM countries are adjusting towards sustainable growth after the strong
                                          rebound following the crisis, owing to the softening of domestic fiscal impulse and external
                                          demand. China is likely to remain the single largest contributor to global growth at more
                                          than 1% (ie, 25% of global growth). At this point, China’s import share of world exports is
                                          about to overtake the declining share of the US (Figure 2). 1 US, euro area, and China
                                          business confidence appear quite synchronized at the moment, after the strong leading role
                                          played by China during the recovery and subsequent growth resurgence.

Growth in the developed world is          We expect growth in the developed world to weaken modestly in 2011 (from 2.5% to
   set to weaken modestly, while          2.4%), mainly due to slower performance in Japan. Conflicting signals about the strength of
                   surging in the US      the US recovery may continue in coming months, but we expect growth to increase towards
                                          H2 11 and US growth for 2011 as a whole to accelerate slightly relative to 2010 (at 3.1%

Figure 1: Contribution to global growth                                       Figure 2: China’s global import share is reaching US’s level

  6                                                                                                Goods imports as share of world exports
  5                                                                             25
  0                                                                             10
 -2                                                                              5
         2007        2008         2009    2010      2011        2012
              Euro area                     Developed ex-euro                    0
              China                         India                                    00   01     02     03     04      05      06   07   08    09        10
              Other EM                      Residual                                                                China           US

Source: Barclays Capital                                                      Source: IMF, Haver Analytics, Barclays Capital

                                            This somewhat overestimates the role of Chinese domestic demand in supporting global demand, to the extent
                                          imported goods are used for re-exports (see China’s global significance, 28 September 2009).

Barclays Capital | Global Top Picks 2011

                                              versus 2.8%). Barring deep financial turmoil, Europe is likely to continue its recovery with an
                                              uneven pattern. Growth is likely to move beyond Germany (which experienced a sizable
                                              rebound that we expect to slow in coming quarters) toward the rest of the euro area. Other
                                              core countries are likely to be highly synchronized with Germany over the next two years, as
                                              German growth moderates to more sustainable levels. Even peripheral countries (with the
                                              exception of Portugal) could see better growth numbers in 2011 relative to 2010, a much-
                                              needed relief for their financial situations (Figure 3).

        Global imbalances are not             We do not see global trade imbalances returning to pre-crisis levels anytime soon, but neither
   returning to pre-crisis levels…            are they falling consistently (Figure 4). We expect global trade to slow following an adjustment
                                              to the large post-crisis trade growth rebound, coupled with a moderate global growth
                                              slowdown. With the notable exception of the US, most countries are expected to reduce their
                                              current account-to-GDP ratios over the next two years. We expect Asia to shrink its current
                                              account from 3.4% of GDP in 2010 to about 2.3% in 2012, with contractions of similar
                                              magnitude in Japan (from 3.5% to about 1.9%) and China (from 5.3% to 4.3%). The main
                                              driver is not a change in the real exchange rate but a reduction in external demand, as global
                                              trade softens after the strong rebound in the aftermath of the crisis. Despite shrinking current
                                              account surpluses, reserve accumulation is likely to continue to be sustained in the emerging
                                              world, as large capital inflows remain driven by copious liquidity in advanced economies.

    … while the US deficit widens             We expect the US, however, to widen its current account deficit from about 3.6% in 2010 to
       due to strong consumption              5.2% in 2012. This is not only because of the limited expected adjustment in the Chinese
            spurred by wealth effects         currency, but also because we forecast a strong domestic consumption rebound in the US,
                                              driven by low interest rates and wealth effects associated with an improving stock market.
                                              In the euro area, we see net exports as likely to experience only moderate growth in
                                              2011-12. For strong exporters such as Germany, the constraints will come more from
                                              external demand. In several other countries, especially in the periphery, a key factor remains
                                              the loss of competitiveness associated with the persistent real exchange rate appreciation,
                                              coupled with the more costly access to credit owing to fiscal and financial imbalances.

                                              This pattern would be of concern to US policymakers aiming for higher growth and
                                              employment. Movement in the renminbi is unlikely to have a significant effect on bilateral
                                              trade and promote US exports. Also, more limited Asian savings may lower traditional
                                              demand for US securities, which acts similarly to QE2 at present, thus pushing for a possible
                                              extension of QE2 at the margin.

Figure 3: Even peripheral Europe is “rebounding”                            Figure 4: Current accounts, % of GDP

             y/y %                                                                  %
  10        change                                                             8
   4                                                                           4
  -2                                                                           0
  -8                                                                          -4
       00    01   02    03   04    05   06   07   08   09   10   11   12
                                                                                   08             09           10           11            12
                       Greece           Ireland        Italy
                       Portugal         Spain          Germany                                         US   EM Asia     Euro area

Source: Haver Analytics, Barclays Capital                                   Source: Barclays Capital

Barclays Capital | Global Top Picks 2011

                                                                        Living on different planets
               Two-speed Europe again                                   Over the past few months, American and European policymakers have been sending very
                                                                        different signals in terms of their diagnosis of the current economic situation. Euro area
                                                                        policymakers appear to believe high unemployment and low growth is mostly a structural
                                                                        problem and, hence, not much can be achieved through additional loosening of monetary
                                                                        and fiscal policy. Indeed, because of fiscal concerns related to peripheral countries, euro
                                                                        area policymakers believe it is necessary to start tightening fiscal policy sooner rather than
                                                                        later, even in core countries in which markets remain untroubled. US policymakers appear
                                                                        to be taking a different approach: in their view, most of the increase in unemployment is
                                                                        cyclical and, hence, may be addressed through further monetary easing.

 The divergence reflects differing                                      The two approaches may reflect differing realities, as one could argue that European
       realities, as well as different                                  problems may be more structural than the US ones to a certain degree. Europe is showing a
          preferences and mandates                                      high degree of heterogeneity, again displaying the distinction between the core and the
                                                                        periphery that had become blurred in recent years. Core European countries have suffered a
                                                                        limited contraction in output and unemployment and now grow at pre-crisis levels –
                                                                        Germany recently printed a post-reunification-high PMI and has its lowest unemployment
                                                                        rate in the past 20 years (Figure 5). Meanwhile, with the exception of Italy, the periphery
                                                                        experienced a more pronounced contraction and a substantial rise in unemployment and is
                                                                        not expected to recover soon. The distinction between core and periphery is also evident in
                                                                        the housing price evolution (Figure 6), as most peripheral countries except Portugal
                                                                        experienced a boom.

                                                                        Hence, to the extent that one believes problems in peripheral Europe are structural, one
                                                                        would need to accept European problems as being more structural in nature. The poor
                                                                        growth and unemployment in peripheral Europe and its deeper financial weakness are
                                                                        mainly associated with the persistent lack of adequate structural reforms, traditionally
                                                                        overvalued real exchange rate, and excessive borrowing over the past decade.

 Europe-US: Similar weaknesses,                                         A second crucial reason to believe problems may be a bit more structural in Europe than in
       but distributed differently…                                     the US is that the financial adjustment is underway in the US, while it is still brewing in
                                                                        Europe. The real estate price correction returned prices to 2004 levels in the US. A similar
                                                                        adjustment has been made only in Ireland; Greece and Spain have had similar price
                                                                        increases since 2004, yet limited adjustments so far. In the US, returns on high yield and

Figure 5: European unemployment is very uneven                                                                         Figure 6: Real estate prices in Europe and the US

 %, SA
 20                                                                                                                     550
 16                                                                                                                     450
  6                                                                                                                     250
  2                                                                                                                     150








                                                                                                                               95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
                         Spain                           Ireland                            Greece                                          US                  Greece       Ireland
                         Italy                           Portugal                           Germany                                         Spain               Germany      Italy

Source: Eurostat, Haver Analytics, Barclays Capital                                                                    Note: indexed, Q1 95 = 100.
                                                                                                                       Source: Eurostat, Haver Analytics, Barclays Capital

Barclays Capital | Global Top Picks 2011

                                                   investment grade bonds are at historical minimums after financial markets recovered from
                                                   the lending freeze of two years ago. Similarly, bank stress tests were more credible in the US
                                                   than in Europe, and the corporate sector balance sheet is in better shape.

               … and different policies            Those differences bear on different policy choices across the Atlantic, but the main
                                                   difference may be due to preferences. US and euro area monetary authorities clearly
                                                   respond to different mandates. The ECB insists its main mandate is inflation even when a
                                                   new financial crisis may unravel, while the Fed explicitly cites high unemployment as
                                                   motivating QE2. Indeed, while the Fed quickly implemented QE2, the ECB has been winding
                                                   down long-term support to banks even as peripheral Europe was experiencing increasing
                                                   pressure. Only after the negative market reaction to the Irish package did the ECB hint at
                                                   possible additional financial support and a potential delay in the liquidity withdrawal.
                                                   Perhaps the most striking difference in behaviour is the evolution of the Fed and the ECB’s
                                                   balance sheets (Figure 7). Fiscal expansion differences have also been noticeable, as the
                                                   expansion has been unprecedented in the US and more limited in Europe (Figure 8).

                                                   Euro area bank and sovereign debt: Pre-emptive action needed2
      After a period of tranquility,               Sovereign bond markets of euro area periphery countries have been under intense pressure
          rising bond yields and CDS               recently (Figure 9). Investors have continued to differentiate among periphery countries:
               spreads, along with the             yields on Italy’s sovereign debt decoupled from the yield increase observed for Irish,
     likelihood of contagion, have                 Portuguese, Greek and Spanish sovereign debt (Figure 10). However, concerns about the
            been pushing EUR down                  ability of Irish and Spanish banks to fund themselves in the markets; questions about the
                                                   political sustainability of harsh fiscal adjustment programmes in Ireland, Portugal and
                                                   Greece; policy slippage in terms of the budget execution in Portugal; and, importantly, the
                                                   German proposal for an orderly crisis resolution mechanism (CRM) discussed at the EU
                                                   summit in late October have led to rising uncertainty and nervousness among investors.

   So far, the extensive measures                  We regard recent news about the loan programme for Ireland and its underlying details as
  taken to reassure markets have                   undoubtedly positive and conducive to overall improved risk sentiment. However, the sheer
                  not proven sufficient            existence of the EU financial backstop facility (ESA/EFSF/EFSM), coupled with IMF support,
                                                   restrictive fiscal policies in the peripheral countries and an overall expansionary monetary

Figure 7: Fed and ECB total assets                                                     Figure 8: Public debt in US and euro area

   $, bn                                                               €, bn               %
 3000                                                                      2500         100
                           Fed total assets, lhs                                          90
 2500                                                                                                          Euro area
                           ECB total assets, rhs
 2000                                                                                     80
 1500                                                                                     70
 1000                                                                                     60

                                                                            500           50

      0                                                                     0             40
          00     01   02     03    04   05    06       07   08   09   10                       00   01    02     03    04    05     06    07    08    09     10    11    12

Source: ECB, Haver Analytics, Barclays Capital                                         Source: Eurostat, US Treasury, the Federal Reserve, Haver Analytics, Barclays Capital

                                                    This section borrows from Euro area bank and sovereign debt, 30 November 2010, written by Frank Engels, Antonio
                                                   Garcia Pascual, and Piero Ghezzi.

Barclays Capital | Global Top Picks 2011

                                                                         policy stance in the euro area, do not seem to have been sufficient to convince financial
                                                                         markets that the problem in selected peripheral European sovereigns and related domestic
                                                                         banks might be manageable, suggesting the final chapter(s) of the euro area sovereign debt
                                                                         crisis has (have) yet to be written.

                                                                         Spain may determine whether European problems become systemic. On 7 July 2010 (see
                                                                         Spain: Solvent with risks), we estimated credit institutions would need about EUR46bn in
                                                                         additional capital, mainly from losses in the commercial real estate sector. We believe this
                                                                         estimate is still adequate, yet it is worth examining banks’ exposures to this sector in detail.

We still expect most of the losses                                       Commercial real estate is by far the riskiest segment in banks’ portfolios: most of the
  of Spanish credit institutions to                                      estimated losses stem from this segment. The NPL ratio for this sector has increased rapidly
  come from the commercial real                                          to nearly 12%. In sharp contrast, the NPL ratio for residential real estate loans is 2.5%
                                    estate sector                        (September 2010), and we think it is likely to peak well below 5%. We expect low default
                                                                         rates despite the sharp increase in unemployment, as monthly mortgage payments and
                                                                         affordability ratios have remained contained. More than 95% of residential mortgages are
                                                                         set at floating rates, linked to the very low Euribor, plus the average length for mortgage
                                                                         contracts at origination is nearly double their length in the mid-1990s. Additionally, there
                                                                         was a significant increase in wage income from the mid-1990s until 2007.

The residential real estate sector                                       Finally, the residential real estate sector has significant buffers against losses in the event of
        has significant buffers in the                                   default, even if NPLs were to increase to 4% from 2.5% currently (as they did in the mid-
                                  event of default                       1990s, when unemployment increased to nearly 24%). The availability of collateral and
                                                                         moderate loan-to-value ratios (LTVs) would limit potential losses. According to the Bank of
                                                                         Spain, the average LTV stands at c.65%.

                          Our updated debt                               Against this backdrop, our updated debt sustainability analysis shows Spain remains
       sustainability analysis shows                                     solvent. Even in a hypothetical stress scenario in which bank losses double our estimates
                    Spain remains solvent                                (EUR92bn), and assuming the state would need to absorb them, we estimate that public
                                                                         debt/GDP would peak at 84% by 2014, moving along a downward trajectory thereafter.
                                                                         Public debt would likely become explosive only if interest rates rise to 7% and stay at those
                                                                         levels or above thereafter.

Figure 9: 10y government bond yields (%)                                                                           Figure 10: Relative outperformance of Italian sovereign debt
                                                                                                                   (yield ratio, %)

                                                                                                                    4.0                                                                                                                         4.0
                              YTM (%), 10YR Government Bonds                                                                                   YTM(country)/YTM(Italy), 10YR Bonds
 12                                                                                                           12
                                                                                                                    3.5                                                                                                                         3.5
                                  Greece                       Ireland
                                                                                                                    3.0                              Ireland                             Portugal                                               3.0
 10                               Portugal                     Spain                                          10
                                                                                                                    2.5                              Spain                               Greece                                                 2.5
   8                                                                                                          8
                                                                                                                    2.0                                                                                                                         2.0

   6                                                                                                          6     1.5                                                                                                                         1.5
                                                                                                                    1.0                                                                                                                         1.0
   4                                                                                                          4
                                                                                                                    0.5                                                                                                                         0.5
   2                                                                                                          2     0.0                                                                                                                         0.0


















Source: Bloomberg, Barclays Capital                                                                                Source: Bloomberg, Barclays Capital

Barclays Capital | Global Top Picks 2011

       Our results suggest Spain       Our results thus suggest Spain would not need EU/IMF financial support. In our view, this
         would not need EU/IMF         makes it paramount that European policymakers take pre-emptive action to contain
                financial support      financing costs for viable banks and prevent the sovereign from reaching prohibitive levels.
                                       We believe targeted but sizeable policy action by the ECB would prevent liquidity problems
                                       of viable banks from affecting market perception of sovereign risk further, particularly for
                                       Spain and Ireland. This liquidity support could be conditional on further action to promptly
                                       resolve nonviable banks, which would be barred from tapping ECB liquidity facilities in the
                                       future. We think the ECB should also be ready to step up its Security Markets Programme
                                       (SMP). European countries should also consider adding more funds (we estimate
                                       EUR100bn is needed) to the European support programmes currently in place. This would
                                       bring total available funds to a level that could support Spain, even though we do not
                                       believe it would be necessary.

 We believe that Portugal’s core       Among the other three peripheral countries under market scrutiny, Portugal is the only one
       economic problem is low         without a programme. We believe low productivity growth lies at the core of Portugal’s
             productivity growth       economic troubles. The competitiveness gap with EU peers, at about 15%, remains
                                       substantial. Without a strong structural reform agenda, which the minority government lacks
                                       the political support to push through, Portugal is unlikely to grow out of its indebtedness. We
                                       think the banking system does not pose a significant threat to the Portuguese sovereign.
                                       Under an extreme but plausible stress scenario, we estimate recapitalization needs for the
                                       financial system would be c.EUR10bn (EUR8.5bn for the four largest banks). Portugal did not
                                       suffer a boom/bust in real estate as did Spain and Ireland. In fact, we would argue that
                                       Portuguese banks are the victims of a low-growth environment.

     The market has not reacted        The market has not reacted positively to the 2011 fiscal consolidation plan, which proposes
     positively to the 2011 fiscal     reducing the deficit from 7.3% of GDP in 2010 to 4.6% in 2011 (with more than 4% worth
              consolidation plan       of fiscal measures). Against this backdrop, in our baseline macroeconomic scenario for
                                       Portugal, public debt/GDP would reach about 100% of GDP by 2014. Average interest rates
                                       of 6% or above would fail to stabilize the debt-to-GDP ratio. We therefore believe Portugal
                                       should request financial support.

      We think it is still too early   In Greece, given the consolidation and reform measures implemented so far, we believe it is
   to consider debt restructuring      still too early to contemplate a pre-emptive debt restructuring because the costs would
                         in Greece     outweigh the gains. Until all the still significant unknowns about Greece’s ability to continue
                                       implementing its fiscal adjustment and its ability to grow are clearer, it is not possible to be
                                       categorical about its solvency.

   Fiscal adjustment could route       That said, six months into the EU/IMF programme, Greece’s fiscal performance is
     debt dynamics downwards,          improving: major reforms have been approved, and the fiscal budget is largely on target.
                     but only just     Based on our projections, fiscal adjustment would be sufficient to put the debt dynamics on
                                       a downward trajectory, but only just – slight deviations would take the debt dynamics on
                                       different trajectories. After adding up the 2010-14 fiscal measures, we estimate that public
                                       sector debt peaks in 2014 at 153% of GDP. The primary balance would reach 4% of GDP by
                                       2015 from -8.5% in 2009. Greek solvency is thus set to remain a concern for the time being.

  We believe it is unlikely Greece     While we acknowledge the downside risks to our baseline forecast and the related debt
  restructures its debt under the      sustainability analysis, we believe it is unlikely that Greece would pre-emptively restructure
       current EU/IMF package,         its debt under the current EU/IMF package. We do not think the European Stabilisation
     notwithstanding the recent        Mechanism (ESM) would increase the likelihood of that, as the Eurogroup proposal aims to
 Eurogroup proposal for an ESM         become only effective post-2013 (ie, after the expiry of the current EU/IMF programme for
                                       Greece). In addition, the proposed ESM would be based on a two-stage sequential

Barclays Capital | Global Top Picks 2011

                                      procedure in which a restructuring would only be considered once all other measures fail to
                                      generate sustainable public finances. In summary, we believe restructuring would make
                                      sense only once other options have been exhausted.

        We consider the EU/IMF        In Ireland, we consider the EU/IMF programme sufficient to address prevailing bank
programme sufficient to address       problems and ensure funding for the sovereign for up to three years. On this basis, and
    bank problems and fund the        taking a prudent approach to evaluate debt sustainability, we assume stress conditions
  sovereign for up to three years     prevail in Ireland. This could be the case in a baseline scenario of commercial real estate
                                      prices falling another 10-15%. Under these conditions and given fiscal consolidation
                                      measures of c.EUR15bn, in line with the government’s fiscal consolidation plan, public debt
                                      would peak at about 125% of GDP in 2013 and fall rapidly thereafter. We thus believe
                                      Ireland should be well equipped to tackle the pressing problems in its banks and restore
                                      market confidence in its corporate and sovereign debt markets. Most importantly, based on
                                      our assessment of remaining risk exposures in the banks and our medium-term DSA, we
                                      believe the sovereign remains solvent even if further unexpected loan losses were to occur.

                                      How much potential for contagion from Europe?
           It is crucial to prevent   A key question is: to what extent can losses in the countries subject to financial pressure be
        idiosyncratic losses from     transferred to other countries? Indeed, in a world of deep financial connections, a financial
             becoming systemic        shock can propagate quickly and extensively across financial institutions and countries. This
                                      was visible during the Asian crisis and has been confirmed during the global financial crisis.

                                      Figure 11 offers some indication in this respect, showing bank holdings in reporting
                                      countries (columns) of assets from borrowing countries or country groupings (rows). The
                                      figures encompass bank, non-bank private sector, and public sector lending, as reported
                                      from the BIS (ultimate risk basis). As claims do not account for the increasing use of
                                      derivatives, they can significantly underestimate actual exposures.

First round effect may be large…      Hence, lower bounds for first round effects can be read off the chart. A loss of 20% of assets
                                      in Greece, Ireland, and Portugal would imply an almost $160bn effect on European banks,
                                      concentrated in Germany, France and the UK, but also in Spain, which has an $80bn
                                      exposure to Portugal alone. A loss of 20% on Spain would have a similar effect on reporting
                                      banks ($130bn), concentrated in the same countries and the Netherlands, Italy and Greece
                                      are reasonably well insulated from losses in these countries. However, they have significant
                                      direct exposure to Emerging Europe ($160bn for Italy and 50% of assets for Greece).

   … and secondary rounds can         Obviously, these numbers give only an idea of the exposure. Subsequent rounds’ effects can
             strongly compound        quickly compound these figures. For example, about 15% of Italian assets are invested in
                                      Austria, which has a 50% exposure to EM Europe. If the country-specific problems become
                                      systemic, the losses could be an order of magnitude larger.

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Figure 11: Financial holdings of BIS reporting banks in assets of selected countries
Lender                           European
Borrower                          banks         Austria        Belgium   France    Germany    Greece   Ireland   Italy       Japan    Netherlands Portugal   Spain       Sweden Switzerland    UK        US
All countries                          17,443         465          382     3,238      2,992      133       549     871        2,294         1,225      139    1,257          670       1,602   3,782     3,092
Austria                                   272          NA            3        21         86        0         5     121            7             9        0        5            1          11       9         9
Belgium                                   467           3           NA        NA         35        0         6       4           16           109        0        6            3          13      30        44
France                                    789           9           58        NA        197        2        19      34           96            81        8       27           11          68     270       243
Germany                                 1,222          51           18       269         NA        6        30     261          162           156        5       40           71         108     175       234
Greece                                    147           3            2        57         37       NA         8       5            2             5       10        1            0           3      12         7
Ireland                                   423           4           29        44        139        0        NA      15           21            19        4       14            4          19     132        57
Italy                                     832          22           27       424        154        1        40      NA           38            43        4       33            1          13      67        35
Japan                                     460           1            1       145         60        0        15      NA           NA            12        0        1            1          75     144       313
Netherlands                               572          12           23       123        149        4        13      22           42            NA       11       19            9          41     140       124
Portugal                                  206           2            5        41         37        0         5       5            2             6       NA       78            0           3      22         3
Spain                                     647           7           20       165        182        1        27      26           22            73       24        0            4          13     105        52
Sweden                                    114           2            1        15         38        0         2       2           17             5        0        2           NA          10      23        23
Switzerland                               214          13            1        56         56        1         7      11           22            17        3        6            4          NA      39        85
United Kingdom                          1,852          22           43       315        462       18       196      42          154           121        8      383           36         197      NA       697
United States                           3,596          18           38       549        562        4        90      42          989           242        9      189           51         663   1,126        NA
Developed countries                    13,505         227          292     2,702      2,528       46       499     657        1,809         1,049       90      827          565       1,366   2,545     2,209
Europe                                  8,912         204          248     1,947      1,826       42       376     605          676           678       80      632          509        581    1,090     1,685
Other developed countries               4,593          22           44      756        702         4       123       48       1,132           372       10      196           56        785    1,455      524
Developing countries                    2,883         227           85      398        310        84        31     193          237           147       37      404           79        118     749       626
Africa & Middle East                      426            4           2      104         47         4         1       11          25             9        9           5         2         18     208           53
Asia & Pacific                            706            7           4      105         78         3         3       16         143            41        1           8         4         55     378       311
Latin America/Caribbean                   654            1           1       41         33         0         1           5       49            28       13      383            2         30     117       206
EM Europe                               1,097         215           79      148        152        78        25     161           20            69       15           8        72         16         46        56

Greece, Ireland, Portugal                 776            9          36      142        213         1        13       24          25            31       14       93            5         24     166           68
Peripheral Europe *                     2,254          39           83      731        548         2        80       50          85           147       41      126           10         50     338       156
Note: *Greece, Ireland, Italy, Portugal, Spain.
Source: Bank of International Settlements, Barclays Capital.

Barclays Capital | Global Top Picks 2011

                                           US: How effective will QE2 be?
       US growth and employment            We expect growth in the US to remain strong, thanks also to fiscal impulse from tax cuts,
        outlook to improve through         and reach 3.6% in 2012. So far, growth in labour-intensive sectors has been limited, thus
   2012 thanks to a pickup in the          preventing a decline in unemployment; however, we expect growth in services to pick up in
                       service sector      2011, bringing unemployment down to about 8.3% by the end of 2011.

        The Fed may continue QE2           The Fed continues to place employment and growth at the top of its priorities. Following the
                   easing after June       mixed signals reflecting recent weak payroll and employment numbers, the Fed hinted that
                                           quantitative easing may continue after the expiration of the current $600bn plan in June.

       The portfolio effect from QE2       The portfolio balance effect, intended as the main channel for QE2, was visible before QE2 was
started before the announcement            officially announced. Yields on investment grade and high yield bonds started declining since a
                                           hint at QE2 could be read in the FOMC statement following the 10 August meeting (Figure 12).
                                           At the same time, the dollar depreciated and the US stock market rose (Figure 13).

 Its main effectiveness on growth          In Channeling QE2: A modest upside risk to growth, 5 November 2010, we find that QE2 is
   and employment may need to              likely to provide a modest boost to growth over the next year. The effect is likely to be on
        rely on the exchange rate…         the order of 0.5%, about two-thirds of which is due to the effect of the exchange rate on
                                           trade and most of the rest due to a wealth effect on consumption. The more standard
                                           monetary channels are not expected to be large. The effect on those who still have limited
                                           access to credit may be muted, bank credit remains subdued, effective mortgage rates
                                           remain at the pre-crisis level, and credit standards have been significantly tightened.

     … but it has been valuable in         Even if the effect of QE2 on our baseline scenario for growth is modest, the main effect of
       reducing the risk of deflation      QE2 on the economy is probably that by increasing inflation expectations it reduces the
                                           probability of deflation tail risk significantly.

             Part of unemployment          We believe a substantial part of the increase in unemployment is structural. Reducing the size
                         is structural     of the construction sector will require a time-consuming reallocation of resources. Traditional
                                           labour mobility is impaired by the limited liquidity of real estate assets (often in negative
                                           equity), and the strong increase in long-term unemployment makes the unemployed less
                                           employable. According to our estimates, the NAIRU has increased to about 7% (Figure 14,
                                           see “High unemployment is here to stay”, Global Economics Weekly, 23 July 2010),
                                           suggesting the employment gap is about half of that estimated by the CBO (Figure 15).

Figure 12: Yields                                                        Figure 13: Stock market, dollar, and commodity prices

 %             Investment grade corporate bond yields (lhs)     %          Index, Aug. 10, 2010 = 100
 5.0           High yield corporate bond yields (rhs)            9.8      112                S&P 500          FOMC
                                                                                             CRB Spot
 4.8                                               Aug
                                                                          108                Trade-weighted $
                                                  FOMC           9.3
 4.4                                                             8.8
 4.2                                                                      100

 4.0                                                             8.3
 3.4                                                             7.3        88
       Jan Feb Mar Apr May Jun           Jul Aug Sep Oct Nov                  May        Jun        Jul        Aug   Sep   Oct   Nov

Source: Bloomberg, Barclays Capital                                      Source: Bloomberg, Barclays Capital

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Hence, monetary policy will need                 Bringing unemployment down quickly may require additional policy efforts on the fiscal and
             to be complemented if               structural fronts due to the limited effectiveness of monetary policy and the structural
        unemployment needs to be                 components of the increase in unemployment. It would therefore not be surprising if the
                 brought down fast…              extension of the broad set of tax cuts announced by President Obama on 6 December is
                                                 approved by Congress, providing a stimulus of approximately $400bn in 2011. It is not clear
                                                 how much more will be done in the near term. US fiscal space has declined after the large
                                                 fiscal expansion that followed the financial crisis, and the Treasury may want to keep
                                                 additional measures available for other possible negative shocks.

   … but QE2 is here to stay well                Overall, this is not likely to change the Fed’s course of action. Indeed, if there is something we
                            into 2011            have learned from the crisis it is that the Fed cares more about unemployment and less about
                                                 inflation than most investors realized. Unless inflation expectations get out of control, we believe
                                                 the Fed will most likely continue QE even if it is an imperfect mechanism to boost the economy.

                                                 So where will the effect of the large monetary injection show up? In addition to asset prices
                                                 in the US, the intended target of the portfolio balance effect, monetary easing would
                                                 influence asset and commodity prices around the world, as discussed in the next section.

                                                 Easy money is not easy for all EM
Abundant global liquidity is likely              In recent months abundant global liquidity has exacerbated the structural global portfolio
        to continue to tilt portfolios           rebalancing trend in favour of emerging economies. This trend has been associated with
                       towards EM…               EM’s traditional underrepresentation in the global portfolio and their generally much
                                                 stronger growth prospects and sounder fiscal footing relative to the G4.

                                                 The corresponding surge in capital inflows (Figure 16) and ensuing domestic currency
                                                 appreciation pressures have led several countries to step up currency intervention. Many
                                                 governments have also been more inclined than previously to complement reserve
                                                 accumulation with “sand in the wheels” to inflows. Some countries have implemented or
                                                 restarted capital controls (eg, Brazil and Korea), while others have preferred alternative
                                                 measures related to banking regulation to slow inflows.

                                                 Capital inflows to EM slowed in the last two weeks of November due to heightened
                                                 concerns about the fate of Europe. Should market concerns about Europe abate fully, the
                                                 capital inflows are likely to resume and drive asset prices up.

Figure 14: US unemployment rate and NAIRU                                        Figure 15: Unemployment gap smaller than many think

       %                                                                           pp, inverted            Unemployment gap estimates
 11                                                                               -2
   6                                                                               2

   5                                                                               3
   4                                                                               4
       60   64    68   72    76    80       84   88   92   96   00   04   08
                                                                                   1Q-85             1Q-91             1Q-97     1Q-03         1Q-09
            Unemployment rate               Estimated time-varying NAIRU                                           BarCap      CBO

Source: Haver Analytics, Barclays Capital                                        Source: Haver Analytics, Barclays Capital

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   … and drive commodity prices           An additional policy challenge for EM, stemming from the abundant global liquidity, is the
             up, with possibly large      inflationary pressure driven by the increase in international commodity prices. Our
   inflationary pressures in EM…          calculations made for a recent study (Easy money is not easy for all EM, 23 November 2010)
                                          indicate the recent increase in commodity prices should result in only a modest 0.2-0.4%
                                          inflation increase in some regions, should commodity prices face a moderate reversal or
                                          remain flat in 2011. However, if stronger commodity prices return – not even at the
                                          accelerated pace of September-October – there could be meaningful risks to EM inflation,
                                          which we believe could be as material at about 4%, on average, but double such levels in
                                          some cases (Figure 17).

       …and jointly may push EM           These risks could alter trade-offs for EM policymakers. Commodity price inflation and
   policymakers to tolerate more          capital inflows would pose opposite calls for interest policy. This may leave EM policymakers
             currency appreciation        with no other option than to tolerate further currency appreciation.

                                          Fears of global inflation in the medium term?
   Abundant global liquidity may          It is unknown whether loose monetary policy in the advanced world eventually turn into an
                generate inflation…       inflationary outcome at the global level. Interest rates are low historically, central banks of
                                          developed countries have expanded their balance sheets sizably, and the Fed is going to
                                          inject liquidity for several months to come. In EM, the effect is pressure on inflation via
                                          capital inflows and higher commodity prices.

       … risks are to the upside…         The big risk is that inflation expectations become unhinged in the advanced world. At
                                          present, it is not yet so, but risks are to the upside. The 5y5y breakeven rate has been
                                          increasing in both the US and the UK recently (reaching about 3% and 3.5%, respectively).
                                          In the UK, such rates and most other measures of inflation expectations are above target. In
                                          the US the rate is close to a historical high and is higher than other indicators, such as the
                                          10-year inflation expectations from the Cleveland Fed (at 1.5%) or the Survey of
                                          Professional Forecasters (at 2.2-2.3%). The higher levels from breakeven rates may reflect
                                          unrelated factors, such as the Fed interventions or liquidity issues, but also inflation risks,
                                          which are not captured in direct measures of inflation expectations.

Figure 16: Flows into EM are surging, particularly in equities          Figure 17: Additional contribution to EM inflation from
                                                                        international commodity prices

 160                                                                      5%             Some shock reversal
 140                                                                                     Flat prices at Nov level
 120                                                                      4%
                                                                                         Further 40% an. shock in H1 11
  60                                                                      2%
  20                                                                      1%
 -20                                                                      0%
     2006          2007           2008   2009        2010
             Total EM Bond Flows         Total EM Equity Flows              Oct-10         Jan-11         Apr-11         Jul-11         Oct-11

Source: Haver, Barclays Capital                                         Source: Barclays Capital: Easy money is not easy for all EM, 23 November 2010

Barclays Capital | Global Top Picks 2011

  …either on fears that it will be    Indeed, we see two possible risks for inflation expectations: one is moderate and temporary
difficult to unwind central banks’    and the other severe and persistent. If easing persists well into next year and a full recovery
balance sheets when inflationary      in financial markets is not prompt, the public may begin to fear central banks may not be
             pressures pick up…       able to unwind their asset holdings quickly without disrupting financial markets. Persistent
                                      liquidity may eventually feed into higher temporary inflation whose secondary round effect
                                      may take time to fade. However, long-term credibility would not be affected, and inflation
                                      would gradually revert to its usual level.

… or on perceptions that inflation    The more dangerous scenario is the one in which the public perceives inflation as a
will need to be an essential policy   necessary policy ingredient. We see this as highly unlikely at this stage, given the strongly
  remedy if, for example, a global    reiterated commitment to keeping inflation under control and the global recovery under
                 double dip arises    way. However, should a global double dip arise – for example, due to a serious unravelling of
                                      the European financial turmoil with global repercussions – such a scenario would no longer
                                      be unlikely. Indeed, most governments no longer have the fiscal space to cope with a
                                      significant downturn (as in 2008), and they could well choose inflation over a drastic
                                      increase in unemployment.

Barclays Capital | Global Top Picks 2011

Figure 18: Summary of Barclays Capital economics projections – GDP and inflation
                                                                   Real GDP % y/y                                          CPI inflation % y/y**
                                  Weight*           2008      2009      2010      2011        2012            2008        2009       2010        2011    2012
 Canada                                 1.9           0.5      -2.5       2.9        2.3         2.5            2.4         0.3        1.8         2.1    2.2
 US                                    20.4           0.0      -2.6       2.8        3.1         3.6            3.8        -0.4        1.6         1.5    1.8
 North America                         22.3           0.0      -2.6       2.8        3.0         3.5            3.7        -0.3        1.6         1.6    1.8
 Argentina                              0.8           6.8       0.9       8.9        5.3         4.0           26.7        16.3       22.1        26.9   28.0
 Brazil                                 2.9           5.1      -0.2       7.5        4.5         4.4            5.9         4.3        5.7         6.3    5.5
 Chile                                  0.3           3.7      -1.5       5.4        6.1         4.5            8.7         1.5        1.4         2.2    3.4
 Colombia                               0.6           2.7       0.8       4.2        4.3         4.1            7.0         4.2        2.2         3.2    3.2
 Mexico                                 2.1           1.5      -6.1       5.1        3.2         3.0            5.1         5.3        4.2         4.1    3.8
 Peru                                   0.4           9.8       0.9       8.9        7.7         6.8            6.7         0.3        2.3         2.5    2.3
 Venezuela                              0.5           4.8      -3.3      -1.6        2.1         3.6           30.9        25.1       27.5        24.8   23.5
 Latin America                          7.8           4.3      -1.8       6.1        4.3         4.0           10.1         7.2        8.2         8.7    8.4
 The Americas                          30.1           1.1      -2.4       3.7        3.3         3.6            4.9         1.1        2.9         2.6    3.1
 Austria                                0.5           1.9      -3.7       1.9        2.9         1.9            3.2         0.4        1.7         1.7    1.4
 Belgium                                0.5           0.8      -2.7       2.2        2.6         2.2            4.5         0.0        2.3         2.1    1.7
 Finland                                0.3           1.0      -8.1       2.9        3.2         3.5            3.9         1.6        1.7         2.5    1.6
 France                                 3.0           0.1      -2.5       1.6        1.8         2.1            3.2         0.1        1.7         1.6    1.8
 Germany                                4.0           0.7      -4.7       3.6        2.8         2.1            2.8         0.2        1.2         1.9    1.8
 Greece                                 0.5           2.0      -2.3      -3.8       -2.7         1.2            4.2         1.3        4.7         4.1    4.3
 Ireland                                0.3          -3.6      -7.6      -0.3        1.4         2.0            3.1        -1.7       -1.6         1.1    1.7
 Italy                                  2.5          -1.3      -5.1       1.1        1.5         1.5            3.5         0.8        1.6         1.8    1.9
 Netherlands                            0.9           1.9      -3.9       1.7        1.9         2.0            2.2         1.0        0.9         1.4    1.9
 Portugal                               0.3           0.0      -2.6       1.3       -1.3         1.0            2.7        -0.9        1.4         2.3    2.0
 Spain                                  1.9           0.9      -3.7      -0.2        0.8         1.2            4.1        -0.2        1.7         2.0    1.9
 Euro area                             15.1           0.3      -4.0       1.7        2.0         1.9            3.3         0.3        1.6         2.0    1.7
 Norway                                 0.4           1.6      -1.2       1.9        2.9         2.8            3.8         2.2        2.4         1.2    1.9
 Sweden                                 0.5          -0.8      -5.3       5.2        3.8         2.8            3.4        -0.3        1.2         1.7    2.2
 UK                                     3.1          -0.1      -5.0       1.6        2.0         2.1            3.6         2.2        3.2         3.2    1.8
 W Europe                              19.7           0.3      -4.1       1.8        1.9         1.9            3.3         0.6        1.8         2.0    1.9
 Czech Republic                         0.4           2.5      -4.1       2.5        3.3         3.4            6.0         1.1        1.5         2.1    2.0
 Hungary                                0.3           0.6      -6.3       1.2        3.1         3.7            6.1         4.3        4.8         3.9    3.4
 Poland                                 1.0           4.9       1.6       3.8        4.0         4.3            4.1         3.5        2.5         3.1    2.9
 Central Europe                         1.8           3.9      -1.3       3.2        3.7         4.0            4.8         2.8        2.5         2.8    2.7
 Russia                                 3.0           5.6      -7.9       3.8        3.8         4.0           14.1        11.7        6.9         8.0    6.9
 Turkey                                 1.3           0.7      -4.7       8.1        4.7         4.3           10.2         6.3        8.4         6.5    6.4
 Europe                                26.9           1.5      -4.4       2.4        2.4         2.4            4.3         1.6        2.4         2.6    2.4
 Australia                              1.2           2.4       1.3       2.7        3.4         3.8            4.4         2.9        2.7         2.9    2.8
 PR China                              12.6           9.6       9.1      10.2        9.3         9.2            5.9        -0.7        3.3         4.3    4.0
 Hong Kong, SAR                         0.4           2.2      -2.8       6.6        4.6         4.0            4.3         0.5        2.5         3.3    3.0
 China, Taipei                          1.1           0.7      -1.9      10.3        4.0         4.5            3.5        -0.9        0.9         1.6    2.2
 India                                  5.1           7.3       6.8       8.9        8.5         9.0            8.7         2.2        9.1         5.9    6.7
 Indonesia                              1.4           6.0       4.5       6.0        6.5         6.7           10.3         4.3        5.2         6.3    5.8
 Japan                                  6.0          -1.2      -5.2       3.5        1.2         1.6            1.5        -1.3       -1.0        -0.4   -0.2
 Malaysia                               0.5           4.7      -1.7       7.5        5.5         6.0            5.4         0.6        1.7         2.5    2.2
 Philippines                            0.5           3.7       1.1       7.0        5.0         5.6            9.4         3.2        3.9         3.6    3.4
 Singapore                              0.3           1.8      -1.3      15.0        4.0         6.5            6.6         0.6        2.8         2.6    2.0
 South Korea                            2.0           2.3       0.2       6.1        4.0         4.5            4.7         2.8        3.0         2.7    1.6
 Asia                                  31.7           5.5       3.8       6.6        6.4         6.7            3.5        -0.8        2.4         2.7    2.7
 South Africa                           0.7           3.7      -1.7       2.8        3.6         3.9           11.5         7.1        4.3         4.3    5.1
 Developed                             49.2           0.0      -3.5       2.5        2.4         2.7            3.3         0.0        1.4         1.6    1.6
 BRIC                                  23.5           8.0       5.3       8.8        7.8         7.9            6.8         1.4        4.8         5.1    4.9
 Global                                96.0           2.9      -0.7       4.9        4.2         4.4            4.6         0.9        2.4         2.6    2.5
Note: * IMF weight of real GDP using PPP, 2009 estimates for real GDP; nominal GDP (2009) for CPI inflation. ** Conventional rate; HICP for euro area.
Source: Barclays Capital

Barclays Capital | Global Top Picks 2011

Figure 19: Summary of Barclays Capital economics projections – External and government balances
                                                       Current account (% GDP)                              General gov't. (% GDP)**
                         Weight*            2008        2009        2010       2011        2012      2008   2009     2010      2011    2012
 Canada                        2.3             0.5       -2.7        -2.8       -2.7        -2.4      0.1    -4.9      -4.1     -3.2   -1.7
 US                           24.4            -4.9       -2.7        -3.6       -4.6        -5.2     -3.2   -10.1      -8.9     -7.9   -6.1
 North America                26.7            -4.4       -2.7        -3.5       -4.4        -5.0     -2.9    -9.6      -8.5     -7.5   -5.8
 Argentina                     0.5             2.3        3.8         1.4        0.0        -0.6      0.9    -2.5      -1.7     -1.8   -1.6
 Brazil                        2.7            -1.7       -1.5        -2.5       -2.9        -3.1     -1.9    -3.4      -2.5     -2.9   -3.1
 Chile                         0.3            -1.5        2.6        -0.9        2.7         0.7      4.8    -4.4      -1.0     -0.8   -0.9
 Colombia                      0.4            -2.8       -2.0        -2.4       -2.6        -2.1     -0.1    -2.7      -3.6     -3.2   -0.9
 Mexico                        1.5            -1.5       -0.7        -0.4       -1.2        -1.5     -0.1    -2.3      -2.7     -2.5   -2.0
 Peru                          0.2            -3.7        0.2        -1.4       -3.3        -3.8      1.7     2.2      -2.1     -1.1   -0.2
 Venezuela                     0.6            14.8        4.5         7.5        7.2         9.8     -2.8    -2.7      -8.2     -1.3   -1.2
 Latin America                 6.3             0.1       -0.1        -0.6       -1.0        -1.0     -1.0    -0.7      -3.5     -2.3   -2.4
 The Americas                 33.0            -3.6       -2.2        -3.0       -3.8        -4.2     -1.0    -2.5      -8.4     -7.5   -5.1
 Austria                       0.7             4.9        2.9         3.0        4.6         5.5     -0.5    -3.5      -3.4     -2.8   -2.0
 Belgium                       0.8            -1.8        0.9         0.0        1.1         2.3     -1.3    -6.0      -4.2     -4.0   -2.8
 Finland                       0.4             2.9        2.7         3.6        5.4         6.9      4.2    -2.5      -4.8     -4.3   -3.7
 France                        4.6            -1.9       -2.0        -2.1       -2.4        -2.5     -3.3    -7.5      -7.6     -6.0   -4.6
 Germany                       5.8             6.7        5.0         5.0        5.3         5.3      0.1    -3.0      -3.8     -2.5   -1.6
 Greece                        0.6           -14.5      -10.9        -9.7       -6.9        -6.1     -9.4   -15.5      -9.6     -8.2   -7.1
 Ireland                       0.4            -5.6       -3.0        -1.9        0.4         2.8     -7.3   -14.4     -31.5    -10.6   -8.2
 Italy                         3.7            -3.6       -3.4        -4.0       -3.7        -3.4     -2.7    -5.3      -5.0     -4.7   -4.2
 Netherlands                   1.4             4.3        4.6         5.1        6.2         7.0      0.6    -5.4      -4.8     -4.0   -2.8
 Portugal                      0.4           -12.6      -10.3       -11.3      -10.9       -10.4     -2.9    -9.3      -7.3     -5.0   -4.3
 Spain                         2.5            -9.7       -5.5        -4.4       -2.4        -2.1     -4.2   -11.1      -9.0     -6.4   -4.3
 Euro area                    21.2            -1.5       -0.6        -0.6       -0.7        -0.4     -2.0    -6.3      -6.3     -4.7   -3.5
 Norway                        0.7            16.2        7.4         8.5        8.5         9.0     19.3     9.9      11.0     11.0   11.5
 Sweden                        0.7             7.6        7.2         5.9        5.6         5.5      1.7    -1.6      -3.0     -2.3   -1.0
 UK                            3.8            -1.6       -1.3        -2.8       -2.1        -1.0     -6.0   -10.4     -10.1     -7.8   -6.2
 W Europe                     27.7            -0.1        0.2         0.1        0.7         1.1     -1.8    -6.0      -6.1     -4.5   -3.3
 Czech Republic                0.3            -3.1       -1.1        -2.6       -3.3        -3.5     -2.7    -5.8      -5.3     -4.6   -3.8
 Hungary                       0.2            -6.9       -0.4         0.9        0.3        -0.5     -3.7    -4.4      -3.9     -2.9   -3.0
 Poland                        0.7            -4.7       -2.3        -3.0       -3.0        -3.1     -3.9    -7.5      -6.9     -6.5   -6.0
 Central Europe                1.4            -4.9       -1.7        -2.1       -2.5        -2.7     -3.4    -6.4      -6.1     -5.1   -4.6
 Russia                        2.1             6.1        3.9         4.4        2.8         2.1      3.8    -5.9      -4.6     -2.5   -1.8
 Turkey                        1.1            -5.7       -2.3        -6.0       -5.9        -6.0     -2.5    -5.9      -3.9     -3.3   -3.0
 Europe                       32.3             0.4        0.5         0.3        0.2         0.3     -1.5    -6.0      -5.9     -4.4   -3.3
 Australia                     1.7            -5.5       -3.2        -3.0       -2.6        -2.8     -0.8    -4.1      -4.3     -2.1   -0.1
 PR China                      8.6             9.4        6.0         5.3        4.8         4.3     -0.4    -2.2      -2.8     -2.0   -2.0
 Hong Kong, SAR                0.4            13.7        8.7         8.2        8.2         8.0      0.1     0.8       1.6     -1.4    0.0
 China, Taipei                 0.7             6.9       11.4         8.7        5.7         6.0     -0.7    -4.1      -2.5     -1.9   -2.3
 India                         2.1            -3.4       -2.5        -4.0       -3.0        -3.1     -9.8   -11.0      -8.3     -8.1   -7.5
 Indonesia                     0.9             0.1        2.0         1.1        0.5         0.1     -0.1    -1.6      -1.0     -1.3   -1.3
 Japan                         8.7             3.2        2.8         3.5        2.3         1.9     -2.9    -8.8      -9.5     -8.0   -7.5
 Malaysia                      0.3            17.5       16.4        10.5       13.7         9.9     -4.8    -7.4      -5.0     -3.9   -2.8
 Philippines                   0.3             2.1        5.4         5.7        6.6         5.9     -0.9    -3.9      -3.4     -3.2   -2.7
 Singapore                     0.3            18.5       17.7        19.7       16.2        13.1      0.1    -1.2       0.2      0.0    0.5
 South Korea                   1.4            -0.6        5.1         3.2        1.7         1.2      1.2    -1.7      -0.2      0.2    0.2
 Asia                         26.0             5.5       -4.7         8.2        5.5         5.5     -2.0    -5.3      -5.3     -4.3   -4.0
 South Africa                  0.5            -7.1       -4.1        -3.3       -3.6        -4.2     -1.2    -6.7      -5.5     -5.1   -3.5
 Developed                    64.9            -2.2       -1.1        -1.5       -2.0        -2.1     -2.7    -8.2      -7.8     -6.4   -5.0
 Emerging                     31.4             1.8        2.1         1.0        0.5         0.2      2.5     1.5       2.3      1.8    1.2
 BRIC                         15.6             5.1        3.1         2.3        2.0         1.6     -1.4    -4.1      -3.7     -3.1   -2.9
 Global                       96.2            -1.0       -0.2        -0.7       -1.3        -1.4     -1.1    -5.3      -4.8     -4.0   -3.2
Source: Barclays Capital. Note: nominal GDP (2009) weights for current account and fiscal balance.

Barclays Capital | Global Top Picks 2011


                                    Robust corporate profitability trumps political risk
                 Barry C. Knapp            With earnings likely to rise smartly, albeit at a slower pace than in 2010, an
               +1 212 526 5313             improving macro outlook and ultra-easy Fed policy, our base case for the S&P 500 at               year-end 2011 is 1,420. From a sector perspective, we are taking a much more
                  BCI, New York            aggressive stance entering 2011.

                                           European equities continue to benefit from low valuation levels and moderate
           Edmund Shing, Ph.D.
                                           economic improvement, reflected in improving profitability and free cash flow
           +44 (0)20 7773 4307
                                           generation. Driven as they are by an improvement in productivity, positive inflationary
                                           benefits and high exposure to emerging markets, we re-emphasize our 2011 year-end
        Barclays Capital, London
                                           target of 325 (+23%) for the STOXX 600 and 3350 (+21%) for the Euro STOXX 50.
            Fumiyuki Takahashi             In Japan, we believe that the continued earnings recovery among Japanese exporters,
                81 3 4530 2943             combined with the expectation for depreciation of the yen against the dollar, will              enable the Nikkei Average to test 12,000 at the end of 2011.
                    BCJL, Tokyo
                                    United States: A favorable first half drives a slightly more upbeat
                                    outlook for 2011
                                     We are more optimistic than we have been at this time in each of the past two years. While
                                     we would not rule out a significant equity market correction in 1H11, our base case is for a
                                     favorable first half, resulting in a slightly more upbeat full-year outlook for 2011. We are
                                     encouraged by the progress in the deleveraging process and believe the economy will
                                     achieve a form of escape velocity, with the labor market at the forefront of the improved
                                     macroeconomic outlook. We suspect that 2011 will not be completely smooth from a
                                     capital markets’ perspective: we believe a deceleration in developing world growth and
                                     public sector deleveraging in the developed world will cause periodic market corrections.
                                     Additionally, if we are correct about the economy, by this time next year monetary policy
                                     tightening may be in sight, so equities may limp into year-end. Still, with earnings rising
                                     smartly, albeit at a slower pace than in 2010, the macro outlook improving, and ultra-easy
                                     Fed policy, our base case for the S&P 500 at year-end 2011 is 1,420.

                                     Monetary policy
                                     At this time last year, the potential winding down of Large-Scale Asset Purchases (LSAP) I
                                     was a key factor in our cautious approach to equities for 1H10; the 1H11 outlook appears
                                     more favorable. Given the three potential growth outcomes a year ago, we thought the
                                     equity market would struggle in two of those scenarios, largely because the typical best
                                     case scenario for equities, stronger-than-potential growth, would have led the Fed to end
                                     LSAP I in 1Q10, drain liquidity in 2Q10 and begin to normalize rates in 3Q10. Because of the
                                     deterioration in business confidence brought on by public policy, household sector
                                     deleveraging, fiscal contraction in Europe, and monetary policy tightening in Asia and
                                     emerging markets, the Fed was only able to take step one. As we look out into 2011, we are
                                     quite confident that it will complete LSAP II and it is unlikely the Fed staff’s forecast for
                                     inflation will have improved enough to consider exit strategy steps. In fact, it may even
                                     continue to expand its balance sheet. This implies that the strong growth outcome is likely
                                     to be a best case scenario for equities this year, rather than a catalyst for a correction, as
                                     was the case a year ago. If, instead, growth muddles along slightly below potential, as long

Barclays Capital | Global Top Picks 2011

                                     as the Fed is expanding its balance sheet through LSAP, equities should perform reasonably
                                     well, given cheap valuations relative to other asset classes. Still, the risks of monetizing the
                                     debt cannot be completely dismissed. If the bounce we expect in business confidence fails
                                     to trigger a sustainable recovery in the labor market and the debt and deficit stabilization
                                     process in DC slows, the risks to Fed credibility and the dollar are considerable. Despite the
                                     downside risks, we can say – certainly with a much greater degree of confidence relative to
                                     our public policy outlook – that monetary policy is likely to be supportive for equities in
                                     1H11 and perhaps for most of the year.

                                     US equities: A favorable risk profile
                                     As we begin 2011, the policy outlook is crucial for the third consecutive year; however, we
                                     believe that the role of policy in determining equity market valuations is somewhat reduced
                                     relative to 2009 and 2010. The deleveraging progress of the corporate and consumer
                                     sectors implies less dependency on monetary policy to lower the cost of capital. Still, with
                                     the public sector having not begun the process, monetary policy cannot be tightened in
                                     2011, in our view, resulting in a very favorable monetary policy environment for equities.
                                     Additionally, the growth outlook is improving, and most investors, even those who are
                                     bullish on equities, are skeptical of views that the economy will do much better than the
                                     2Q10-3Q10 growth rate, leaving some room for improved economic expectations early in
                                     2011. We believe a bounce in business confidence is underway and we are seeing signs of
                                     increased business investment in capital and labor as a result.

                                     In essence, business confidence for both small and large enterprises was acting like a
                                     clogged monetary policy transmission mechanism (similar to bank lending); a rebound
                                     should improve the economic multiplier effects. It is crucial to our outlook for equities to
                                     have a strong year that this occur early in 2011, because of slowing developing world
                                     growth, worries about the effect of fiscal contraction in Europe as well as in the U.S. (if only
                                     at the state and local level), and widespread concerns about the effectiveness of LSAP on
                                     the real economy. Building economic momentum and aggressive monetary policy stimulus
                                     should overcome the headwinds. Still, as we watch European sovereign spreads widen after
                                     a second sovereign package, contemplate who would buy their European government
                                     bonds if European banks were to sell them (pensions, insurers, individuals, the ECB, or
                                     foreigners), and watch the EU struggle to construct a resolution mechanism that may allow
                                     politicians to decide who the winners and losers are in the event of a default, we remain
                                     cognizant of lingering deleveraging risks.

                                     Equity valuations: Do not isolate them
                                     When we look at equity market valuation metrics since the early 1970s, current valuations
                                     cannot be viewed as attractive, with only one measure of the eight we actively track scoring
                                     on the low side of the long-term mean. Even the one seemingly positive measure, the free
                                     cash flow multiple, is of somewhat questionable value, given major cuts in capital investment
                                     during the Great Recession. In particular, metrics that integrate debt, using the enterprise
                                     value as the numerator, are among the most extended ratios. To be sure, these are not so
                                     stretched that they present a major impediment to higher prices, but given the sharp valuation
                                     compression in 2010, a call for richer valuations requires significant justification.

Barclays Capital | Global Top Picks 2011

                                     Figure 1: Given equity market valuation metrics since the early 1970s, current valuations
                                     cannot be viewed as attractive
                                     S&P 500 Valuation Metrics                            December 7, 2010         1973 Mean
                                     Price / Sales                                              1.3x                  0.8x
                                     Price / Free Cash Flow                                     14.1x                 16.9x
                                     Price / Trailing Earnings (As Reported)                    17.0x                 14.8x
                                     Price / Trailing Earnings (Operating)                      15.5x                 13.9x
                                     Price / Forward Earnings                                   13.0x                 11.4x
                                     Price / Book Value                                          2.1x                  1.9x
                                     Dividend Yield                                             2.4%                  3.3%
                                     EV / EBITDA                                                 8.2x                  6.2x
                                     EV / Sales                                                  1.7x                  1.1x
                                     Source: Barclays Capital

                                     For a time in 2010, we had consistent discussions about equity valuations becoming
                                     detached from richening fixed income valuations. This certainly would have been
                                     understandable had the richening occurred only relative to risk-free rates (Treasuries), as is
                                     frequently the case during periods of rising credit risk. This issue came into focus after
                                     credit stabilized following the Greek support package while equities continued to drift lower,
                                     reminiscent of the performance of financial equities relative to credit in the aftermath of the
                                     Bear Stearns collapse (an ominous comparison, to be sure). This would be an
                                     oversimplification, though, because equities have been cheapening relative to investment
                                     grade credit (using equity risk premium models) since early 2009 and by mid-2010 had
                                     reached levels of cheapness not seen since the 1980s. Demographic issues, individual
                                     investor risk tolerance severely weakened by the events in autumn 2008, and pension fund
                                     dynamics have all contributed. Still, these explanations are analogous to the structural
                                     unemployment thesis: they explain a significant portion of the story, but dismissing equities
                                     on the assumption that they will remain structurally cheap to fixed income for the
                                     foreseeable future is to assume it is different this time. To be sure, we do not believe these
                                     metrics are mean-reverting over any short interval of time, so there is no reason to assume
                                     2011 will be the year when they significantly outperform fixed income unless a catalyst
                                     exists. In fact, however, a potential one does exist: LSAP.

                                     For those who doubt the Fed’s goal is to resolve this relative undervaluation of equities, we
                                     refer them to a paper penned by Fed Chairman Bernanke, Vincent Reinhart and Brian Sack
                                     in 2004 on Japanese currency intervention, in which the authors proposed that measuring
                                     the effectiveness of intervention solely in terms of the effect on the yen was too narrow a
                                     focus, and that the effect on Japanese equities was a more important factor to the country’s
                                     economic activity. And there are plenty of recent references by the Fed that make it quite
                                     clear that a primary goal of LSAP is to raise equity market valuations, and we believe it will
                                     be successful, at least for a time.

                                     With the Fed on the equity market’s side, there is a case for higher relative valuations;
                                     however, it is certainly possible that if it is successful in boosting business confidence,
                                     which in turn leads to a sustainable recovery in the labor market, at least some portion of
                                     the low relative valuation could be resolved through higher rates. Certainly, risk-free rates
                                     rose during LSAP I, and equities, while rallying sharply during 2009, actually got cheaper
                                     compared to investment grade credit because of credit spread compression and the rapid
                                     recovery in corporate earnings. Still, we do not believe there is much upside in Treasury
                                     rates during 1H10 while LSAP II is in motion (there is a limit to the steepness of the Treasury
                                     yield curve, given that the front end is “controlled” by the Fed). So, in our view, the key to

Barclays Capital | Global Top Picks 2011

                                     Figure 2: The median expansion of business cycles going back to the 1920s, excluding
                                     the 1960s and 1990s, is 38 months


                                               20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 12
                                                                             U.S. Business Cycles: Duration of Expansions
                                     Source: NBER, Haver Analytics, Barclays Capital
                                     having equity market valuations expand on both an absolute and a relative basis for more
                                     than a brief interval while LSAP II is underway is the expected duration of the business cycle.

                                     We have been asked periodically whether we thought we were on the verge of a secular bull
                                     market or a correction within a bear market. This question got us thinking about periods of
                                     rising valuations – the 1960s and 1990s – and of single-digit P/E multiples – the early
                                     1950s, late 1970s and early 1980s. The common thread was not the growth rates or
                                     changes in inflation levels, but the length of the business cycle. The median expansion of
                                     business cycles going back to the 1920s, excluding the 1960s and 1990s, is 38 months. This
                                     raises the question, why toss out the 1960s and 1990s? It turns out these long expansions
                                     were the exception, rather than the rule. If we are in the midst of a long business cycle,
                                     multiples should expand during the middle of it; if we are in a 38-month cycle, the Fed is
                                     likely to be unsuccessful in boosting valuations for more than a brief period. Now, we may
                                     be giving the equity market too much credit as a business cycle discounting mechanism
                                     (generally six to nine months is about as long a lead time as one could expect equities to
                                     discount a recession) and 38 months would imply a contraction in early 2H12, so 2011
                                     would be too early for signs of a contraction.

                                     We believe we have found an interesting approach to estimating this intuitive relationship
                                     between economic volatility and equity valuations by using the cyclically adjusted price
                                     earning ratio (CAPE) and a measure of economists’ nominal GDP forecast dispersion.
                                     Forecast dispersion seems to us more forward-looking than our previous approach to
                                     measuring economic volatility (the standard deviation of GDP); additionally, the statistical
                                     relationship is stronger, though we do not want to overstate the importance of this model.
                                     We believe equity valuations are related to the growth outlook, and, with LSAP II potentially
                                     distorting the economic information content in large portions of the Treasury yield curve,
                                     we think it is important to take relative valuation metrics with a grain of salt.

                                     In the model, not surprisingly, forecast dispersion is falling and the current reading implies
                                     an expected CAPE for year-end 2011 that equates to an S&P 500 Index level of 1,300. If,
                                     instead, we assume that forecast dispersion continues its downward trajectory to a level
                                     midway between the current reading and the 2004-7 average, the 2011 year-end value for
                                     the S&P 500 is 1,420. If this measure were to begin rising again by a similar order of
                                     magnitude, the model-derived value (Figure 3 and 4) would be 1,200.

Barclays Capital | Global Top Picks 2011

                                                 If the labor market instead proves incapable of generating these types of numbers, a
                                                 shallow contraction in late 2012, perhaps led by capital investment, cannot be ruled out.
                                                 On balance, we are sympathetic enough to the deleveraging forces capping growth to place
                                                 a very low probability of a 1960s or 1990s expansion that results in significantly richer
                                                 equity market valuations. However, if the labor market achieves “escape velocity,” the Fed’s
                                                 LSAP program is likely to be successful in raising equity market valuations on both an
                                                 absolute and a relative basis for a period somewhat longer than the duration of the
                                                 program. The net of all this is that we are going to assume that LSAP II has had some effect
                                                 on multiples already, but because we expect the labor market to improve enough to
                                                 mitigate the risk of a 38-month business expansion, we are forecasting a slightly higher P/E
                                                 multiple in a year’s time. In other words, our base case is that the economic outlook will
                                                 improve sufficiently to allow for a 0.5 increase in the market P/E (above our expectation for
                                                 the 2010 year-end P/E), and taken in combination with our expected 9% earnings increase,
                                                 1,420 is our 2011 year-end S&P 500 target.

                                                 Earnings: Margins hold the key
                                                 The growth rate of earnings is slowing, as evidenced by our analysts’ earnings estimate
                                                 revision index, which completed an ISM-style recession and recovery round-trip from deep
                                                 contraction to sharp expansion and now back to the boom/bust line, where we expect it to
                                                 settle for most of the business cycle. The revenue growth rate is also slowing as it
                                                 converges towards nominal GDP, plus an extra kicker for the greater percentage of non-
                                                 dollar revenues than was the case in prior cycles. In spite of equity earnings growth settling
                                                 into a more sustainable rate, our margin analysis points to a decent earnings growth rate in
                                                 2011. We have looked at all the typical drivers – unit labor costs, commodity costs, and the
                                                 business cycle at both the market and sector level – and our expectation is that while
                                                 margins are not likely to realize the bottom-up consensus forecast of an 80bp increase, they
                                                 should expand 30bp.

Figure 3: If forecast dispersion continues its downward                            Figure 4: …and the 2004-07 average, the 2011 year-end
trajectory to a level midway between the current reading…                          value for the S&P 500 from this model is 1,420

  %                                                                           %      Nominal GDP Forecast Dispersion
  17                                                                         4.0     16
  15                                                                         3.5     14
  13                                                                         3.0     12
                                                                             2.5     10
                                                                             2.0      8
   5                                                                         1.5      6
   3                                                                         1.0      4                                                y = 3.8832x - 0.4391
   1                                                                         0.5      2                                                      R = 0.7012
       70 73 76 79 82 85 88 91 94 97 00 03 06 09 12                                   0
                 S&P 500 Cyclically Adjusted Earnings Yield (L)                       0.75        1.25        1.75        2.25        2.75          3.25   3.75
                 Nominal GDP Forecast Dispersion (R)                                                 S&P 500 Cyclically Adjusted Earnings Yield

Note: The cyclically adjusted earnings yield is the ten-year average of real S&P   Source: Philadelphia Fed, Robert Shiller, Barclays Capital
500 as reported earnings divided by real S&P 500 price (Robert Shiller’s CAPE
methodology). Source: Philadelphia Fed, Robert Shiller, Barclays Capital

Barclays Capital | Global Top Picks 2011

                                     Figure 5: The combination of a 5.1% revenue increase and 30bp margin expansion implies
                                     $91 in earnings for the S&P 500 in 2011
                                                                            Actual                   BarCap                           Consensus
                                     SPX Variable                            2009            2010             2011             2010             2011
                                     RPS                                     $908            $957            $1,006            $957            $1,005
                                     y/y % chg                                 -             5.1%             5.1%             5.4%             5.0%
                                     Operating EPS Margin %                  6.3%            8.7%             9.0%             8.8%             9.5%
                                     Operating EPS                           $57             $83               $91             $85              $96
                                     y/y % chg                               15%             47%               9%              49%              13%
                                     Note: Consensus Bull Case = bottom up. In all cases, our earnings growth rates reflect the y/y % chg on trailing 12-
                                     month operating EPS. Source: Barclays Capital

                                     The consumer discretionary and technology sectors have already exceeded prior peak
                                     margins; however, several other sectors, including healthcare, energy, and industrials, look
                                     to have room for additional expansion. Because of the sensitivity of earnings to margins, the
                                     combination of a 5.1% revenue increase and a 30bp margin expansion implies $91 in
                                     earnings for the S&P 500 in 2011. This is an increase from our prior forecast of $88, in part
                                     because 3Q10 earnings exceeded our forecast, making our 2010 estimate slightly on the
                                     low side. Additionally, we increased our margin forecast slightly, as 3Q10 margins also
                                     exceeded our forecast. Interestingly, the dispersion of equity analyst forecasts also seems
                                     to be falling, as our quantitative research team went through an exercise at the single stock
                                     level of “correcting” for equity analyst forecast bias to derive a “true” bottom-up forecast of
                                     $93.20, not too far from our macro-driven approach. We suppose our contrarian readers
                                     may find this troubling.

                                     Taking an aggressive sector stance entering 2011
                                     Since the previous edition of the Global Outlook, one of our prominent themes has been the
                                     decline of intra-market and cross-sector correlations from historical highs. To us, this
                                     means we are in an environment in which individual sector and stock selection is key, and
                                     investors should distinguish between cyclicals and defensives alike. In other words, the
                                     performance pendulum has swung from the macro to the micro: sectors are being driven
                                     more by their idiosyncrasies and less by systemic forces. As we went through all the major
                                     indicators in our framework, we made an effort to be consistent with our falling correlation
                                     theme and assessed each segment based on its own merits (ie, we de-emphasized the
                                     business cycle).

                                     That said, one of the biggest lessons we learned (or re-learned) this year is that a size buyer
                                     (ie, the Fed) overrides all in a tight market (read: don’t fight the Fed). In sum, the Fed is
                                     purchasing $875bn of Treasuries over the next seven months ($26bn per week), which
                                     would absorb all of the 2011 net supply ($24bn per week) and then some. If the past is
                                     prescient, reduced Treasury supply should continue pushing investors out of “risk-free”
                                     assets into “riskier” assets such as credit and equities. From a sector perspective, we believe
                                     the Fed’s LSAP favors cyclicals at the expense of counter-cyclicals, which is an important
                                     reason why we are upgrading technology, financials and consumer discretionary and
                                     downgrading telecom, health care, consumer staples and utilities (Figure 6). While we were
                                     admittedly early on the defensive trade coming into this year, we overstayed our welcome
                                     and find ourselves taking a much more aggressive sector stance entering 2011.

Barclays Capital | Global Top Picks 2011

Figure 6: Upgrading tech, financials & discretionary; downgrading telecom, health care, staples & utilities

                                                                              Scorecard Sub-Components
                       S&P 500                        Business             Valuations                Sentiment             Technicals
                       Sector                          Cycle             (Risk/Reward)               (Catalyst)             (Timing)             Recommendation
                       Energy                         Positive               Elevated                Bottoming             Overbought                Overweight
                       Industrials                    Positive                 Fair                    Peaking             Overbought              Marketweight+
                       Technology                     Positive                Cheap                    Peaking                Neutral              Marketweight+
                       Materials                      Positive                 Rich                 Neutral/Neg.              Strong               Marketweight
                       Financials                     Positive                 Rich               Neg./Improving             Oversold              Marketweight
                       Discretionary                  Positive              Stretched                  Peaking             Overbought              Marketweight
                       Telecom                        Negative                 Fair                    Positive            Overbought              Marketweight-
                       Health Care                    Negative                Cheap                  Bottoming               Oversold              Marketweight-
                       Staples                        Negative                Cheap                  Bottoming                Neutral              Marketweight-
                       Utilities                      Negative                 Fair                    Neutral                Neutral               Underweight
Note: Our business cycle score is based on the current trajectory of the ISM Manufacturing Index. Our valuation score is the renormalized sum of each sector's
normalized relative valuation metrics. Our sentiment score is based on an assessment of relative analyst earnings estimate revisions. Our technical score is driven by a
review of our relative overbought/oversold price oscillators. ↑/↓ = increases/decreases to ratings in place since 12/03/10 or earlier. Source: Barclays Capital.

                                                Europe: Rain in Spain, still equities can gain
                                                We believe that real assets in general, and equities in particular, will continue to represent a
                                                promising asset class in 2011, even after positive performance for the majority of equity
                                                indices in 2009 and 2010. With 2011 now firmly in view, we have established a positive
                                                outlook for European equities over the next 12 months in spite of the current intense market
                                                focus on potential euro area contagion risks from sovereign and financial system funding, and
                                                the prospective need for further sovereign bailouts (revolving around Portugal and Spain).

                                                We re-emphasize our end-2011 European index target of 325 (+23%) for the STOXX 600
                                                and 3350 (+21%) for the Euro STOXX 50 indices (outlined in detail in our 15 November
                                                2010 publication European Equity Explorer: Breakout!), for four key reasons:

                                                1. Valuations remain low in both absolute (versus history) and relative (versus other
                                                   regions and other asset classes) terms, with a de-rating in evidence over the past 10
                                                   years. While some of the more recent de-rating can be attributed to lower post-crisis
                                                   structural euro area nominal GDP growth and increased risks to euro area financial
                                                   stability from peripheral European difficulties, this is far from explaining the whole story
                                                   (European Strategy Essay: Equities gleam through the valuation prism, 12 August 2010).

                                                2. The structural reallocation by both institutional and retail investors from equities to
                                                   bonds (as described in European Strategy Essay: Renaissance, 20 October 2010), driven
                                                   by regulatory and business model changes in defined benefit pension funds and
                                                   insurance companies, explains a good proportion of this de-rating. However, we are
                                                   now starting to see signs of a tentative reversal in this structural selling pressure for
                                                   equities, with insurance companies starting to raise their equity allocations and private
                                                   pension funds seeing contributions flow increasingly to more equities-biased defined
                                                   contribution schemes as companies seek to cap pension fund liabilities.

                                                3. Potential upside macro surprises in the US and German economies in particular are
                                                   underestimated for 2011, in our view. In the US, a more favourable employment dynamic
                                                   finally looks to be unfolding, and in Germany, record-low unemployment, improving

Barclays Capital | Global Top Picks 2011

                                           productivity-fuelled wage growth and investment catch-up all point to a long-awaited
                                           uptick in domestic demand growth, not to mention higher-than-expected tax receipts.

                                           Even in the UK, the effect of the fiscal austerity programs announced by the
                                           Conservative-Liberal Democrat coalition government is suggested by the Office for
                                           Budget Responsibility to have a more moderate effect on public-sector employment
                                           than previously thought, pointing to economic growth potentially above current
                                           consensus expectations. Not only do our economists retain global GDP growth
                                           forecasts exceeding 4% for next year, but within that retain an above-consensus 1.7%
                                           growth rate for the euro area in spite of the estimated 1% fiscal drag from the various
                                           austerity programmes in effect.

                                     4. The prospect of higher headline inflation in developed economies (European Strategy
                                        Essay: Deflation today’s fear, inflation tomorrow’s? 13 July 2010), following the high and
                                        rising inflation rate regimes already evident in major emerging market economies,
                                        continues to be a potential positive for risk assets including equities (which have benefited
                                        historically from inflation rates ranging from 1 to 4%), particularly for oligopolistic
                                        commodity-related stocks and sectors including basic resources and foodstuffs (eg, the
                                        chemicals sector via fertilisers, seed technology and crop protection).

                                     Risks to this optimistic view: Spain is the gorilla in the room
        Spain more of a liquidity   While much attention has been focused on the EUR85bn Irish bailout package and the
        risk than a solvency risk   widening of peripheral European sovereign bond spreads over Germany, we consider
                                    Spain to be the "800-pound gorilla in the room”, given that it represents some 10% of euro
                                    area GDP, versus only 6% for Ireland, Greece and Portugal combined.
                                     The fragility of the Spanish residential housing market (Figure 7) and the consequent risk to
                                     the Spanish banking system continue to weigh heavily on the minds of investors, given that
                                     there are legitimate concerns that Spanish banks continue to be under-capitalised in the
                                     face of rising real estate-related losses, combined with the heavy capital requirements of
                                     Basel III.

                                     Figure 7: Spanish house prices have declined 22% since the start of the crisis

                                      3,400             Spainish house prices (€/m²)                                       340,000
                                                        tsb & ESRI Irish average house price (€, rhs)
                                      3,200                                                                                320,000

                                      3,000                                                                                300,000

                                      2,800                                                                                280,000

                                      2,600                                        -22%                                    260,000
                                      2,400                                                                                240,000

                                      2,200                                                                                220,000

                                      2,000                                                                                200,000

                                      1,800                                                                                180,000
                                          2005             2006             2007          2008          2009   2010

                                     Source: Bloomberg,,

Barclays Capital | Global Top Picks 2011

                                     According to the latest figures from the IMF, non-performing loans (NPLs) now represent
                                     5.5% of total Spanish loan books, equivalent to the NPL ratio for the US banking sector;
                                     however, this is still far below the 10.4% registered by the Irish banking system (Figure 8).

                                     Figure 8: NPLs/total loans and bank provisions/NPLs
                                                   Non-performing loans/total loans %              Bank provisions/NPLs %
                                     Country         2007    2008     2009      2010*       2007    2008    2009     2010*      Latest*
                                     US              1.4      2.9      5.4        5.5        92      75      58       64        March
                                     Spain           0.9      3.4      5.1       5.5         215     71      59       57        April
                                     Ireland         0.8      2.6       9        10.4        49      47      45       45        June
                                     Source: IMF

                                     Clearly, the current stage in the euro area sovereign crisis is manifesting itself as a liquidity risk
                                     rather than a fundamental solvency risk, given the estimated EUR73bn debt refinancing
                                     requirements of the Spanish state plus banks from now to April 2011 (Blindsided: How banks
                                     can undermine their sovereign, 26 November 2010). After all, at a certain level of interest rates,
                                     no sovereign can refinance itself ad infinitum without defaulting at some stage.

        Continue to keep a wary      For now, given that the 2011 Spanish sovereign debt/GDP ratio is forecast to hit 70% and
         eye on sovereign yields     that absolute bond yields have risen only to levels slightly above those reached in mid-2008,
               and CDS spreads       current Spanish bond spreads do not appear terminal so long as they do not continue to
                                     widen further.

      Fiscal reform should boost     What is also encouraging is the prospect of further structural reforms in Spain, centred on
     European productivity and,      increasing the retirement age to 67 years, thus reducing the prospective pension burden on the
        hence, economic growth       state. So, we see the silver lining to this particular financial cloud as this: Europe has a bad habit
           rates and profitability   of not undergoing structural reform until mired in a crisis, but the crisis is underway, and
                                     European governments are being forced to tackle structural problems, such as the
                                     unsustainable nature of state pension benefit systems at a time of rapidly aging populations,
                                     alongside the shrinking of the public sector's weight in the broad economy. In time, these
                                     fundamental reforms should aid European productivity growth, which in turn should improve
                                     both potential economic growth rates and corporate profitability.

                                     The European stock market is not the euro area economy
                                     One final point: we would not exaggerate the importance of the peripheral euro area
                                     economies within the overall European stock market. The Irish, Greek and Portuguese stock
                                     markets together represent just 1.7% of STOXX Europe 600 index capitalization, in contrast
                                     to the 30% weighting of German and French stocks combined, nearly 28% for the UK, and
                                     nearly 11% for Switzerland (Figure 9).

Barclays Capital | Global Top Picks 2011

                                     Figure 9: Percentage of euro area GDP vs. percentage of STOXX 600
                                                             % of euro area          GDP growth, % y/y         Market       % of
                                     Euro member                  GDP                2010e           2011e   Cap. EURmn   STOXX 600
                                     Euro area                   100%                 1.6             1.6    6,548,424
                                     Germany                     29.1%                3.5             2.2     812,182       12.4%
                                     France                      21.5%                1.6             1.8     1,152,699     17.6%
                                     Italy                       16.2%                1.1             1.5     311,591       4.8%
                                     "Big 3"                     66.8%                                        2,276,472     34.8%
                                     Netherlands                  6.3%                1.8             2.2     352,063       5.4%
                                     Belgium                      3.8%                2.1             2.6     157,023       2.4%
                                     Austria                      3.2%                1.9             2.9      54,866       0.8%
                                     Finland                      2.1%                2.9             3.2     114,633       1.8%
                                     Slovakia                     0.5%                4.2             3.7         -           -
                                     Luxembourg                   0.4%                3.3             2.6      27,135       0.4%
                                     Slovenia                     0.3%                1.5             2.6         -           -
                                     Cyprus                       0.2%                0.6             2.0         -           -
                                     Malta                        0.1%                3.6             3.3         -           -
                                     Others                      16.7%                                                      10.8%
                                     Spain                       10.3%                -0.4            0.3     413,244       6.3%
                                     Portugal                     1.7%                1.3            -1.1      47,732       0.7%
                                     Ireland                      1.8%                -0.3            1.4      30,786       0.5%
                                     Greece                       2.4%                -3.7           -2.7      30,136       0.5%
                                     "Peripherals"               16.3%                                                      8.0%
                                     UK                          19.5%                1.7             2.2     1,807,486     27.6%
                                     Sweden                       4.1%                4.3             3.3     295,367       4.5%
                                     Switzerland                  4.4%                2.9             1.8     698,705       10.7%
                                     Non-Euro                    28.0%                                                      42.8%
                                     Source: DataStream, OECD, Barclays Capital Economics Research

                                     Three themes for 2011
                                     Given these four key reasons for our continued positive stance on European equities, we
                                     propose three key investment themes for the coming year:

                                     1. An increasing focus on European (and global) productivity growth, to answer the
                                        question "Have European non-financial corporates already achieved peak operating
                                        profit margins by end-2010, or can they make further progress next year?"

                                     2. Which stocks and sectors can profit from, or will lose out from, any uptick in headline
                                        PPI and CPI rates?

                                     3. Has the emerging market growth theme further to run in the most exposed European
                                        names, despite this year's clear outperformance?

                                     The Three Ps: Progress, productivity and profit margins
            Expect further profit   While corporate restructuring in Europe has preceded sovereign structural reform over the
     margin expansion driven by     past ten years, the fruits of these labors are clearly visible in a number of sectors where
         strong top-line growth,    operating profit margins are not only back to long-term averages (only two years after a
restrained labor costs and muted    historic drop in European economic output), but in several cases (such as industrial goods
               production costs     and chemicals) are already close to cyclical highs, prompting investor concerns over
                                    whether peak margins have already been reached in this cycle, particularly in these
                                    manufacturing-based industries. At the end of the day, companies can only improve

Barclays Capital | Global Top Picks 2011

Figure 10: Sales growth expected to be strong                                 Figure 11: Output gap brings potential for margin expansion

 22%              STOXX 600 ex fin sales growth (rhs)             40%           6%                                                                    20%
                  STOXX 600 ex fin EBITDA Margin
 20%                                                                                                                                                  18%
 18%                                                                                                                                                  16%
 16%                                                              20%                                                                                 14%

 14%                                                                            0%                                                                    12%

 12%                                                              10%                                                                                 10%
 10%                                                                                                                                                  8%
                                                                               -4%              US output gap %
   8%                                                                                                                                                 6%
                                                                                                US real GDP % y/y
   6%                                                -10%                      -6%              US pre-tax profit margin % (rhs)                      4%
        1995 1997 1999 2001 2003 2005 2007 2009 2011e                                1991         1996           2001          2006          2011

Source: DataStream, Barclays Capital                                          Source: IMF, DataStream

                                        profitability so far by cutting costs (largely already achieved), while continued growth in
                                        earnings and profit margins clearly requires top-line growth and investment.

                                        Examining the potential for further profit margin improvement from operational leverage
                                        arising from top-line growth, we would argue that 2011 can see further, if modest,
                                        improvement in European corporate profitability, for several reasons:

                                              Ex-Europe top-line growth (eg, in emerging markets) remains strong (Figure 10), as world
                                              real GDP growth is forecast to remain above 7% next year, with EM nominal growth reaching

                                              Unit labour costs are still restrained, with productivity growth still substantial not only in
                                              Europe, but also in the US and in emerging markets; typically, while real economic
                                              output remains below potential and unemployment remains well above the NAIRU,
                                              corporate profit margins can still expand.

                                              While input commodity costs are clearly rising, with the CRB commodities index up 27% y/y
                                              in euro terms, this pressure remains relatively muted for the manufacturing and service
                                              sectors, with European PPI still 2.4% below October 2008’s level (Figure 15).

                                        European sovereign reform to boost productivity
                                        While it is commonly accepted that European productivity lags that in the US, this gap and,
                                        thus, the gap in output per head, can be attributed to three key factors (according to the
                                        McKinsey Global Institute3):

                                         1. Longer holidays and sickness absence in Europe, with the French "trente-cinq heures"
                                            reduction in working hours a drag on resultant activity.

                                         2. A larger public sector, with state monopolies in areas such as education and health and
                                            heavy state involvement still in infrastructure such as airports, energy and water utilities,
                                            and telecoms: the state may not be the best allocator of resources.

                                         3. Low productivity versus the US in “local services”, including hotels, restaurants and
                                            personal services.

                                            “Beyond austerity: A path to economic growth and renewal in Europe”, October 2010, McKinsey and Company

Barclays Capital | Global Top Picks 2011

Figure 12: IMF forecasts suggest output gaps will close by                     Figure 13: European investment pickup to help profitability

  3                                                                             12         Investment ex. Construction (% nominal GDP)
                                                                                               Germany        Euro 12       US      UK
  1                                                                                                                                        Forecast

  0                                                                             10

 -1                                                                               9
 -3                                                                               8

 -4                                                                               7
 -5            Euro area output gap %
 -6            UK output gap %
 -7            US output gap                                                      5
  1990          1995          2000           2005          2010      2015         1980       1985         1990   1995    2000     2005     2010

Source: IMF, DataStream                                                        Source: Barclays Capital

                                              Given these fundamental drags on European productivity versus the case on the other side
                                              of the pond, it is perhaps surprising that European corporates had a relatively modest dip in
                                              profit margins over 2008-09, despite a historically huge drop in economic output, and
                                              operating margins that are forecast this year and next to move beyond the peaks of the
                                              previous cycle, in spite of modest real GDP growth in the Old Continent.

                                              But it pays to keep two salient facts in mind: first, European corporate restructuring has
                                              been implemented far more rapidly than at the sovereign level for many years now – indeed,
                                              well before the recent financial crisis hit. In addition, the financial crisis forced non-financial
                                              corporates to conserve cash at any cost, given the sudden evaporation of bank funding,
                                              with the result that investment rates collapsed. Indeed, European investment is only now
                                              starting to recover as a proportion of GDP (Figure 13), pointing to further productivity-led
                                              profit margin gains as these investments start to bear fruit.

                                              Second, the historically wide output gaps still in place in the developed economies (Figure
                                              11, Figure 14), even if somewhat overestimated by official bodies, point to a lack of broad-
                                              based cost pressures and therefore suggest that European corporates can further expand

Figure 14: Output gaps give profit margins further upside                      Figure 15: Input prices rise, but offset by modest wage

  6%             Europe Output Gap % (OECD)                              18%     8%             Europe hourly earnings % y/y
                 Europe real GDP % y/y                                                          Europe PPI % y/y
                 Europe SE: operating margins % (rhs)
  4%                                                                     16%     6%

  2%                                                                     14%
  0%                                                                     12%
 -2%                                                                     10%

 -4%                                                                     8%     -4%

 -6%                                                                     6%     -6%
       1991          1996          2001             2006          2011             1997       1999        2001   2003   2005    2007     2009

Source: OECD, DataStream, Barclays Capital                                     Source: Eurostat, OECD, DataStream

Barclays Capital | Global Top Picks 2011

                                        their profit margins, probably for longer than many analysts expect (according to the IMF,
                                        for instance, euro area and US output gaps will not fully close up until 2015; Figure 12).

                                        Thus, despite the sharp improvement in European profit margins over 2009 and 2010, we
                                        believe the stage is set for further margin gains in 2011, particularly given the optimistic
                                        growth outlook outside of Europe, combined with the high extra Europe exposure of the
                                        average European large cap.

                                        Mild inflation positive for equities; prefer food retail, basic resources, chemicals
      Emerging market inflation to      In European Strategy Essay: Deflation today’s fear, inflation tomorrow? 13 July 2010, we had
      continue to be imported into      argued for upside risks to inflation through an uptick in commodity prices, coupled with wage
            developed economies         increases in emerging markets and a weaker trade-weighted euro – a key consequence being
                                        that tradable goods inflation would be exported out of emerging markets into Europe. We are
                                        starting to see signs of this trend, with robust inflation in emerging markets (Figure 16) and
                                        import prices now near 2006 highs (Figure 17).

                                        From an asset allocation perspective, one may intuitively make the argument that since
                                        equities are “real” assets, they should effectively be inflation-proof, as opposed to their
                                        nominal bond brethren. However, we would advise prudence when estimating the effect of
                                        inflation on equities. In Figure 18, we use 139 years of monthly US data to plot the year-
                                        over-year change in real earnings during different inflationary regimes (broken down by
                                        buckets). Theoretically, since equities are real in nature, real earnings should remain
                                        unaffected by inflation. However, our little data experiment reveals quite a different picture.

      A 1%-5% inflationary regime       As one would expect during severe deflationary periods, real earnings experience significant
historically best for real earnings     erosion, driven by a decline in pricing power and a contraction in margins (as in Japan last
              growth and equities       decade). However, severe inflationary periods also act as a drag on real earnings because
                                        companies progressively find it harder to pass inflation through to the consumer while
                                        simultaneously expanding margins through cost control measures. Clearly, the best case
                                        scenario for equities is when inflation is 1-4%. Such an environment makes it easier for
                                        companies to pass through price increases while cutting costs (assuming that we are in a period
                                        of reasonable economic growth). Our economists forecast real GDP growth of 1.6% for Europe
                                        and 4.1% for the world, along with inflation of 1.7% for Europe and 2.7% for the world for 2011.
                                        An environment of mild inflation should be supportive of equities.

Figure 16: Emerging market inflation quite robust                     Figure 17: EM inflation imported into the euro area

 12          Indian CPI % y/y         Brazil CPI % y/y         10        20%           Eurozone unit value of imports % y/y      20%
                                                                                       US export prices % y/y
             Chinese CPI % y/y                                                         Chinese export prices % y/y               15%
 10                                                            8         15%
  8                                                            6         10%
  6                                                            4          5%
  4                                                            2          0%
  2                                                            0         -5%
  0                                                            -2       -10%                                                     -15%

  -2                                                           -4       -15%                                                     -20%
   2004     2005    2006     2007     2008   2009    2010                   2002           2004    2006       2008       2010

Source: Bloomberg                                                     Source: DataStream

Barclays Capital | Global Top Picks 2011

                                                                                               Figure 18: Mild inflationary periods are best for real earnings growth (1879-2010)

                                                                                                    10%                             US real earnings growth y/y%
                                                                                                                                                                                                                                                                                                US CPI is at 1.2% today





                                                                                                                                  -0.17 to -0.14

                                                                                                                                                           -0.14 to -0.11

                                                                                                                                                                                           -0.11 to -0.08

                                                                                                                                                                                                            -0.08 to -0.05

                                                                                                                                                                                                                               -0.05 to -0.02

                                                                                                                                                                                                                                                          -0.02 to 0.01

                                                                                                                                                                                                                                                                              0.01 to 0.04

                                                                                                                                                                                                                                                                                                         0.04 to 0.07

                                                                                                                                                                                                                                                                                                                               0.07 to 0.1

                                                                                                                                                                                                                                                                                                                                                         0.1 to 0.13

                                                                                                                                                                                                                                                                                                                                                                              0.13 to 0.16

                                                                                                                                                                                                                                                                                                                                                                                                         0.16 to 0.19

                                                                                                                                                                                                                                                                                                                                                                                                                                   0.19 to 0.22
                                                                                                                                                                                                                                                               Inflation y/y
                                                                                               Source: DataStream

      Prefer basic resources, food                                                            Sectors that would benefit from inflation would be those that are effectively able to pass
                   retail and chemicals                                                       through price hikes without having a concomitant negative effect on revenues – ie, those
                                                                                              that have significant pricing power. As we observe in Figure 21 and Figure 22, food retail
                                                                                              and basic resources represent excellent sectors in which to execute a pro-inflationary
                                                                                              strategy, both being able to increase margins as commodity prices increase. Chemicals also
                                                                                              fare well, given the inherent rise in demand for fertilizers, seed technology and crop
                                                                                              protection in order to increase crop yields to combat food price inflation, especially in
                                                                                              emerging markets.

                                                                                               Has the emerging markets theme been played out in Europe?
Emerging markets: key theme for                                                               Emerging markets have been the global growth driver and the spotlight of the equity market,
    outperformance year-to-date                                                               with EM equities outperforming a tremendous 32% versus the world in 2009 and adding
                                                                                              another 6% year-to-date. Liquidity has poured not only into the emerging markets but also
                                                                                              into sectors in advanced markets that are profoundly exposed to them. Fund flows are still
                                                                                              coming into the consumer goods and industrials sectors, while outflows have occurred in
                                                                                              Europe year-to-date.

Figure 19: Mild inflationary periods positive for margins                                                                                                                                                   Figure 20: Margins and revenues have increased in Europe

   120%                                                                                              US profit margins yoy                                                                                                   40%
   100%                                                                                              change
    40%                                                                                                                                                                                                                      0%
   -20%                                                                                                                                                                                                                                                                                                                                        European profit margins
   -40%                                                                                                                                                                                                               -40%
   -60%                                                                                                                                                                                                                                                                                                                                        yoy change
                                                                                                    Mild inflation positive
   -80%                                                                                                                                                                                                                                                                                                                                        European revenues yoy
                                                                                                         for margins
  -100%                                                                                                                                                                                                                                                                                                                                        change
             -0.02 to -0.01

                              -0.01 to 0

                                           0 to 0.01

                                                       0.01 to 0.02

                                                                      0.02 to 0.03

                                                                                     0.03 to 0.04

                                                                                                    0.04 to 0.05

                                                                                                                   0.05 to 0.06

                                                                                                                                         0.06 to 0.07

                                                                                                                                                        0.07 to 0.08

                                                                                                                                                                            0.08 to 0.09












                                                                           Inflation y/y                                                                                                                                                                                                                     Inflation y/y

Source: DataStream                                                                                                                                                                                          Source: DataStream

Barclays Capital | Global Top Picks 2011

Figure 21: Food retail profit margins benefit from inflation        Figure 22: Basic resources well leveraged to metal prices

    10%       European Food Retail profit margin yoy change (%)        50%                 UK Basic Resources: Chg in net profit mgns (y/y%)
     8%                                                                40%
     6%                                                                20%
     4%                                                                10%
     0%                                                               -20%                                                 5% today
    -2%                                                               -30%
    -6%                                                               -60%

                                                                                -0.08 to -0.05

                                                                                                 -0.05 to -0.02

                                                                                                                  -0.02 to 0.01

                                                                                                                                  0.01 to 0.04

                                                                                                                                                 0.04 to 0.07

                                                                                                                                                                0.07 to 0.1

                                                                                                                                                                              0.1 to 0.13

                                                                                                                                                                                            0.13 to 0.16
            -0.02-0      0-0.02 0.02-0.04 0.04-0.06 0.06-0.08
                      Europe HICP: Food component y/y                                                             UK PPI: Basic Metals y/y

Source: DataStream                                                  Source: DataStream

                                       Many European companies and sectors are heavily exposed outside of developed Europe
                                       and, therefore, have enjoyed significant re-rating since 2009. Outperformance of these
                                       sectors has led to various valuation metrics trading close to their long-term historical
                                       averages. For example, the 12-month forward P/Es of industrials and food & beverage are
                                       trading close to their 12-year medians. EV/sales for 2010 of basic resources is at a premium
                                       of 87% to the 10-year average, and while the premium for chemicals is much less, it is still
                                       16% higher than the long-term average.

              However, structural      Thus, the question now has shifted from how to be exposed to emerging markets to how to
       improvement in operating        pay a reasonable price for the growth. One reason that could justify the valuation is that
     margin indicates we are not       operating margins have structurally increased as businesses expand overseas. Companies
            overpaying for growth      see strong improvement in profitability not only for this year due to the distortion of the
                                       base year but also in the years to come. BMW sees its EBIT margin at about 10% in the years
                                       to come, which has not happened since the early nineties. Our chemicals analysts also look
                                       for an upward trend in EBIT margin for their companies under coverage (Figure 23).
                                       Therefore, although the valuations do price in some of the emerging markets theme, they
                                       do not look stretched.

       Further re-rating potential     Moreover, we expect emerging economies to continue to be the key driver of global growth
               for sectors exposed     and the source of profitability for European companies. According to the IMF, the nominal
             to emerging markets       GDP of emerging and developing economies is expected to grow 11.6% y/y in 2010, and
                                       the share of the emerging and developing economies is forecast to represent more than
                                       50% of the world by 2015 (Figure 24). Therefore, we conclude that there still exists further
                                       potential for an upward re-rating of valuations for European companies exposed to
                                       emerging markets. We still favour sectors with high emerging market exposure, such as
                                       industrials and basic resources, and expect European companies to rely even more on
                                       emerging markets for growth.

                                       Conclusion: We see Europe as having a combination of attractive investment
                                       characteristics: deep value on a regional basis, while offering substantial ongoing top-line
                                       exposure to the faster growth in emerging markets, with the added growth lever of
                                       upside economic momentum in Germany. The price for this is probable ongoing volatility
                                       from sovereign risk issues, but we feel this is a risk that is well worth taking, given the
                                       substantial potential benefits.

Barclays Capital | Global Top Picks 2011

Figure 23: Upward trend in EBIT margin for chemicals                   Figure 24: Emerging markets still the driver of growth

 20%              Chemicals weighted avg. EBIT margin                   20           Emerg. share of world GDP, % (PPP adj., rhs)      60
                  Syngenta EBIT margin                                               Emerging economies' real GDP % y/y
                  BASF EBIT margin                                                   Emerging economies' nominal GDP % y/y

 15%                                                                    15                                                             50

 10%                                                                    10                                                             40

   5%                                                                    5                                                             30

   0%                                                                    0                                                             20
     2001       2003       2005   2007   2009   2011e   2013e                1990     1995      2000       2005       2010      2015

Source: Barclays Capital                                               Source: IMF

                                         Japan: Heightened hopes that recovery in exporter earnings can be
                                            We forecast that the earnings recovery among Japanese exporters will continue, aided by
                                            the strength of Asian economies and the improving US economy. We believe this,
                                            combined with the expectation for depreciation of the yen against the dollar, will enable
                                            the Nikkei Average to test 12,000 at the end of 2011.

                                            Exporters with a large percentage of sales in Asia have posted substantial improvements
                                            in capital efficiency, a trend that we expect to continue through 2011. This is particularly
                                            the case among automobile firms and in the machinery sector.

                                            Higher profits and cost cuts have led to large increases in free cash flow (FCF) among
                                            exporters. This has resulted in a virtuous cycle in which profits can catch up with the
                                            increase in FCF.

                                         We forecast a rise in the Nikkei Average to 12,000 at end-2011 as exporter
                                         earnings recover
 TOPIX EPS to recover to JPY60.5         We forecast that the earnings recovery among Japanese exporters will continue, aided by
at end-2011 (from JPY25 at end-          the strength of Asian economies and the improving US economy. The expectation for
         March 2010), with TOPIX         depreciation of the yen against the dollar is also positive for earnings and share prices. We
                recovering to 1,030      forecast that the Nikkei Average will test 11,100 in June 2011 and 12,000 at the end of 2011.
                                         We also expect TOPIX EPS to recover to JPY60.5 at the end of 2011 (from JPY25 at the end
                                         of March 2010), with TOPIX recovering to 1,030.

                                         Risks to this scenario include slower economic growth in China as a result of monetary
                                         tightening, and a weaker euro resulting from a prolonged debt crisis. However, we regard
                                         these risks as limited, given the growth in demand in Asian nations such as India and
                                         Vietnam and increased sales by Japanese exporters in Asia. In contrast, we see little
                                         prospect of major profit improvement among domestic-demand companies for some time,
                                         due to the prolonged weakness of the Japanese economy, deflation, and the ending of the
                                         demand boost created by government stimulus programs.

Barclays Capital | Global Top Picks 2011

                                                Improved profits and underperformance on an international comparison
                                                make exporter stocks increasingly attractive
        Exporter earnings improved              The yen's rapid recent appreciation has created headwinds for Japanese exporters. Despite
           on expanded demand in                this, many posted solid profit growth in 1H FY10, aided by the expansion of demand from
          Asia and a greater ability            emerging markets in Asia and an increased ability to cope with a strong yen. The market
          to cope with a strong yen             may see an even greater prospect of earnings improvement, based on our expectation that
                                                the yen’s run-up against the US dollar will halt.

     Prospect of sales growth and               ROE at Japanese exporters worsened far more than the ROE of world stock indices in the
   improved profits at carmakers                aftermath of Lehman Brothers' collapse in 2008, and share prices underperformed heavily in
and machinery producers in Asia                 reflection of this. Exporters’ ROE has improved substantially since then, narrowing the ROE
                                                gap considerably, but share prices have not corrected their underperformance to the same
                                                degree. Exporters with a large percentage of sales in Asia and "other" regions (excluding
                                                Europe and North America) have posted substantially greater improvements in capital
                                                efficiency than those with a larger weighting to industrialized markets. We expect this trend
                                                to continue through 2011, particularly among automobile and machinery sector companies,
                                                many of which are expanding their sales in Asia.

                                                A virtuous cycle of earnings recovery means NP growth can now catch up
                                                with FCF
        Exporter sectors are poised             Cost-cutting by Japanese businesses as earnings deteriorated in the wake of the Lehman
     for sustained profit recovery;             shock has led to major improvements in FCF. It has also resulted in a virtuous cycle in which
          this also applies to some             NP growth can catch up with the increase in FCF. This trend has been particularly pronounced
         domestic-demand sectors                in exporter sectors, which are now positioned for a sustained recovery in profit. The forecast
                                                P/E of exporter stocks now matches the average of the previous recovery phase in 2004-07.
                                                However, the correlation between FCF and profit improvement suggests that conditions now
                                                are more favorable for sustained profit growth, indicating that stocks are undervalued on a
                                                P/E basis. We also see improved prospects for profit recovery in a number of domestic-
                                                demand sectors, particularly specialty retailing, trading companies & distributors, road &
                                                railways, and real estate management & development.

Figure 25: Relative share price performance of Japanese                          Figure 26: Relative share price performance of Japanese
exporter stocks vs. world stock index and ROE                                    exporter stocks vs. world stock index and USD/JPY rate

   Rel. price                                                           (%)       JPY/USD                                                               Rel. Price
                       Relative share price (End Dec-99=100) (LHS)
  140                  ROE of Japanese exporter stocks (RHS)              20      150                     USD/JPY rate (LHS)                                140
                       ROE of MSCI World Index (RHS)
  130                                                                                                     Relative share price (end Dec-99=100) (RHS)
                                                                                  140                                                                       130
  120                                                                             130                                                                       120
  110                                                                             120                                                                       110

  100                                                                     5       110                                                                       100

   90                                                                             100                                                                       90
   80                                                                              90                                                                       80
   70                                                                              80                                                                       70

   60                                                                     -10      70                                                                       60
    Dec-99 Jun-01 Dec-02 Jun-04 Dec-05 Jun-07 Dec-08 Jun-10                         Dec-99   Jun-01   Dec-02   Jun-04   Dec-05   Jun-07   Dec-08   Jun-10

Note 1: Relative share price = Japanese exporter stocks/MSCI World Index.        Note 1: Relative share price = Japanese exporter stocks/MSCI World Index.
Note 2: Japanese exporter stocks consist of TOPIX500 stocks with foreign sales   Note 2: Japanese exporter stocks consist of TOPIX500 stocks with foreign sales
ratio of 30% or higher. Source: Bloomberg, FactSet, Barclays Capital             ratio of 30% or higher. Source: Bloomberg, FactSet, Barclays Capital

Barclays Capital | Global Top Picks 2011

Figure 27: Free cash flow and net profit trends (TOPIX500                      Figure 28: P/E of exporter companies and domestic
excluding financials): Export-related companies                                companies (TOPIX500 excluding financials)
    (%)                                                                          (x)
   5.0                                                                          70



                       Net profit/ Total asssets (%)                                          Forecast P/E of exporter companies (x)
  -2.0                 Free cash flow/ Total assets (%)                         10
                                                                                              Forecast P/E of domestic companies (x)

  -3.0                                                                           0
     May-00 Nov-01 May-03 Nov-04 May-06 Nov-07 May-09 Nov-10                     May-00    Nov-01    May-03    Nov-04     May-06       Nov-07   May-09   Nov-10

Note: Japanese exporter stocks consist of TOPIX500 stocks with foreign sales   Note: Japanese exporter stocks consist of TOPIX500 stocks with foreign sales
ratios of 30% or higher. Source: FactSet, Barclays Capital                     ratios of 30% or higher, and domestic stocks consist of the other stocks.
                                                                               Forecasts are based on I/B/E/S consensus data. Source: I/B/E/S, FactSet,
                                                                               Barclays Capital

Barclays Capital | Global Top Picks 2011


                                     2011 Outlook: It’s all about strategic growth
     Matthew S. Rothman, Ph.D.             Our quantitative earnings forecast model implies 2011 ROQS S&P 500 earnings of
               +1 212 526 9127             $93.20 per share and an S&P 500 target level of 1314. We see Financials as having                 the greatest downside relative to consensus bottom-up earnings estimates and
                 BCI, New York             Materials having the greatest upside. In other words, we think that fundamental
                                           analysts have become too bullish on the prospects of Financials and too bearish on

                                           From a thematic point of view, we believe that capital usage will be the dominant
                                           theme in 2011. Companies continue to have record levels of cash relative to
                                           enterprise value on their balance sheets. Companies that will use that cash wisely are
                                           likely to outperform, while those that behave in a shareholder-unfriendly manner are
                                           likely to underperform.

                                     2011 S&P 500 Earnings Forecast
                                     Our quantitative earnings forecast model implies a 2011 ROQS S&P 500 earnings forecast at
                                     $93.20 per share. This forecast is a purely quantitatively derived earnings forecast model
                                     built from a bottom-up blending of individual analyst forecasts. Additionally, we are
                                     forecasting a 2011 year-end index level of 1314.

                                     Our S&P 500 earnings forecast is derived from taking individual analyst forecasts for each
                                     stock in the S&P 500. We develop a statistical model to adjust each analyst’s forecast for
                                     known sources of bias and error. Specifically, we take each individual analyst forecast for a
                                     given company and correct it for errors such as recency, past forecast error and the degree
                                     to which the analyst appears to follow management guidance. All of the individual forecasts
                                     for a given company are then combined to form a single composite forecast for the
                                     company. These company level forecasts are then combined to create sector-level
                                     forecasts, as well as our aggregate S&P 500 index level forecast. We believe our model
                                     provides a more reliable predictor of future earnings and returns than do consensus
                                     numbers arrived at by calculating simple averages among individual analyst forecasts,
                                     without adjusting for the factors above.

                                     Presently, the S&P 500 2011 consensus earnings forecast is for $95.00 per share. As of
                                     November 29, among the top-down equity strategists, the median forecast is $89.00 with a
                                     high of $95.00 and a low of $82.00.

                                     Figure 1 shows our 2011 earnings forecast for each of the 10 individual S&P 500 sectors.
                                     We are relatively most negative on Financials, estimating EPS of $16.63, which is 6.8%
                                     below consensus forecasts. On the other hand, we are relatively most bullish on Materials,
                                     calling for $16.48 per share, which is 3.9% above consensus. In other words, we think that
                                     analysts have become too bullish on the prospects of Financials and too bearish on

Barclays Capital | Global Top Picks 2011

                                     Figure 1: Barclays Capital Quantitatively Derived 2011 EPS Forecasts

                                                                                                Barclays Capital                   Difference from
                                                           Sector                              Quantitative ROQS                      Bottom-Up
                                                                                               2011 EPS Forecast                     Consensus
                                                          S&P 500                                     $93.20                            -1.5%
                                                   Consumer Discretionary                             $19.59                            -1.4%
                                                     Consumer Staples                                 $21.64                             0.5%
                                                          Energy                                      $38.51                             0.1%
                                                         Financials                                   $16.63                            -6.8%
                                                        Health Care                                   $33.50                             1.5%
                                                         Industrials                                  $19.80                            -1.4%
                                                   Information Technology                             $29.56                            -2.0%
                                                         Materials                                    $16.48                             3.9%
                                                 Telecommunication Services                            $7.68                            -2.5%
                                                          Utilities                                   $12.78                             0.1%
                                     Source: Barclays Capital Quantitative Equity Strategies; Thomson Reuters (consensus); Standard & Poor’s

                                     We highlight the sectors where we expect the greatest year-over-year growth over 2010
                                     consensus projections. We assume that at this point in the year, consensus estimates are
                                     relatively accurate predictors of actual 2010 earnings, especially at the sector level. As
                                     Figure 2 details, we see the greatest year-over-year growth coming in Materials (+30%) and
                                     Industrials (+16%), with Energy (+12%), Financials (+11%), and Consumer Discretionary
                                     (+11%) not far behind. On the other hand, we predict that the slowest year-over-year
                                     growth will occur in Utilities (-1%), Consumer Staples (+6%) and Telecoms (+8%).

                                     Figure 2: Forecasted Earnings Growth per Sector for 2011 for S&P 500
                                                                                    Barclays Capital                   2010
                                                                                   Quantitative ROQS                Bottom-Up          Forecasted
                                     Sector                                        2011 EPS Forecast                Consensus          YOY Growth
                                     S&P 500                                              $93.20                       $84.33                   11%
                                     Consumer Discretionary                               $19.59                       $17.62                   11%
                                     Consumer Staples                                     $21.64                       $20.51                   6%
                                     Energy                                               $38.51                       $34.41                   12%
                                     Financials                                           $16.63                       $15.03                   11%
                                     Health Care                                          $33.50                       $30.79                   9%
                                     Industrials                                          $19.80                       $17.11                   16%
                                     Information Technology                               $29.56                       $26.81                   10%
                                     Materials                                            $16.48                       $12.65                   30%
                                     Telecommunication Services                            $7.68                       $7.10                    8%
                                     Utilities                                            $12.78                       $12.87                   -1%
                                     Source: Barclays Capital Quantitative Equity Strategies; Thomson Reuters (consensus); Standard & Poor’s.

                                     Capital Use as the Driver of Strategic Growth
                                     We expect capital use to be the dominant theme in 2011. It is our assumption that equity
                                     markets will continue to recover, or, at worst, will be range-bound in the coming year. Given
                                     this, we expect equity issuance, stock repurchases, dividend initiations/increases, and M&A
                                     activity to be in the headlines in 2011. We expect the principal drivers of returns will be
                                     companies returning cash to shareholders, either through companies being targeted for
                                     takeover and ultimately acquired, or through a more general and broader repurchasing of

Barclays Capital | Global Top Picks 2011

                                     U.S. corporations are currently sitting on historically high levels of cash. Figure 3 shows the
                                     proportion of cash relative to enterprise value for the Russell 1000.

                                     Figure 3: Cash-to-Enterprise Value for the Russell 1000 Universe (Ex-Financials) (April
                                     1972 to November 2010)








                                        Apr 1972        Apr 1978        Apr 1984        Apr 1990        Apr 1996        Apr 2002       Apr 2008

                                                                       Cash-to- Enterprise Value (Excluding Financials)

                                     Source: Barclays Capital Quantitative Equity Strategies, CRSP, IDC, Standard & Poor’s, Russell.
                                     Note: Past performance is no guarantee of future results.

                                     For investors this is likely to be frustrating. Indeed, since late 2008, cash levels have
                                     represented approximately 10% of the enterprise value of a firm – levels last seen in the
                                     early 1970s. Cash has built up as firms have cut back on capital expenditures and M&A,
                                     while at the same time continuing to raise capital and generate free cash flow from general
                                     business activities. True, investors want a firm they have invested in to maintain sufficient
                                     liquidity, particularly in uncertain economic times. However, cash is an unproductive asset.
                                     At best, cash can earn interest but with interest rates at such low levels, the pressure is on
                                     firms to do better. Investors are now looking to firms to utilize this cash in a way that
                                     maximizes shareholder value.

                                     While shareholders can point one finger at high cash balances and challenge firms to do
                                     something with this asset, another finger can be pointed at the historically high levels of the
                                     equity risk premium and urge management to exploit this opportunity. The implication of a
                                     high equity risk premium is that the cost of equity is significantly higher than the cost of

                                     Figure 4 shows that the equity risk premium – defined as the 12-month forward earnings
                                     yield of the S&P 500 minus the 10-year Treasury yield – is at high levels. Currently, the high
                                     equity risk premium is being driven by a low 10-year Treasury yield. Investor interest in yield
                                     has resulted in a contraction in the 10-year Treasury yield to 2.8% from 3.9% in early April.
                                     Even for firms that do not have excess cash on their balance sheet, the large dispersion
                                     between the cost of equity and the cost of debt presents numerous opportunities.

Barclays Capital | Global Top Picks 2011

                                     Figure 4: S&P 500 Equity Risk Premium (January 1980 to November 2010)







                                             Jan 1980     Jan 1985        Jan 1990        Jan 1995        Jan 2000         Jan 2005        Jan 2010

                                                                                       Equity Risk Premium

                                     Source: Barclays Capital Quantitative Equity Strategies, CRSP, IDC, Standard & Poor’s, Thomson Reuters.
                                     Note: Past performance is no guarantee of future results.

                                     First, firms can seek to grow their business. They can invest in internal growth prospects
                                     (capital expenditures, R&D) or external growth prospects (mergers/acquisitions). If firms go
                                     down this path, they can obviously tap their large cash reserves, or alternatively exploit the
                                     equity risk premium – for instance, borrow at low interest rates and buy the equity of a
                                     target company which has a higher earnings yield. Second, firms can return cash to
                                     shareholders and lenders. Returning cash to lenders involves repaying debt, while returning
                                     cash to shareholders can come in the form of dividends or stock buybacks. For example, a
                                     firm that can borrow at lower levels can then buy back its stock which currently carries a
                                     higher cost.

                                     We believe buying back equity is a logical action and represents the likely outcome in an
                                     environment of high cash balances and a high equity risk premium. With high cash
                                     balances, firms have the funds required to buy back their own stock. More so, with a high
                                     equity risk premium the expectation is that several firms will also have a cost of equity that
                                     exceeds their cost of borrowing. If this is true, then the expected return on repurchasing
                                     stock will exceed the firm’s weighted average cost of capital. From this perspective,
                                     buybacks make economic sense.

                                     Traditionally, a return of cash to shareholders in the form of a buyback is viewed as a
                                     positive signal by the stock market. Investors are always looking to managers of companies
                                     for indications about the true value of the company, as managers clearly have better
                                     information than what is available to the average outsider. If companies are buying back
                                     their own shares, it is a good indication that they believe their own shares are undervalued.
                                     Conversely, if companies are net sellers (or issuers) of their own shares, one can surmise
                                     that firms believe their shares are overvalued.

                                     The current environment is no different. We still expect management to repurchase shares
                                     only at attractive prices. In fact, if a firm’s stock is expensive, and its earnings yield is less
                                     than its cost of borrowing, then the decision to buy back shares does not yield an economic
                                     profit and should be rejected.

                                     To demonstrate that buybacks are beneficial for shareholders, we examine several
                                     investment strategies based on share buybacks. Figure 5 shows the log cumulative return to
                                     these strategies. We form portfolios based on stocks that bought back stock in the last three

Barclays Capital | Global Top Picks 2011

                                     months. Strategy 1 weighs stocks in proportion to the value of their buyback scaled by
                                     market capitalization; we call this our buyback weighted strategy. Strategy 2 equal weights
                                     the portfolio of stocks that have engaged in a buyback in the last three months. Both
                                     strategies exclude stocks that had a small buyback relative to other stocks. These strategies
                                     are rebalanced quarterly. Strategy 3 is an equal-weighted portfolio of quintile 1 stocks based
                                     on the 12-month percentage change in shares outstanding, and is rebalanced monthly.
                                     Strategy 3 is based on our current change in shares factor in the Barclays Capital Quant
                                     ROQS model. All strategies are based on the Russell 3000 universe and cover the period
                                     October 1950 to August 2010. We focus on the Russell 3000 in order get a sufficient
                                     number of buyback events.

                                     Figure 5: Log Cumulative Returns for a Buyback Strategy applied to the Russell 3000
                                     Universe (October 1950 to August 2010)


                                         Log Cumulative Return





                                                                 Oct 1950   Oct 1960   Oct 1970   Oct 1980      Oct 1990        Oct 2000         Oct 2010

                                                                   Buyback Weighted    Buyback Equal Weighted         Change in Shares              R3000

                                     Source: Barclays Capital Quantitative Equity Strategies, CRSP, Russell.
                                     Note: Past performance is no guarantee of future results.

                                     All three strategies have outperformed the Russell 3000 universe for the duration of our
                                     sample. The average monthly returns for the three strategies were almost identical, ranging
                                     between 1.50% and 1.52%. This compared to the average monthly return on the Russell
                                     3000 of 0.91%. Interestingly, even prior to 1982 when Congress enacted rule 10b-18, the
                                     three strategies all outperformed the Russell 3000.4

                                     Buybacks are only one possible course of action in which firms can engage. To look more
                                     broadly, we generate a list of stocks that we believe are candidates to undertake future
                                     activity that uses their excess cash and results from their relatively high equity risk

                                     We screen for stocks in the Russell 1000 universe that have cash-to-enterprise value ratios
                                     above their sector median, and also have a forward earnings yield above their cost of
                                     borrowing.5 We approximate borrowing costs using Standard & Poor’s credit ratings. We
                                     next focus on names that are determined to be attractive across a wide swath of Quality

                                       Rule 10b-18 provided a safe harbor for firms, protecting them from liability for securities manipulation. It made large
                                     scale buybacks viable.
                                       For the Financial sector we replace cash-to-enterprise value with cash-to-total assets.

Barclays Capital | Global Top Picks 2011

                                     High quality companies are identified as those with management that are cautious with
                                     shareholder capital and have a track record of using it wisely in the past. In our view, a high
                                     level of capital spending is a clear negative signal because it often occurs at peaks in
                                     business cycles, when trends are unsustainable. Conversely, we believe positive signals all
                                     include capital being returned to shareholders in the form of share purchases, low levels of
                                     inventory build and other accruals on the balance sheet, and reducing the level of non-
                                     productive assets and employees. Furthermore, companies that generate large returns on
                                     equity and invested capital and have shown an ability to increase sales over time are
                                     considered higher quality. We believe that management of high quality firms will make the
                                     best decisions in utilizing excess cash and in exploiting a high equity risk premium.

                                     Figure 6 details the specific names which have satisfied this screen. In total 66 names satisfy
                                     the criteria we set. Please contact us if you are interested in any customized revisions to
                                     these criteria.

Barclays Capital | Global Top Picks 2011

Figure 6: Russell 1000 Companies that are Likely Candidates for Undertaking Major Corporate Activity in 2011 (as of close
November 30, 2010).
                                                                                                              12M       12M Forward
                                                                                  Market         Imputed                                 Cash-to-    Cash-to-
                                                                                                            Forward    Earnings Yield                           Quality
  Ticker                Company Name                      Sector Name          Capitalization   Borrowing                               Enterprise     Total
                                                                                                            Earnings   minus Imputed                             Rank
                                                                                ($ Billions)       Cost                                   Value       Assets
                                                                                                              Yield    Borrowing Cost
HRB        BLOCK H & R INC                          Consumer Discretionary          $3.88         5.8%       13.1%          7.3%          29.4%       25.7%       1
GPS        GAP INC DEL                              Consumer Discretionary         $13.22         6.1%        9.2%          3.1%          14.3%       21.4%       1
TJX        TJX COS INC NEW                          Consumer Discretionary         $18.05         5.4%        8.1%          2.7%           8.5%       18.0%       1
EAT        BRINKER INTL INC                         Consumer Discretionary          $1.89         6.0%        8.2%          2.2%           9.7%       12.8%       1
EXPE       EXPEDIA INC DEL                          Consumer Discretionary          $6.62         6.0%        7.5%          1.6%          23.2%       22.0%       1
HOG        HARLEY DAVIDSON INC                      Consumer Discretionary          $7.37         5.8%        6.4%          0.6%          15.7%       18.3%       1
LO         LORRILLARD INC                           Consumer Staples               $11.91         6.0%        8.4%          2.4%          18.2%       60.3%       1
WAG        WALGREEN CO                              Consumer Staples               $32.26         5.4%        7.7%          2.2%           5.7%        7.2%       1
HLF        HERBALIFE LTD                            Consumer Staples                $4.07         6.1%        7.8%          1.7%           4.7%       15.5%       1
SLE        SARA LEE CORP                            Consumer Staples                $9.59         5.8%        7.0%          1.1%           9.8%       12.2%       1
MUR        MURPHY OIL CORP                          Energy                         $12.99         5.8%        7.9%          2.0%           8.5%        8.0%       1
NBR        NABORS INDUSTRIES LTD                    Energy                          $6.30         5.8%        7.2%          1.4%           7.6%        6.6%       1
HIG        HARTFORD FINL SVCS GROUP INC             Financials                      $9.90         5.8%       15.2%          9.4%         -160.3%      14.5%       1
AIZ        ASSURANT INC                             Financials                      $3.76         5.8%       14.1%          8.3%          80.5%        7.9%       1
AWH        ALLIED WRLD ASSUR COM HLDG L             Financials                     $2.48          5.8%       13.1%          7.3%          91.7%       13.6%       1
RNR        RENAISSANCERE HOLDINGS LTD               Financials                      $3.31         5.4%       12.6%          7.2%          38.3%       14.8%       1
AHL        ASPEN INSURANCE HOLDINGS LTD             Financials                      $2.22         5.7%       12.1%          6.4%         170.7%       17.6%       1
XL         XL GROUP PLC                             Financials                      $6.35         5.7%       12.0%          6.3%         183.7%       12.4%       1
PRE        PARTNERRE LTD                            Financials                      $5.77         5.4%       11.7%          6.2%          60.4%       10.2%       1
JPM        JPMORGAN CHASE & CO                      Financials                    $146.20         5.3%       11.5%          6.2%          56.3%       13.6%       1
AFG        AMERICAN FINL GROUP INC OHIO             Financials                      $3.32         5.7%       11.7%          6.0%          86.5%        6.3%       1
HCC        HCC INS HLDGS INC                        Financials                     $3.24          5.4%       10.7%          5.2%          39.2%       10.7%       1
UTR        UNITRIN INC                              Financials                      $1.45         6.0%       11.0%          5.0%          51.9%        8.1%       1
NDAQ       NASDAQ OMX GROUP INC                     Financials                     $4.25          5.8%       10.6%          4.7%          13.3%        7.1%       1
ACGL       ARCH CAP GROUP LTD                       Financials                      $4.41         5.6%        9.7%          4.1%          35.9%        7.7%       1
DFS        DISCOVER FINL SVCS                       Financials                     $9.96          6.0%        9.7%          3.7%          46.5%       15.0%       1
AXP        AMERICAN EXPRESS CO                      Financials                     $52.03         5.7%        9.0%          3.3%          21.0%       14.6%       1
STT        STATE STR CORP                           Financials                     $21.69         5.3%        8.5%          3.2%         133.3%       19.1%       1
PGR        PROGRESSIVE CORP OHIO                    Financials                     $13.50         5.3%        7.3%          2.0%          14.6%        8.9%       1
BEN        FRANKLIN RES INC                         Financials                     $25.56         5.2%        7.0%          1.8%          25.1%       49.8%       1
OB         ONEBEACON INSURANCE GROUP LTD            Financials                     $0.33          6.0%        7.6%          1.6%         183.5%        7.8%       1
WDR        WADDELL & REED FINL INC                  Financials                      $2.63         5.7%        6.9%          1.2%          16.5%       44.0%       1
NTRS       NORTHERN TR CORP                         Financials                     $12.18         5.2%        6.3%          1.1%        -1289.2%      32.7%       1
CFR        CULLEN FROST BANKERS INC                 Financials                     $3.26          5.6%        6.7%          1.1%         234.9%       16.1%       1
AMTD       TD AMERITRADE HLDG CORP                  Financials                      $9.64         5.7%        6.6%          0.9%          18.8%       11.8%       1
EV         EATON VANCE CORP                         Financials                      $3.50         5.6%        6.5%          0.9%           8.2%       24.0%       1
CIT        CIT GROUP INC                            Financials                      $7.90         6.5%        6.6%          0.1%          34.2%       21.1%       1
LLY        LILLY ELI & CO                           Health Care                    $38.81         5.2%       12.9%          7.7%          15.4%       20.5%       1
CI         CIGNA CORP                               Health Care                     $9.97         5.8%       12.9%          7.1%          23.5%        5.3%       1
HUM        HUMANA INC                               Health Care                    $9.43          6.0%       10.6%          4.6%        1003.0%       61.6%       1
HNT        HEALTH NET INC                           Health Care                     $2.58         6.2%       10.0%          3.7%          154.0%      44.5%       1
CAH        CARDINAL HEALTH INC                      Health Care                   $12.42          5.7%        7.7%          2.0%          22.9%       12.9%       1
OSK        OSHKOSH CORP                             Industrials                    $2.60          6.4%       12.2%          5.9%           9.5%        7.2%       1
MMM        3M CO                                    Industrials                   $60.03          5.2%        7.3%          2.2%           9.7%       19.5%       1
JOYG       JOY GLOBAL INC                           Industrials                    $7.88          6.0%        6.3%          0.4%           9.8%       22.8%       1
FLR        FLUOR CORP NEW                           Industrials                    $10.34         5.6%        5.8%          0.2%          26.0%       28.2%       1
LXK        LEXMARK INTL NEW                         Information Technology          $2.85         6.0%       12.4%          6.4%          47.1%       30.6%       1
LRCX       LAM RESEARCH CORP                        Information Technology          $5.58         6.4%       12.0%          5.7%          20.0%       35.2%       1
STX        SEAGATE TECHNOLOGY                       Information Technology          $6.34         6.1%       11.7%          5.6%          34.2%       27.1%       1
MSFT       MICROSOFT CORP                           Information Technology        $216.09         4.8%       10.1%          5.3%          24.2%       48.3%       1
INTC       INTEL CORP                               Information Technology        $118.02         5.3%        9.3%          4.0%          20.8%       34.2%       1
SNDK       SANDISK CORP                             Information Technology         $10.46         6.4%        9.9%          3.6%          31.4%       35.8%       1
ADI        ANALOG DEVICES INC                       Information Technology         $10.62         5.6%        7.9%          2.3%          32.3%       62.1%       1
ACN        ACCENTURE PLC IRELAND                    Information Technology         $27.46         5.3%        7.1%          1.8%          21.0%       37.7%       1
BMC        BMC SOFTWARE INC                         Information Technology          $7.89         5.7%        7.1%          1.4%          21.8%       36.4%       1
OI         OWENS ILL INC                            Materials                       $4.40         6.1%       11.4%          5.3%           8.5%        7.1%       1
UFS        DOMTAR CORP                              Materials                      $3.16          6.0%       10.4%          4.4%          14.8%        9.0%       1
SCCO       SOUTHERN COPPER CORP                     Materials                      $35.64         6.0%        7.0%          1.1%           6.4%       30.2%       1
MOS        MOSAIC CO                                Materials                     $30.14          6.0%        6.6%          0.6%           8.1%       18.1%       1
NIHD       NII HLDGS INC                            Telecommunication Servic        $6.56         6.5%        6.7%          0.2%           29.4%      28.7%       1
EXC        EXELON CORP                              Utilities                     $26.04          5.8%       10.3%          4.4%           7.6%        5.4%       1
ETR        ENTERGY CORP NEW                         Utilities                      $12.89         5.8%        9.1%          3.2%           8.5%        5.1%       1
FE         FIRSTENERGY CORP                         Utilities                      $10.70         6.0%        8.9%          2.9%           2.6%        1.8%       1
EIX        EDISON INTL                              Utilities                     $12.04          6.0%        8.2%          2.2%           9.1%        4.5%       1
ATO        ATMOS ENERGY CORP                        Utilities                      $2.72          5.7%        7.7%          2.0%           2.7%        2.0%       1
TEG        INTEGRYS ENERGY GROUP INC                Utilities                       $3.78         5.7%        6.5%          0.8%           2.7%        1.8%       1
Source: Barclays Capital Quantitative Equity Strategies; Thomson Reuters; IDC; Standard & Poor’s Compustat; Russell.
Note - Model Quintile Rankings: 1=Most Attractive; 5=Least Attractive; NA = Not Available.

Barclays Capital | Global Top Picks 2011


                                                     Strong performance in 2010, well poised for 2011
                         Venu Krishna                   U.S. convertibles are solidly positioned heading into 2011, and we forecast low
                    +1 212 526 7328                     double-digit returns for the market. The expected macro environment in 2011                          appears largely positive for the asset class. If macro concerns re-emerge and equities
                        BCI, New York                   move lower, we expect the U.S. convertibles to handily outperform stocks.

                                                        We are similarly constructive on EMEA and Asia Pacific convertibles in 2011. This
                   Manoj Shivdasani
                                                        reflects our strategists’ forecasts of equity gains and, to a lesser extent than in 2010,
                    +1 212 526 5995
                                                        positive credit returns. We expect that fundamental selection, relative value, event
                        BCI, New York
                                                        risk/‘ratchets’ and new issuance/buybacks, will bolster convertible performance.

                                                     United States
                      Piyush Anchliya
                    +1 212 526 8432                  Although the U.S. market’s year-to-date return of 13.81% (as of November 30, 2010) might                       appear modest relative to 2009’s anomalously high 50.72%, converts significantly
                        BCI, New York                outperformed other asset classes (Figure 1). The primary engine driving performance was
                                                     the strong equity rally, which was especially pronounced in small- and mid-caps (62% of
                            Luke Olsen               the convert market at the beginning of 2010). Second, converts enjoyed significant
              + 44 (0)20 777 38310                   improvement in relative valuation even as high yield (HY) and investment grade (IG) spreads
                      hardly budged. While the HY index tightened by just 6bp to 561bp, the HY convert index
          Barclays Capital, London                   OAS tightened by 212bp to 584bp. For IG converts, spreads tightened by 36bp to 169bp
                                                     and the implied vol came down from 35% to 32%. Finally, a strong rates rally further aided
               Heather Beattie, CFA                  the asset class; 2Y and 5Y tightened 68bp and 121bp, respectively. Arbitrage funds appear
              + 44 (0)20 777 35859                   to have had a decent year as well, posting low- to mid-teen returns on average.
                                                     Attractive and Balanced Risk-Reward to Position for Expected Equity Rally
          Barclays Capital, London
                                                     We believe that converts are solidly positioned heading into 2011 after the full normalization
                        Angus Allison                of the asset class in 2010. Reasonable valuations, supportive technicals, and attractive terms
              + 44 (0)20 777 35759                   bode well for the asset class, in our view, especially given the positive equity outlook, benign                      policy environment and expected relative stability in credit (both IG and HY). Although rates
          Barclays Capital, London                   are forecast to rise by the end of 2011, we believe the negative impact on converts would be
                                                     modest given the relatively short duration and higher equity sensitivity.

Figure 1: Asset Class Returns                                                        Figure 2: OAS Trends
                                     2010                                             bps
                                     YTD       2009       2008      2007     2006
US Con vert Composite                13.81     50.72     (34.59)    5.62     13.33
US Con vert Rec Portfolio            35.83     46.97     (33.91)    6.90     13.43    1750
HFRX Convertible Arbitrage            7.87     42.46     (58.37)    (0.95)    9.57    1500
S&P 500                                7.86    26.47      (37.00)    5.49    15.79    1250
Russell 2000                         17.53     27.17      (33.79)   (1.56) 18.44      1000
NASDAQ                               11.16     45.36      (39.98)   10.65    10.39     750
BarCap US High Yield                 13.07     58.21      (26.16)    1.87    11.85
BarCap US Credit                       9.58    16.04       (3.08)    5.11     4.26
1-3yr Treasury                         2.60      0.80      6.67      7.31     3.92
                                                                                         Nov 06       Jul 07    Mar 08 Nov 08   Jul 09   Mar 10 Nov 10
3-5yr Treasury                       11.06      (3.08)    15.15     10.25     3.27
7-10yr Treasury                      13.28      (6.03)    13.74     10.20     2.67                  IG Convert Bonds             US Credit Index
Past Performance is no Guarantee of Future Results                                                  Non-IG Convert Bonds         US HY B Index
Source: Bloomberg, Barclays Capital. (As of November 30, 2010)                       Source: Barclays Capital

Barclays Capital | Global Top Picks 2011

                                                 Stock selection is going to be of greatest importance given the nature of the convert
                                                 market, the relatively flat outlook for IG credit, the slightly negative price outlook for HY and
                                                 the modestly bearish outlook for rates. In line with our equity strategists’ view, we favor
                                                 cyclicals over defensives and somewhat higher-delta names. In addition, relative value,
                                                 security selection, tactical sector rotation, cap-structure trades, primary market cheapness
                                                 and event-driven opportunities will likely continue to play an important role in generating
                                                 returns, especially since the across-the-board valuation dislocation in the asset class has
                                                 mostly been captured over the past two years.

  The convert asset class is in the              We like the composition of the convert market, with small- and mid-cap equity names
  sweet spot, with terms of 4.1%,                accounting for 57% of the market and bond structures comprising 80% of the market.
                   a premium of 40%              Terms are attractive as well, in our view, with a yield of 4.1%, a premium of 40%, and a delta
                                                 of 58%. The average price of the overall market is 107.4% with 4.6 years to put/maturity
                                                 and three years of call protection. As we head into 2011 with a sense of balanced optimism,
                                                 we believe the convert asset class is in the sweet spot of risk/reward. The market’s diversity
                                                 across profiles, sectors and credit quality allows for a variety of investment strategies for
                                                 both outright and arbitrage investors.

    Technicals remain supportive                 Positive technicals for the asset class include normalized leverage and funding conditions; a
                                                 balanced investor base of around 50% arbitrage/50% outright; limited supply (face
                                                 outstanding is down at $235 billion from $248 billion at the beginning of 2010); arbitrage
                                                 funds operating at a reasonable leverage (2.5x to 3x) with spare investing capacity; and
                                                 significant pent-up demand for the product. For the second straight year, primary issuance
                                                 was modest in 2010 ($32.5 billion year to date). However, issuance has picked up in the
                                                 most recent months, at $9.9 billion quarter to date, and could pick up further in 2011 as
                                                 rates rise, equities rally and HY refinancing needs arise. New issue cheapness would likely be
                                                 a continued source of incremental value (2.57% cheapness in 2010, average one-day delta
                                                 neutral capture of 1.61%).

Figure 3: Convert Market Profile – Barclays Capital US Convertibles Composite Index
            Size                   Greeks               Characteristics             Type           Stk Market Cap             Cvt Profile              Credit Rating
Face Value ($B)      234.6 Delta            58% Yield                4.1%   Bonds          80%   Large Cap    43%   Equity Sensetive        40%   IG            26%
Mkt Value ($B)       252.0 Rho*        1.69% Premium                 39.7% Preferreds      12%   Mid Cap      33%   Typical                 37%   non-IG        39%
# of Securities      638     Vega**    0.23% Put/ Mat (Yrs)           4.6   Mandatories    9%    Small Cap    24%   Busted                  22%   NR            36%
                                                Call Prot. (Yrs)      3.0                                           Distressed              1%

Source: Barclays Capital
                                                 The expected macro environment in 2011 appears largely positive for the asset class. For
                                                 2011, Barclays Capital is forecasting for the U.S.: 1) Economics: 3.1% real GDP growth and a
                                                 benign policy environment; 2) Rates for 2s, 5s and 10s will widen by 35bp, 52bp and 53bp,
                                                 respectively, with near zero Fed-funds rates remaining in place; 3) Credit: IG +2% absolute
                                                 return (15bp spread tightening) and HY 5%-6% absolute return; 4) Equity momentum will
                                                 likely continue with a roughly 16% rally for the S&P 500 on the back of continued economic
                                                 recovery and a supportive policy regime (target is based on 15.6x $91 2011E earnings
                                                 versus $83 2010E earnings); cyclical sectors are expected to outperform; and 5) the S&P
                                                 500’s realized volatility will likely trend lower to 17% from 19% in 2010.

     We expect returns in the low                Based on these views, our expected return for the convert market is in the low double digits.
   double digits, largely driven by              If macro concerns re-emerge and equities move lower, we expect the convert asset class to
   equities against a backdrop of                handily outperform stocks. Credit market return expectations are modest going into 2011,
                           stable credit         the outlook for Treasuries is modestly bearish, and although equities are viewed favorably,
                                                 we believe the asset class could experience volatility in light of various macro risks. Against
                                                 this backdrop, the overall balanced profile of the convert market offers investors an
                                                 attractive risk/reward, in our view.

Barclays Capital | Global Top Picks 2011

                                              Macro concerns are the primary risk to the asset class, in our opinion. Since most of the
                                              value dislocation has been captured, convert performance largely hinges on economic
                                              recovery, policy actions and the allied performance of equity, credit and Treasuries.

                                              EMEA and Asia Pacific
                                              Strong equities and, to a lesser extent, credit expected to drive EMEA and
                                              Asia Pacific convertible returns
                                              We project c.10% outright returns for both EMEA and Asia Pacific convertibles in 2011. This
                                              should be fuelled by rising equities (particularly in Europe) as well as positive – albeit more
                                              modest y/y – credit gains, in line with our strategists’ views. Convertible valuations remain
                                              approximately fair in both EMEA and Asia Pacific in implied volatility terms, according to our
                                              relative value analysis. Convertible, option-implied and realised volatilities have all ticked
                                              slightly lower since the end of Q3. Scenario analysis based on one-standard deviation
                                              moves from current levels shows the asymmetric potential returns profile of convertibles,
                                              with potential upside/downside return ratios of 1.3x for EMEA and 1.5x for Asia Pacific.

     Returns may be bolstered by              Aside from leveraging fundamental name and sector views and their asymmetric returns
relative value, event risk and new            profile, we expect returns in 2011 will be augmented by identifying convertibles that are
               issuance/buybacks              compelling in relative value terms (eg, low implied volatility, or relative to straight
                                              credit/equity), those that could richen substantially in a change of control event (eg, bonds
                                              with lucrative ‘ratchets’) and attractively priced new issues/buybacks. We estimate that
                                              27% of the convertibles in EMEA and 14% in Asia Pacific could outperform their underlying
                                              equity in a change of control scenario.

                                              2010 convertible performance was modest compared to 2009, but positive
      EMEA convertibles returned              EMEA convertibles have returned 6.6% in 2010 YTD, versus 6.0% for the STOXX 600 broad
                          6.6% YTD            equity index, both on a total return basis. The return for high yield credit (Barclays Capital
                                              Pan-European HY 3% Cap ex-Financials index) was 12.2% and 6.8% for investment grade
                                              credit (Barclays Capital Euro-Aggregate Corporates index) (Figure 4).
          Asia Pacific convertibles           Asia Pacific convertibles have returned 5.5% in 2010 YTD, versus 13.9% for their underlying
               returned 5.5% YTD              equities (parity), 16.1% for HY credit (Barclays Capital EM Asia USD Credit Corporate HY index)
                                              and 9.3% for IG credit (Barclays Capital EM Asia USD Credit Corporate HG index) (Figure 4).

Figure 4: Performance of convertible, credit and equity indices in 2010

  EMEA                                                                            Asia Pacific

   120                                                                             120

   115                                                                             115

   110                                                                             110

   105                                                                             105

   100                                                                             100

                                                                                       31-        28-        30-     30-       31-      31-
    31-Dec      28-Feb    30-Apr     30-Jun     31-Aug    31-Oct
                                                                                       Dec        Feb        Apr     Jun       Aug      Oct
           EMEA Convertibles Index             Stoxx600 index                                Convertibles                  Parity
           PE HY 3% Cap ex-Finls               Euro-Agg: Corporates                          EM USD Credit HY Corp         EM USD Credit HG Corp

Note: Rebased to 100 at 31 December 2009 and measured until 30 November 2010. Source: Bloomberg, Barclays Capital

Barclays Capital | Global Top Picks 2011

                                              These convertible returns look modest relative 2009, when EMEA and Asia Pacific
                                              convertibles returned 42% and 37%, respectively. However, 2010 performance is still
                                              significantly positive, despite still ongoing concerns surrounding Euro area sovereign debt.
                                              Moreover, our analysis points to a third successive year of positive returns in 2011.

                                              Issuance and redemptions in balance in both EMEA and Asia Pacific
       EMEA new issuance YTD is               EMEA convertible market value was €84.8bn with nominal value €82.8bn at 30 November
       €12.2bn, versus €12.8bn of             2010. New issuance was €12.2bn from 39 deals in 2010 YTD, with €3.9bn rated investment
 redemptions; we forecast €10bn               grade. Bond redemptions totalled €12.8bn, resulting in slightly negative net supply. We
           of redemptions for 2011            forecast bond redemptions of €10.3bn for 2011 (Figure 5).

Asia Pacific new issuance YTD is              Asia Pacific convertible market value was $81.2bn with nominal value $73.3bn at 30
       $14.2bn, versus $13.1bn of             November 2010. In these numbers, for Japan, we only include active names. New issuance
 redemptions; we forecast $19bn               was $14.2bn from 39 deals in 2010 YTD, helped by a record $6.9bn in September alone.
           of redemptions for 2011            $5.6bn was investment grade. Bond redemptions totalled $13.1bn, resulting in slightly
                                              positive net supply. We forecast bond redemptions of $18.8bn for 2011 (Figure 5).

                                              Valuations are little change in volatility relative value, and remain
                                              approximately fair
  Convertible, option implied and             Our analysis of volatility-sensitive convertibles in EMEA shows that average convertible-
  realised volatilities ticked lower          implied volatility is flat over Q4. However, average credit-calibrated convertible implied
                   since Q3 in EMEA           volatility, 12m at-the-money option-implied volatility and realised volatility have each declined.
                                              Hence the asset class remains fairly valued in volatility relative value terms, as it was at the end
                                              of Q3, in our view. As of 30 November, on average: convertible implied volatility was 28.6%,
                                              0.2pts lower since end-Q3; credit-calibrated convertible implied volatility is 34.4%, down
                                              1.6pts, 12m at-the-money option implied volatility is 34.8%, down 2.9pts; 100-day volatility is
                                              30.5%, down 6.7pts; and 999-day volatility is 49.0%, down 2.1pts.
          In Asia Pacific, convertible        For Asia Pacific, our analysis shows that average convertible implied volatility increased
 implied volatilities edged slightly          slightly during Q4, while 12m at-the-money option-implied volatility is little changed. Hence
      higher, while option implied            we now find the asset class fair to marginally expensive in volatility relative value terms.
    volatility is little changed and          As of the end of November, on average: Convertible implied volatility is 29.2%, 1.5pts higher
                                              since end-Q3; credit-calibrated convertible implied volatility is 33.6%, up 1.6pts; 12m
          realised volatility declined

Figure 5: Realised convertible issuance and bond redemptions in 2010 and projected redemptions for 2011

  EMEA (€ bn)                                                                         Asia Pacific ($ bn)

    14                                                                   2.5             16                                                       4.0
    12                                                                                   14                                                       3.5
    10                                                                                   12                                                       3.0
                                                                         1.5             10                                                       2.5
                                                                                          8                                                       2.0
      6                                                                  1.0
                                                                                          6                                                       1.5
                                                                         0.5              4                                                       1.0
                                                                                          2                                                       0.5
      0                                                                  0.0
                                                                                          0                                                       0.0
           Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec*
                                                                                               Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec*
                      2011 redemptions                                                                      2011 redemptions
                      2010 cumulative issuance                                                              2010 cumulative issuance
                      2010 cumulative redemptions                                                           2010 cumulative redemptions

Note: Total 2011 redemption projections are €10.3bn in EMEA and $18.8bn in Asia Pacific. Source: Barclays Capital

Barclays Capital | Global Top Picks 2011

                                     at-the-money option implied volatility is 31.3%, down 30bp; 100-day realised volatility is
                                     30.3%, down 2.8pts; and 999-day realised volatility is 48.7%, down 3.1pts.

                                     Convertibles continue to offer diversity in terms of credit ratings and profile
                                     Throughout 2010 the convertible market in both regions has unsurprisingly become more
                                     balanced given stronger equity and credit markets and also buoyed by new issuance.
                                     Busted convertibles now comprise 26% of our EMEA universe versus 32% at the beginning
                                     of the year, with 37% of our Asia Pacific universe considered busted versus 50% a year ago.
                                     Figure 7 and Figure 9 illustrate the diversity of the market profile in both regions. In terms of
                                     credit ratings, EMEA, in particular, offers a well balanced range of ratings, with Asia Pacific
                                     still dominated by non-rated issuers.

Figure 6: EMEA universe market value by rating                      Figure 7: EMEA universe market value by profile

                                            High Yield                          Equity            4%
                                              24%                             sensitive &
          Non Rated                                                               7%
                                                                            sensitive &


Source: Barclays Capital                                            Source: Barclays Capital

Figure 8: Asia Pacific universe market value by rating              Figure 9: Asia Pacific universe market value by profile

                                                                                       Equity                  Not
                               High Yield
                                                                                     Sensitive &            classified
                                                                                        OTM                    3%
                                                Investment                                                                  Busted
                                                   Grade                        Equity                                       37%
                                                                              Sensitive &

           Non Rated


Source: Barclays Capital                                            Source: Barclays Capital

  Barclays Capital | Global Top Picks 2011


                                           Welcome Respite (for Now)
                                                 In our opinion, SPX realized volatility will decline to about 17% in 2011 versus about
                                                 19% year-to-date in 2010. However, we emphasize that several tail risks remain
                                                 which could easily upset this relatively benign baseline scenario.

                                                 Against the backdrop of our economists’ and strategists’ bullish outlook, we
                                                 evaluate the current volatility regime and hence the prospects for implied volatility
                                                 in 2011 in a long-term historical context. We expect SX5E 12mth realised volatility to
                                                 decline to about 20% in 2011 versus about 23% today.

                                           U.S. Equity Volatility Outlook
               Maneesh Deshpande          Our forecast of 17% for equity volatility is based on our macroeconomic model for equity
                    +1 212 526 0367       volatility (Figure 1). Underpinning it are the assumptions that macroeconomic volatility will             be similar to that during 2010 and that equity markets will rally moderately (SPX +10%),
                        BCI, New York     both driven by a gradual improvement in the U.S. economy aided by the ample liquidity in
                                          the system.
                          Rohit Bhatia
                                          The tail risks that we believe could upset this relatively benign baseline scenario, in
                    +1 212 526 0367
                                          decreasing order of importance, are: further escalation of the European debt crisis,

                                          weakening of the U.S. economy, Chinese monetary policy leading to a hard economic
                        BCI, New York
                                          landing, and geopolitical tensions. We estimate that these risks could potentially lead to
                                          equity volatility rising to as high as 25%. However, we estimate that further moderation in
              Kannan Venkateshwar
                                          macroeconomic volatility and an equity market rally of about 20% would lead to equity
                    +1 212 528 7054
                                          volatility declining to approximately 15%.
                        BCI, New York     The Fed losing control of inflationary expectations and emerging concerns about the fiscal
                                          health of the U.S. are likely to be more medium-term risks, in our opinion. Similarly, the
                         Ashish Goyal     simmering issues in the U.S. municipal debt sector, while not an immediate concern, need to
                    +1 212 526 2771       be carefully monitored. While regulatory uncertainty was a major source of volatility during          2010, we believe the gridlocked law-making bodies are unlikely to spring any surprises on
                        BCI, New York     the markets in 2011.

  Figure 1: SPX realized volatility will likely moderate further          Figure 2: But option implied volatility will likely remain at a
                                                                          premium to realized volatility

   55%                                                                        4
   35%                                                                     2.5
   15%                                                                        1
       1926 1936 1946 1956 1966 1976 1986 1996 2006 2016
                                                                             Jan-90       Jan-94       Jan-98       Jan-02    Jan-06   Jan-10
                 1Y SPX Volatility       Model         2011 Forecast                        VRP           3M Mov Average          Median

  Source: Barclays Capital, Bloomberg                                     Source: Barclays Capital, Bloomberg
                                                                          Note: VRP = VIX / Trailing 1M Realized Volatility

Barclays Capital | Global Top Picks 2011

                                           With the Fed firmly on guard, we believe a substantial decline in equity prices is unlikely.
                                           However, strong macroeconomic upside may not necessarily translate to a meaningful
                                           equity rally, since the Fed withdrawal of liquidity and the attendant volatility will likely weigh
                                           on the market, keeping it fairly range-bound.

                                           Tactical Views and Systematic Strategy Recommendations
                                           Premium of implied relative to realized volatility will likely remain high (Figure 2), which
                                           means that volatility selling strategies will likely perform well in 2011. Given our expectation
                                           for a range-bound market in 2011, we favor call overwriting strategies, even though they
                                           underperformed in 2010 (BXM: 2.4%, Barclays Capital Enhanced Buy-write Strategy: 5.5%,
                                           SPX: 7.9%). (See our publication “Systematic Volatility Strategies Monthly,” November 22,
                                           2010, for more details about these strategies.)

                                           Normalized volatility term structure (the ratio of long-dated volatility to short-dated
                                           volatility), while relatively steep, is now at pre-crisis levels (Figure 3), which is quite typical
                                           of rallying “normal” markets. Concerns around the risks highlighted above will likely steepen
                                           it further and thus volatility curve roll-down strategies predicated on a consistently steep
                                           term structure should remain attractive (see “A Guide to the VIX Derivatives Landscape,”
                                           December 1, 2010). The remarkable growth in the liquidity of VIX-related products means
                                           that these strategies can now be efficiently implemented by a broader class of investors.

                                           SPX skew (or cost of downside protection) has declined substantially after increasing to
                                           anomalous levels during the May crisis, but still remains elevated relative to its own
                                           historical values and to actual realized level of skew (Figure 4). It is likely to decline
                                           moderately through the year if our baseline scenario holds. We note that long-dated skew,
                                           which had stayed persistently high, has now normalized to its long-term median value.

                                           Implied and realized correlations, which had spiked to remarkably high levels during the
                                           May risk flare, have normalized substantially and are now trading at 2009 levels (Figure 5).
                                           An elevated stock correlation makes for a difficult stock-picking environment. While still high
                                           relative to pre-crisis levels, we believe that the increase in baseline correlations is a secular
                                           trend driven by increasing use of ETFs by investors and thus a substantial further drop is
                                           unlikely (see “Correlation, correlation everywhere, but not a drop to sell,” July 26, 2010).

                                           M&A activity will likely be an important theme driving the equity market during 2011.
                                           Derivatives markets not only offer invaluable information on these events but can be utilized

Figure 3: Volatility term structure will likely stay steep                Figure 4: Skew appears rich relative to history and realized

 1.4                                                                        0.6                                                              0.6
 1.3                                                                        0.5
                                                                            0.4                                                              0.3
 1.1                                                                                                                                         0.2
   1                                                                                                                                         0.1
 0.9                                                                        0.2                                                              0
 0.8                                                                        0.1
 0.7                                                                         0                                                                -0.3
 0.6                                                                         Jan-96       Jan-99      Jan-02        Jan-05   Jan-08      Jan-11
   Jan-92    Jan-95     Jan-98   Jan-01   Jan-04   Jan-07   Jan-10
                                                                                               3M Skew              Realized Skew(RHS)
         12M/3M SPX Var Swap               3M Mov Av          Current

Source: Barclays Capital, CBOE                                            Source: Barclays Capital, OptionMetrics

Barclays Capital | Global Top Picks 2011

                                           to express quite refined views, and we believe such strategies should thus be an important
                                           part of investors’ toolkits in 2011 (see “MEE: Option Surface Behavior in the Context of
                                           Event Risk,” December 1, 2010).

                                           Investing in crowded or bubble-prone assets is notoriously hard because they are difficult
                                           to forecast and prone to sudden declines. An unintended consequence of the Fed explicitly
                                           targeting asset prices through the “portfolio rebalance” channel is the danger of another
                                           round of market bubbles. An option strategy using ratio call-spreads can be very effective
                                           (e.g. for EEM and Gold; see “The Fed Delivers,” November 8, 2010), and we recommend
                                           using it for assets which begin exhibiting such momentum or trendy characteristics.

                                           Divergence in SPX implied volatility versus CDS spreads is normalizing to some extent.
                                           CDS spreads had become substantially tight relative to SPX volatility since the May crisis
                                           (Figure 6). In our opinion, this was driven by the rich index volatility due to high implied
                                           correlation rather than overly low credit spreads (“Credit–Equity Relative Value Ideas,”
                                           December 1, 2010). Equity volatility can serve as an attractive tail risk hedge for credit
                                           portfolios and the decrease in richness in equity volatility now makes it incrementally more
                                           attractive (“Hedging Credit Portfolios,” September 14, 2010).

                                           Hedging Strategies
                                           Given our expectation for a range-bound market in 2011, we believe that collars (buy puts
                                           and sell calls) should be the core hedge of choice.

                                           While put spreads collars would also make sense given our view of limited downside and
                                           declining volatility, the relatively fair long-term skew makes this strategy less compelling, in
                                           our view. In addition, we are cognizant of the small but non-trivial probability of a tail event
                                           happening during 2011.

                                           As we have shown, the VXZ – an exchange traded note (ETN) based on the S&P VIX Med-
                                           Term Futures Index – is an efficient tail risk hedge and we would recommend an allocation to
                                           this product to hedge risks of a large downturn (“VXZ as a Tail Risk Hedge,” September 27,
                                           2010). Some of the carry cost of holding VXZ can be mitigated by going short VXX, an ETN
                                           based on the S&P VIX Short-Term Futures Index, which is likely to have large roll cost due to
                                           the steep term structure we expect. For example, a notional ratio of 1:4 VXX to VXZ positions
                                           would provide protection during a downturn and should have a much lower carry cost.

Figure 5: Correlation as normalized but approaching a floor               Figure 6: Richness of credit vs equity volatility diminishing

 90%                                                                45%    Residual
 80%                                                                40%     80%
                                                                                                      Cheap Credit/Wide Spreads
 70%                                                                35%
 60%                                                                30%
 50%                                                                25%     40%
 40%                                                                20%     20%
 30%                                                                15%       0%
 20%                                                                10%
 10%                                                                5%
  0%                                                             0%        -40%
                                                                                              Rich Credit/Tight Spreads
   Jan-96      Jan-99     Jan-02      Jan-05     Jan-08     Jan-11         -60%
                                                                              Nov-05        Nov-06      Nov-07       Nov-08       Nov-09      Nov-10
               3M Realized Corr             3M Imp Corr
               SPY Norm. Volume                                                                               CDX IG           CDX HY
Source: Barclays Capital                                                  Source: Barclays Capital
Note: Normalized Volume = 3M Ratio SPY/Constituent Stocks volumes         Note: Regression Residual of a regression of log(CDS) ~ log(1Y SPX Implied Vol)

Barclays Capital | Global Top Picks 2011

                                          SX5E Equity Volatility Outlook – Generally More Benign
                     Arnaud Joubert       Realised volatilities for major indices became more correlated in the past 15 years. In
              +44 (0)20 3134 8344         Figure 7, we show a time series of 1Y realised volatility of various European indices and the            SPX. The sovereign crisis led to a significant spike in volatility in the SPX in 2010; and at the
          Barclays Capital, London        beginning of the year, we saw large volatility selling flows in the index, as investors
                                          positioned themselves for a differentiation that did not actually materialise.
                     Christian Kober
              +44 (0)20 3134 8673         We observe a pattern of risk return during major crises. In Figure 8, we compare the           current 2011 volatility outlook with similar episodes – from 1974 to 1977 (a volatility cycle
          Barclays Capital, London        induced by a recession and oil price/inflation shock) and from 2002 to 2005 (driven by 9/11
                                          attacks following the collapse of the bubble). During both historical episodes, as
                       Colin Bennett
                                          well as the most recent period, we observe a pattern of volatility falling significantly from the
              +44 (0)20 7773 8332
                                          year of the crash itself (in our example, 1974, 2002 and 2008) through to the following year,
                                          which is the time of the greatest rally during each cycle (1975, 2003 and 2009).
          Barclays Capital, London

                    Jerome Favresse
                                          After the year of initial recovery a period of consolidation begins. The equity market
              +44 (0)20 3134 8452         exhibits generally lower returns with lower realised volatility during the initial year of            recovery following a crash. This pattern was observed in 2010 and is consistent with the
          Barclays Capital, London        experiences of 2004 and 1976. Hence, we would expect 2011 to be similar to 1977 and
                                          2005 in the sense that the realised volatility regime is likely to remain relatively benign, or
                           Ali Fardoun    similar to the previous year. This belief is also predicated on our macro group’s bullish
              +44 (0)20 3134 8435         outlook on risky assets for the first half of 2011. Hence the return momentum, in our view,
          will be more aligned with 1977 – our equity strategists forecast a reacceleration in returns of
          Barclays Capital, London        around 15%.
                  Fabrice Barbereau       Current 1Y realised volatility for the SX5E and SPX is around 23% and 18%, respectively
              +44 (0)20 3134 8442         – we expect 2011 to be marginally below. We expect 2011 realised levels to be marginally             below 2010. Hence, we set a SX5E realised volatility target of around 20%, which translates
          Barclays Capital, London        into an approximate 1.25% move per day on average. This fits with the SPX volatility
                                          outlook from our US colleagues, who have defined a SPX target level of 17%.
                       Anshul Gupta
              +44 (0)20 3134 8122
          Barclays Capital, London

Figure 7: EU and US realised vol became more correlated                  Figure 8: Risk return patterns in past crisis years for Europe

 1Y realised volatility (observed at year end)                            1Y MSCI Europe realised volatility
 45%                                                                      40%
 40%                                                                      35%       2008
 35%                                                                      30%
 30%                                                                                     2002
 25%                                                                      25%                                                2009
 20%                                                                      20%                                               2003
 15%                                                                                                                        2011e
 10%                                                                      15%
                                                                                         1974                                            1975
  5%                                                                      10%                                 2004
                                                                                                     1976                    2005

                                                                             -60%         -40%      -20%      0%      20%          40%    60%
             MSCI Europe           SPX               MSCI UK                                1Y MSCI Europe equity market return
             DAX                   SX5E
Source: Barclays Capital                                                 Source: Barclays Capital

Barclays Capital | Global Top Picks 2011

                                     Implied Volatility, Skew and Correlation Outlook
                                     Given our benign outlook on risky assets in general, we would expect implied volatility to
                                     trade at a premium to realised volatility over the course of 2011. We expect sovereign
                                     contagion fears and EM tightening to put a floor under implied volatility expectations.
                                     However, while we can’t be certain that there won’t be another sovereign rumble in the
                                     market, because the ECB has made it clear in its recent meeting that it will stand behind the
                                     market on a tactical basis, we believe it makes significant volatility spikes such as that seen in
                                     May 10 more unlikely. Markets so far seem to have reached a similar conclusion to us.

                                     In May the increase in realised volatility was accompanied by similar significant spikes
                                     in commodity and currency volatility (Figure 9). Looking at implied cross asset volatilities,
                                     the recent repeat of sovereign concerns in November has mostly affected EURUSD volatility
                                     and to some degree equity market volatility, leaving commodity volatility and other
                                     currency pairs largely unaffected. Should this differentiation trend continue, we think that
                                     we should neither expect to revisit the index skew levels witnessed in 2010, nor should we
                                     see a large spike in realised volatility, at least in the first half of the year.

                                     Implied volatility skew is likely to revert to the 2006-2008 transition regime. One of the
                                     reasons why the skew ceiling has been lifted during H2 2008, in our view, is that many short
                                     skew investors such as volatility arbitrage funds and prop desks have exited the market. This
                                     led to a change in the structural selling flows that depressed skew during the last two regimes
                                     (Figure 10). In addition, structured product desks have been heavy buyers of skew in the
                                     recent sell-off, in order to hedge their short volatility exposure. Even so, from a fundamental
                                     perspective, we would not expect to see skew revisit the extremely elevated levels in May. For
                                     that to happen, we would expect that cross asset implied volatilities need to move together
                                     again. But from a technical perspective, skew has the propensity to spike significantly (even if
                                     implied vol remains more muted) should we see another episode of concerted risk aversion.
                                     Please refer to our note Is volatility smiling or baring its teeth, 17 May 2010.

                                     Implied correlation likely to continue to trade above realised. We have seen violent
                                     swings in implied and realised correlation levels in 2010. Implied correlation traded again at
                                     a premium to historical realised correlation for most of the year. But the P&L from a short
                                     correlation strategy would have been highly negative during the violent bout of sovereign-
                                     driven risk aversion in May. Overall, timing was difficult to get right in 2010. Going forward,
                                     we expect implied correlation to trade at still-elevated levels but realised correlation to
                                     remain at relatively benign levels, opening up this carry trade again. For more details, please
                                     refer to our report Correlation is the statistical outlier, 11 October 2010.

Figure 9: Cross asset implied vols diverged in Nov sell off         Figure 10: Skew dynamics change over time

 3mth ATM implied                  3mth ATM Implied Vol for           SX5E 3M 90% 110% implied volatility skew
 volatility for currencies             SX5E and Crude                14%                                              new resistance
 20                                                      40
 18                                                         35       12%                                 resistance
 16                                                         30
                                                                     10%            old resistance
 14                                                         25         9%
 12                                                         20         8%
 10                                                   15                                                              new floor
        Jun-09 Aug-09 Nov-09 Mar-10 Jun-10 Sep-10 Dec-10
             SX5E (RHS)                crude future (RHS)                        old floor
             EUR USD (LHS)             GBPUSD (LHS)
             JPYUSD (LHS)                                               Feb-01 Aug-02 Feb-04 Aug-05 Feb-07 Aug-08 Feb-10
Source: Barclays Capital                                            Source: Barclays Capital

Barclays Capital | Global Top Picks 2011

                                        Global Index Return and Implied Dividend Outlook
                                        Our strategists don’t have a strong preference between the US and European equity
                                        markets. They believe credible arguments could be constructed for either to outperform
                                        over the next year. Both our US and European strategists are bullish on the SPX and SX5E
                                        (both forecast around 15% upside, with an index target of 1420 and 3350, respectively). If
                                        anything, the macro group believes there are higher risks in Emerging Markets as significant
                                        inflows and tightening could impact equity performance in the region disproportionally.

                                        In order to evaluate current market expectations for the respective regions, we use
                                        option implied risk neutral probability distributions for certain index return scenarios
                                        over the coming 12M (Figure 11). Indeed, current index option prices assign a similar
                                        probability of returns between 10 and 20% for the SPX and the SX5E (18.3% and 16.2%).
                                        Tail risk is still priced higher in Emerging Markets (as approximated here by the EEM index)
                                        with extreme upside tails of +30% still relatively dear (12.2% vs. 3.5% for SPX). Hence the
                                        market does not share our strategists’ view that extreme upside tails could be less likely for
                                        the region in the coming 12 months. Please also refer to our recent report Year end – what
                                        is priced in and how to position, 22 November 2010.

                                        Europe and Japan most attractive from an implied dividend point of view. Current levels
                                        of Eurostoxx50 and Nikkei225 implied dividends suggest a severe double dip, with both
                                        having a c.10% decline between 2011 and 2015. Given the high levels of cash on corporate
                                        balance sheets, and our positive outlook for 2011, we believe current depressed levels of
                                        implied dividends are an attractive buying opportunity. By the end of H1 2011, we believe
                                        the term structure of Eurostoxx50 and Nikkei225 dividends will, like the FTSE and S&P500,
                                        revert to a more normal upward sloping profile. Given current worries about the funding of
                                        peripheral countries in Q2, we do not believe it is likely that term structures will normalise
                                        before then.

                                        Eurostoxx50 dividend growth at historically depressed levels vs. SPX. Even though US growth
                                        has historically been higher, the current sharp divergence between SX5E implied dividend
                                        growth rates (which are negative up to 2015) and SPX implied dividend growth rates (which is
                                        positive and has sharply increased post QE2) represents an anomaly, in our view. While the SX5E
                                        implied dividend growth discount to SPX has been sensitive to the level of the SX5E itself (SX5E
                                        implied growth is likely to rise when the market rises), the recent trading level is an outlier and
                                        represents a trading opportunity, in our view (Figure 12). Please refer to our note Buy SX5E
                                        steepener (2012-14) and sell SPX steepener (2012-14), 19 November 2010.

Figure 11: Option markets still point to a wide range of               Figure 12: SPX – SX5E (2012-2014 dividend growth) vs SX5E
possible index return outcomes

Risk neutral probabilities for 1Y index return scenarios                  8%                          Divergence between S&P500
                                                                                                      and SX5E dividend growth
                                SX5E         SPX           EEM            6%                          has never been wider
Less than -30%                  13.6%       10.9%          15.4%
Between -20% and -30%           7.4%         7.0%          7.9%           4%

Between -10% and -20%           10.7%       10.7%          10.8%          2%
Between -10% and -0%            17.2%       17.9%          15.8%
Between 0% and 10%              20.9%       24.0%          17.8%
Between 10% and 20%             16.2%       18.3%          15.0%         -2%
Between 20% and 30%             9.2%         9.7%          11.3%
More than 30%                   5.6%         3.5%          12.2%
                                                                            2006            2007        2008          2009
                                                                                             SX5E 2012-14 growth
                                                                                             SPX 2012-14 growth
                                                                                             SPX growth - SX5E growth (RHS)
Source: Barclays Capital                                               Source: Barclays Capital

Barclays Capital | Global Top Picks 2011

                                     Structured product outlook
                                     We believe that structured products could have a larger impact on equity market
                                     implied volatility in 2011 given our expectation that structured product market volumes
                                     are set to increase. 2008 formed the trough of the recent structured product cycle, with
                                     depressed market volumes in general. 2009 saw a pick up in volumes, but only at the end of
                                     2010 did private banks come back into the market in size to buy upside again. We expect
                                     private banks to remain in the market for 2011, increasing overall structured product
                                     volumes compared to the previous years and hence potentially exaggerating the structured
                                     product impact on volatility and dividends.

                                     When the market falls, structured product desks positions tend to become shorter
                                     longer-dated correlation (more than 3Y), shorter volatility and longer longer-dated
                                     dividends. This exposure leads index dividends to behave like a short put. In a market sell
                                     off, structured product desks will need to hedge those position changes and hence will
                                     typically scramble to offload their long dividend exposure by selling dividends in the market
                                     at the very time that the market is falling.

                                     Rising short volatility exposure in a market sell-off is typically hedged with long skew
                                     positions (for example by selling a put spread). This was one of the reasons why implied
                                     volatility skew increased to such elevated levels in May this year, even though the absolute
                                     level of volatility was nowhere near the 2008 highs. Going forward, because there are fewer
                                     structural skew sellers around, we cannot rule out implied skew revisiting the highs they
                                     saw in May, from a technical point of view, even if the overall level of volatility is likely to be
                                     much more benign. We also note that our fundamental outlook does not necessarily
                                     support for skew to return to its recent highs.

                                     When the market rallies (as we expect it to do in H1 10), structured product desks tend
                                     to become less long dividends, but are less likely to hedge this. Hence, the structured
                                     product effect on index dividends is negligible on the upside, in our view. They will also get
                                     less short implied volatility and correlation on the upside – their exposure decreases, making
                                     hedging less necessary.

                                     One of the dominant structured products in 2010 has been Autocallables with a long-
                                     dated 3-5Y duration. Those structures make investors short an ATM down and in put with a
                                     low barrier (usually 50-60%), which generates the premium that gets paid in the funded
                                     note. This is particularly interesting for investors in a low rate environment, as they offer a
                                     coupon which is currently much higher than the interest rate. The risk for the investor, apart
                                     from a large sell-off in the equity market, which would knock in the put, would be the credit
                                     risk of the bank in a default scenario, but investors are happy to take those risks as they
                                     tend to perceive a default as less likely, in our opinion.

Barclays Capital | Global Top Picks 2011

                                           TOP PICKS 2011

Barclays Capital | Global Top Picks 2011

                                                       We asked our fundamental analysts to provide their single best alpha generating stock ideas
                                                       for 2011. We have not attempted to impose a top-down macro view on their selections; the
                                                       only constraints were that the stocks should be rated 1-Overweight within the analyst’s
                                                       sector coverage universe and that there should be sufficient liquidity for the average
                                                       investor. To this point, the average market cap of the 65 stocks presented from the
                                                       Americas is nearly $32 billion, with an average daily trading volume of $308 million. The list
                                                       offers an average 24% potential upside from current price levels to our currently published
                                                       price targets and the average name is trading on a 17.1x forward P/E multiple. You will find
                                                       analyst recommendations that offer a more defensive approach, including shareholder
                                                       friendly share buyback and dividend policies. Conversely, there are also a number of more
                                                       growth-oriented stocks that are expected to benefit from the ongoing economic recovery
                                                       and thus generate outsized revenues gains, margin expansion and/or earnings growth.
                                                       Screening these ideas against additional fundamental and strategic variables, we note that:

                                                       27 of our top picks belong to sectors rated as 1-Positive by the respective fundamental
                                                       analysts: A, AAPL, AMR, CIX.TO, FCX, FLR, GFSA3.SA, HES, HIG, ITC, ITSA4.SA, JPM, LEN,
                                                       MRK, NOV, NWL, ONXX, ORCL, PEP, QGEN, ROK, UHS, UNH, UTX, WLL, WY, YHOO.

                                                       14 of our top picks are currently rated '1' by our overall quantitative model: A, AAPL, ACE,
                                                       CAH, COH, DTV, FCX, FLR, HES, HIG, NOV, PETM, SUN, UNH.

                                                       12 of our top picks are within a sector that is rated both 1-Positive by the fundamental
                                                       analysts and recommended as Overweight by our U.S. Equity Strategy team: AAPL, AMR,
                                                       FLR, HES, NOV, ORCL, QGEN, ROK, UTX, WLL, WY, YHOO.

                                                       8 of our top picks are rated ‘1’ by our overall quant score and are within a sector rated 1-
                                                       Positive by the analyst: A, AAPL, FCX, FLR, HES, HIG, NOV, UNH.

                                                       4 of our top picks are within a sector rated both 1-Positive by the analyst and Overweight by
                                                       the strategy team, and are also rated ‘1’ by our overall Quantitative score: AAPL, FLR, HES, NOV.

                                                       For detailed fundamental and quantitative metrics, as well as derivatives and convertible
                                                       strategies on our top picks, go to keyword TopPicksAmericas on Barclays Capital Live.

Potential Total Return of Top Picks


                    3.0%                 Staples
   Dividend Yield


                    2.0%                                                                     Power & Utilities
                    1.5%                                                      Industrials
                                                   Retail                                                        Basic Industries
                    1.0%                                                                                                              Financials
                    0.5%                               Internet & Media Technology

                           5%        10%                    15%         20%             25%              30%            35%         40%            45%
                                                                            Potential Price Appreciation

Source: Barclays Capital

BASIC INDUSTRIES | North America Metals & Mining

Freeport-McMoRan C&G (FCX)
The Investment Case
                                                                                        Stock Rating                          1-OVERWEIGHT
With inelastic, growing demand and restrained mine expansion expected over
                                                                                        Sector View                                1-POSITIVE
the next several years, copper remains the commodity within Metals & Mining
                                                                                        12-Month Price Target                      USD 130.00
with the strongest fundamentals, in our opinion. We believe Freeport-McMoRan
                                                                                        Price (09 Dec 2010)                        USD 110.66
offers significant leverage to a sustained high copper price combined with
                                                                                        Potential Upside/Downside                           17%
quality reserves, an attractive growth profile, a strong and disciplined
management team, and impressive free cash flow generation.
                                                                                        Market Cap (USD mn)                              52,107
                                                                                        Revenue TTM (USD mn)                             17989
The Business Drivers
                                                                                        Current BVPS (USD)                                  24.62
FCX operates a diverse mix of high-quality mining assets that produce copper,           Return on Equity TTM (%)                            38.43
gold, molybdenum, and cobalt at properties around the world. The company’s              Dividend Yield (%)                                    1.1
2007 acquisition of Phelps Dodge combined a strong portfolio of North and               Source: FactSet Fundamentals
South American mine properties and the best-in-class African Tenke Fungurume
                                                                                        EPS (USD)
project with the company’s flagship Grasberg mine in Indonesia, which remains
                                                                                        FY DEC                     EPS               P/E
one of the world’s largest reserves of copper and gold. The company now offers
                                                                                        2009                   5.91A                 18.7
a leading production growth profile, attractive cash costs, and a management
                                                                                        2010                   8.30E                 13.3
team with a track record of strong execution and a commitment to attractive
                                                                                        2011                   9.70E                 11.4
shareholder returns.
                                                                                        Source: Barclays Capital

Copper accounts for more than 80% of the company’s revenue, by our
                                                                                        Upside/Downside Scenario
estimates. We currently forecast 2011 EPS of $9.70, largely based on an average
                                                                                         200                                            $160
copper price of $3.75/lb. We believe the risk to our copper price assumptions                                                   $130  (44.8%)
                                                                                         150                                  (17.6%)
remains to the upside. Every $0.10 increase in the average copper price would,
we estimate, lead to a $0.43 EPS increase. In our opinion, the market continues                                       $65
                                                                                         100                                            Upside
                                                                                                                   (-41.1%)  Price
to underappreciate the value represented by these shares given the prospects of                                                          Case
                                                                                          50                       Downside Target
substantial upside for copper. In addition, we believe the market fails to                                           Case
appreciate the high barriers to entry inherent in copper mining and the value of
                                                                                          16-Dec-09         9-Dec-10          Price Performance
FCX’s geographically diverse resource base.
                                                                                        Source: FactSet

Upside/Downside Scenarios                                                               Percentages indicate potential upside/downside from
                                                                                        current price.
In an upside scenario, labor, geological, and political issues will continue to limit
the mining industry’s ability to ramp up copper production to levels required by        Peter D. Ward, CFA
an improving global economy. This should push up copper prices substantially.           1.212.526.4016
We believe upside for FCX over the next year could be as high as $160.        
                                                                                        BCI, New York
For a downside scenario, a double-dip recession occurs leading to a less tight
supply/demand balance and a weaker copper price. This could lead to lower-
than-expected earnings and limit the opportunities for FCX to bring additional
production on line over the near term. We believe FCX shares could trade as low
as $65 in the downside case.

Valuation Analysis
FCX currently trades at a firm value 4.7x our current 2012 EBITDA estimate of
$9.8 billion. This compares to Alcoa’s current valuation at 5.1x our 2012 EBITDA
estimate and an average gold mining EV/EBITDA multiple of 13.8x. Our price
target of $130 assumes a firm value 5.9x our 2012 EBITDA estimate, in line with
its historical average trading multiple.

BASIC INDUSTRIES | Canadian Mining

Potash Corporation of Saskatchewan Inc. (POT)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
As the world’s largest potash producer and third-largest nitrogen and phosphate
                                                                                      Sector View                                2-NEUTRAL
producer, we believe that Potash Corporation of Saskatchewan is the premium
                                                                                      12-Month Price Target                      USD 165.00
global fertilizer company with the size and product diversification to benefit from
                                                                                      Price (09 Dec 2010)                        USD 138.91
accelerating demand growth across the fertilizer complex.
                                                                                      Potential Upside/Downside                           19%
The Business Drivers
                                                                                      Market Cap (USD mn)                              41,352
Of the three primary fertilizer nutrients (nitrogen, phosphates, and potash),         Revenue TTM (USD mn)                                5988
potash generates the highest gross margins. In addition to being the world’s          Current BVPS (USD)                                  26.38
largest potash producer, POT is also one of the lowest-cost producers of potash.      Return on Equity TTM (%)                            23.46
As a result, the company is able to drive strong margins and cash flows from its      Dividend Yield (%)                                    0.3
potash business.                                                                      Source: FactSet Fundamentals

In addition to being the biggest potash producer, POT is currently in the midst of    EPS (USD)
a large potash capacity-development program that should grow capacity by              FY DEC                     EPS               P/E

approximately 42% (to 17.1 million tonnes from approximately 12 million               2009                   3.26A                 42.6
tonnes) by 2015. With global demand for potash expected to grow faster than           2010                   5.87E                 23.7
any other fertilizer product over the next five years, the capacity expansion         2011                   8.15E                 17.0
should allow POT to grow market share over the next few years.                        Source: Barclays Capital

                                                                                      Upside/Downside Scenario
Upside/Downside Scenarios
The global potash market experienced a significant decline in demand in 2009,          194
                                                                                                                              $165  (33.1%)
driven by falling crop prices, while potash prices were cresting near all-time                                     $115
highs. Demand rebounded significantly in 2010 as producers cut prices to entice                                  (-17.2%)             Upside
buyers back to the market. Looking to 2011, key issues in the potash market will                                                       Case
                                                                                        94                       Downside Target
likely be the size of demand growth; the impact of increased demand on supply
tightness; and the effect the demand growth will have on potash prices.                 16-Dec-09         9-Dec-10          Price Performance

In our opinion, we expect potash demand to return to normal levels in 2011            Source: FactSet
                                                                                      Percentages indicate potential upside/downside from
(around 55 million tonnes), which we expect to create supply tightness. We
                                                                                      current price.
estimate global potash operational capacity to be 60 million tonnes, less than
consensus expectations. We expect this supply tightness to lead to a                  Farooq Hamed
strengthening potash price throughout 2011.                                           1.416.863.8963
In a strong price-increase environment, where realized FOB potash prices reach
                                                                                      BCC, Toronto
$500 per tonne in 2011 with 2-3% growth thereafter, we estimate that our NAV
for POT could reach $185 per share. On the downside, if realized FOB potash
prices revert to early 2010 values closer to $350 per tonne with the same 2-3%
growth thereafter, we estimate that our NAV for POT could fall to $115 per
share. We base our price target on a 1x NAV multiple.

Valuation Analysis
On an EV/EBITDA basis, POT is trading at 11.8x our EBITDA expectation for
2011 of $3,888 million vs a historical average of approximately 11.7x. We base
our valuation of POT on a discounted cash flow and NAV basis, using a WACC of
7.1% and a terminal year of 2015. Based on our NAV of $165 per share, POT is
currently trading at 0.8x NAV.

BASIC INDUSTRIES | Latin America Metals & Mining

Vale (VALE)
The Investment Case
                                                                                         Stock Rating                          1-OVERWEIGHT
We believe Vale is the best vehicle in Latin America to gain exposure to a
                                                                                         Sector View                                2-NEUTRAL
potential five-year iron ore super cycle, with around 75% of the company’s
                                                                                         12-Month Price Target                          USD 46.00
EBITDA tied to iron ore. We believe the stock combines attractive valuation,
                                                                                         Price (09 Dec 2010)                            USD 33.41
earnings momentum, growth opportunities, and world-class assets.
                                                                                         Potential Upside/Downside                              38%
The Business Drivers
                                                                                         Market Cap (USD mn)                              176,168
We view Vale mainly as a play on the iron ore pricing outlook, which we expect           Revenue TTM (USD mn)                                  38733
to remain stronger for longer. Our optimism is supported by: 1) a slower supply          Current BVPS (USD)                                    12.83
side response from miners; 2) a steady rebound in global demand, mainly fuelled          Return on Equity TTM (%)                              21.08
by China; 3) a steeper cost curve in China, the industry’s marginal producer; 4)         Dividend Yield (%)                                      NA
the potential for further underperformance of Indian supply; and 5) a spike in           Source: FactSet Fundamentals
capital-intensity levels, mostly inflated by infrastructure requirements.
                                                                                         EPS (USD)
Vale’s main competitive advantages lie in its: 1) positioning as the lowest-cost         FY DEC                     EPS                  P/E

producer in the industry; 2) superior product quality (i.e., high Fe/low gangue          2009                   1.00A                   33.4
ore); 3) high-return organic growth platform; and 4) long-reserve-life assets.           2010                   2.99E                   11.2
                                                                                         2011                   4.60E                    7.3
Upside/Downside Scenarios                                                                Source: Barclays Capital

An upside scenario: stronger-than-expected demand from China combined with               Upside/Downside Scenario
rising supply constraints and long-term iron ore prices at US$90 per ton (FOB             70                                                $57
equivalent). In our view, market participants may be excessively conservative on          60                                     $46      (70.8%)
                                                                                          50                                   (37.8%)
long-term iron ore price forecasts. Furthermore, we believe the consensus view
                                                                                          40                           $24
on the supply side response from miners is highly optimistic, especially amid the         30                        (-28.0%)               Upside
                                                                                                                                Price       Case
rising project-execution risks in the industry. If we assume long-term realized           20                        Downside   Target
prices at US$90 per ton (FOB equivalent, 28% above our base-case scenario), we                                        Case
estimate a DCF-based fair price for Vale of US$57.                                        16-Dec-09          9-Dec-10          Price Performance

A downside scenario: China’s steel intensity peaking earlier than expected and           Source: FactSet
                                                                                         Percentages indicate potential upside/downside from
higher governmental intervention. In our view, this scenario could translate to:
                                                                                         current price.
1) long-term realized prices of US$50 per ton (FOB equivalent, -28% from our
base-case model), as markets would be oversupplied and China would be                    Leonardo Correa
displaced as the marginal producer; 2) potentially a 100bp higher discount rate,         +55 11 3757 7285
reflecting rising political interference; and 3) higher mining royalties in Brazil, at
8% of adjusted revenues (currently at 2%). In this scenario, we estimate a DCF-          BBSA, São Paulo
based fair price for Vale of US$24 per share.
                                                                                         Christopher LaFemina, CFA
                                                                                         +44 (0)20 3134 5009
Valuation Analysis
Vale trades at an attractive 2011 EV/EBITDA multiple of 5.3x versus its                  BCI, New York
normalized multiple of 7x. We expect the shares to re-rate as investors start re-
pricing its growth opportunities and the longevity of the iron ore pricing cycle.
We employ a discounted cash flow to firm valuation model (DCFF) based on
nominal US$ cash flows. Our nominal (USD based) weighted average cost of
capital (WACC) assumption is based on: 1) Cost of equity of 12%, with a beta of
1.1, a risk-free rate of 5%, equity risk premium of 5% and country-risk premium
of 150bp; 2) target capital structure (D/(D+E)) of 30%; 3) effective tax rate of
25%; and 4) cost of debt of 7%.

BASIC INDUSTRIES | U.S. Paper & Forest Products

Weyerhaeuser Co. (WY)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
Weyerhaeuser is an ongoing restructuring story and a company that will
                                                                                      Sector View                                1-POSITIVE
formally become a REIT when they file their 2010 tax return with the IRS. After a
                                                                                      12-Month Price Target                          USD 29.00
16-year downturn in real lumber pricing (between 1993 and 2009) an upturn is
                                                                                      Price (09 Dec 2010)                            USD 17.68
under way. WY is a superior hard asset play whose highly productive
                                                                                      Potential Upside/Downside                             64%
timberlands thrive in an inflationary environment. We believe a multi-year
cyclical upturn in demand, prices, and profits began in 2010, and positive
                                                                                      Market Cap (USD mn)                                   9,475
momentum should build in 2011, 2012, and beyond. We believe investors are             Revenue TTM (USD mn)                                  6343
significantly underestimating the benefits of a) a three-fold cyclical rise in        Current BVPS (USD)                                      8.6
housing starts, b) a 50% fall in British Columbia log supplies from the Pine          Return on Equity TTM (%)                              20.87
Beetle, c) a 50% fall in Russian log exports (the world’s largest exporter) who is    Dividend Yield (%)                                      1.2
trying to internalize log supplies, and d) a demand shock in China (the world’s       Source: FactSet Fundamentals
largest log importer) who is redirecting their supply chain to rely less on Russia.
                                                                                      EPS (USD)
The transformed WY has large operational leverage to improvements in timber,
                                                                                      FY DEC                     EPS                  P/E
wood product, housing demand, prices, and mix. Post the sale of uncoated free
                                                                                      2009                  -2.05A                    NA
sheet, containerboard, and other assets, the transformed WY has greater growth
                                                                                      2010                   0.42E                   42.1
prospects, less capital intensity, increased tax efficiency, much higher conversion
of each EBITDA dollar to free cash flow, and a lower cost of capital.                 2011                   0.95E                   18.6
                                                                                      Source: Barclays Capital
The Business Drivers
                                                                                      Upside/Downside Scenario
An upturn in demand and prices for housing starts, wood products, and logs is          75                                                $57
needed for investors to appreciate the cash flow potential of the company.                                                             (222.%)

However, we estimate WY’s timberlands represent about 70% of the value of the          50                                     $29
                                                                                                                    $19     (63.8%)
company and as long as Mother Nature keeps providing rain and sunshine for                                                              Upside
                                                                                       25                         (7.3%)                 Case
free, and as long as the DNA of WY’s trees continue to provide the instructions                                              Price
                                                                                                                 Downside   Target
needed for 5%+ biological growth, and 8%+ per unit value growth of WY’s                 0

forest, the intrinsic value of the timberlands should continue to rise with cost of    16-Dec-09          9-Dec-10          Price Performance
capital beating returns. WY’s non-timber assets include a wood products               Source: FactSet
business, a homebuilding business, and a market pulp business.                        Percentages indicate potential upside/downside from
                                                                                      current price.
Upside/Downside Scenarios
                                                                                      Peter Ruschmeier
At worst, we believe shares of WY should trade in line with the liquidation value
of the standing timber inventory and the current SOTP trading value of the non-
timber assets (currently about $6bn). This assumes zero value for the residual        BCI, New York
land value of 6.5mn acres, zero value for 7mn acres of mineral rights, and zero
value for other assets which include several railroads and a shipping business.
This value is $19 per share. Our upside scenario of $57 assumes a mean-
reversion trade of lumber to its 100-year real average of $480, which implies
stumpage prices roughly double our current estimates.

Valuation Analysis
Our DCF-derived 12-month price target of $29 represents a 12.4x multiple on
mid-cycle EBITDA of $1.643bn, less adjusted net debt of $4.744bn (includes
pension liabilities), divided by 537mn shares.

CONSUMER | Latin America Cement & Construction

Gafisa (GFSA3.SA)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
We regard Gafisa as a distinctive opportunity in the sector: a diversified name,
                                                                                      Sector View                                1-POSITIVE
well capitalized, with idle capacity and margins returning to the sector’s average,
                                                                                      12-Month Price Target                          BRL 20.00
and whose valuation barely reflects the amount of cash that should be collected
                                                                                      Price (09 Dec 2010)                            BRL 11.44
in the next couple of years. Gafisa is trading below its impairment value at 0.83x
                                                                                      Potential Upside/Downside                             75%
price-to-liquidation value (P/LV), despite being: 1) a competitive play;
2) increasingly profitable as problematic 2008 projects have been phased out;
                                                                                      Market Cap (BRL mn)                                   4,937
3) well-capitalized and diversified, both geographically and by income segment;       Revenue TTM (BRL mn)                                  3690
and 4) ready to take advantage of growth opportunities in Brazilian housing.          Current BVPS (BRL)                                     8.54
                                                                                      Return on Equity TTM (%)                              12.23
The Business Drivers
                                                                                      Dividend Yield (%)                                      1.1
Gafisa acquired Tenda in 2008 knowing that the transaction would lower its            Source: FactSet Fundamentals
margins for at least a couple of years until Tenda’s legacy projects were phased
                                                                                      EPS (BRL)
out and Gafisa started collecting its receivables. We have recommended the
                                                                                      FY DEC                     EPS                 P/E
stock since 2Q09 assuming that its margins would return to the sector’s
                                                                                      2009                   0.49A                   23.3
average; however, the market’s skepticism about Gafisa’s ability to raise its
                                                                                      2010                   1.07E                   10.7
margins again has made GFSA3 trade at a sizable discount to peers since then.
                                                                                      2011                   1.32E                   8.7
This concern should have diminished, in our view, as we can already see this
                                                                                      Source: Barclays Capital
trend materializing: Gafisa has reported increasing EBITDA and net margins
since 1Q09, and its EBITDA margin has already converged with those of its             Upside/Downside Scenario
diversified peers Cyrela and Rossi in 3Q10.                                                                                              R$22
                                                                                                                           R$20        (92.3%)
                                                                                                                   R$17  (74.8%)
Upside/Downside Scenarios                                                              19                        (48.6%)

Gafisa is very comfortable with its execution capacity going forward. The              14                                    Price     Upside
                                                                                                                 Downside               Case
company is expected to launch R$5.5 billion in projects in 2011, per consensus,         9                          Case

which is roughly the same volume that Gafisa and Tenda launched together in             4
2008 (R$5.3 billion). In an upside scenario, we believe Gafisa could possibly          16-Dec-09          9-Dec-10          Price Performance

deliver a 20% CAGR in launch volumes in 2010-12 vs our 12% estimate, which            Source: FactSet
would imply a stock price of R$22 per share.                                          Percentages indicate potential upside/downside from
                                                                                      current price.
One risk to our investment case is that the inferior margin reported in 2009 was
a result of structurally less profitable performance instead of the temporary         Guilherme Vilazante
effects of a few underperforming projects. However, if the EBITDA margin              +55 11 3757 7376
remains 18.5% and the net margin remains 13.0%, instead of rising to 21.5%  
                                                                                      BBSA, São Paulo
and 17%, respectively, as we estimate, we arrive at a stock price of R$17, still
implying 49% potential upside. This compelling upside in a downside scenario is
explained by the fact that GFSA3 is trading below 1.0x P/LV, which means that
roughly no future launches are embedded in its current valuation.

Valuation Analysis
GFSA3 trades at 0.83x P/LV and 1.01x P/adjusted BV and at a 34% average
discount to large-cap peers. Our R$20 price target implies a compelling 75%
potential upside, and is based on our DCF model in which we discount Gafisa's
cash flow up to 2020 with a cost of equity of 15% in US$ nominal (12.5% in real
terms) and perpetuity growth of 2.5% in US$ nominal (0% in real terms).

CONSUMER | Latin America Consumer

Grupo Modelo (GMODELOC.MX)
The Investment Case
                                                                                       Stock Rating                          1-OVERWEIGHT
Grupo Modelo has an opportunity to reduce costs meaningfully and lift margins
                                                                                       Sector View                                2-NEUTRAL
in the next three years by, we estimate, 500 basis points or more. In our view,
                                                                                       12-Month Price Target                      MXN 85.00
the arrival of Anheuser-Busch InBev's CEO and CFO on Modelo's board could
                                                                                       Price (09 Dec 2010)                        MXN 73.42
potentially act as a catalyst for more determined action on excess costs. We
                                                                                       Potential Upside/Downside                           16%
believe Heineken's arrival in Mexico since last year is likely to provide a positive
backdrop for margins by introducing more rationality in trade and marketing
                                                                                       Market Cap (MXN mn)                              46,398
spending in Mexico. The consumer recovery in the U.S. is also likely to improve        Revenue TTM (MXN mn)                             84375
both Mexican and U.S. top line trends.                                                 Current BVPS (MXN)                                  23.11
                                                                                       Return on Equity TTM (%)                            13.77
The Business Drivers
                                                                                       Dividend Yield (%)                                    2.8
Modelo's revenues are more than 90% derived from beer, with the balance                Source: FactSet Fundamentals
accounting notably for the Extra convenience store chain. Seventy-five percent
                                                                                       EPS (MXN)
of Modelo's beer volumes and 60% of value sales are generated in Mexico; the
                                                                                       FY DEC                     EPS               P/E
rest is comprised of exports, mainly of the Corona brand (80% to the United
                                                                                       2009                   2.67A                 27.5
States). Modelo's share in Mexico is around 54% (versus Heineken's 43% and
                                                                                       2010                   3.03E                 24.2
others’ 3%); however, in the central part of Mexico, Modelo's share is in excess
                                                                                       2011                   3.55E                 20.7
of 70%. In the U.S., Modelo's brands account for 5% of the market and 40% of
                                                                                       Source: Barclays Capital
the import beer segment.
                                                                                       Upside/Downside Scenario
Despite being a duopoly, the Mexican beer market has historically experienced
                                                                                                                                     MXN 93
competitive activity as FEMSA, which is strong in the north of the country, tried       110
                                                                                                                             MXN 85 (26.8%)
to break through in regions where Modelo is dominant. This led to higher                                                     (15.9%)
                                                                                         90                       MXN 68
marketing and channel spending over the years. Ownership by Heineken of                                           (-7.23%)
                                                                                         70                                            Upside
FEMSA Cerveza is likely to lead to a more rational competitive landscape.                                         Downside Target       Case
Export volumes have been soft for the past three years largely due to the U.S.           30
economic environment. We have seen a recovery in Modelo's market share and               16-Dec-09         9-Dec-10          Price Performance

overall volumes in the past few months. The pricing environment appears                Source: FactSet
favorable, with ABI and MillerCoors pursuing a rational, profit-driven strategy.       Percentages indicate potential upside/downside from
                                                                                       current price.

Upside/Downside Scenarios
                                                                                       David Belaunde
Our base-case scenario of MXN 85 is predicated on a 500bp increase to EBIT             1.212.526.5572
margins over three years. In our upside scenario, we believe it is possible to
envisage stronger margin enhancement of around 800bp, which would imply a              BCI, New York
stock price of MXN 93. In our downside scenario, no margin enhancement
occurs and sales remain permanently soft in the U.S. market, implying a stock
price of MXN 68 per share.

Valuation Analysis
The stock is trading at 10.5x EV/EBITDA. This is comparable to AmBev, the other
main Latin American peer, and above European peers at around 9x. While we
acknowledge this is not a bargain valuation for the name, we believe within the
context of a Latin American consumer sector that is trading on historically high
multiples, and given the company's potential to lift margins substantially, this
stock should still outperform the sector. Our price target of MXN 85 is derived
from a DCF valuation using a WACC of 11% and a perpetuity growth rate of 3%.


Kraft Foods (KFT)
The Investment Case
                                                                                         Stock Rating                          1-OVERWEIGHT
The market is not giving Kraft Foods credit for the very real potential for above-
                                                                                         Sector View                                2-NEUTRAL
average, mid-teens EPS growth in 2011, in our view. Although KFT, like others,
                                                                                         12-Month Price Target                          USD 35.00
must deal with reinflation and volume sluggishness next year, it also has the
                                                                                         Price (09 Dec 2010)                            USD 31.09
unusual benefit of the bulk of Cadbury-related cost synergies slated to flow
                                                                                         Potential Upside/Downside                             13%
through. Now trading at a -6% discount to the group and with a 4% dividend
yield, we believe KFT shares provide a compelling risk/reward proposition.
                                                                                         Market Cap (USD mn)                               54,307
                                                                                         Revenue TTM (USD mn)                               46459
The Business Drivers
                                                                                         Current BVPS (USD)                                    19.98
Against an industry backdrop of rapidly accelerating inflation and tepid volume          Return on Equity TTM (%)                                8.8
momentum, KFT stands out among others for its above-average P&L flexibility              Dividend Yield (%)                                      3.7
heading into 2011. Although it is not exempt from industry woes and will                 Source: FactSet Fundamentals
similarly have to flex its pricing muscle to offset cost pressures, the integration of
                                                                                         EPS (USD)
Cadbury and the cost synergies it promises to bring next year should help KFT
                                                                                         FY DEC                     EPS                  P/E
drive above-average, mid-teens EPS growth while others may find it difficult to
                                                                                         2009                   2.03A                   15.3
deliver on their long-term, high single-digit growth goals, in our view. For
                                                                                         2010                   2.02E                   15.4
context, forecast incremental cost savings from Cadbury ($400mn-plus) should
                                                                                         2011                   2.33E                   13.3
drive about two-thirds of the roughly 15% EPS growth we look for in 2011.
                                                                                         Source: Barclays Capital

Upside/Downside Scenarios                                                                Upside/Downside Scenario
For KFT shares to “work” into next year, we believe two key factors have to               43                                     $35        $35
come together: 1) KFT’s core business must show signs of top-line acceleration            38                                   (12.6%)    (12.6%)
and 2) cost synergies need to begin to palpably flow through. We believe                  33
investors will be more keen to wait on the latter if the former materializes more                                               Price      Upside
                                                                                          23                        Downside   Target       Case
quickly. Specifically, KFT has guided to a “bigger” 4Q10, which is slated to show         18                          Case

sequentially higher pricing y/y and more stable volume results in its base.               13
                                                                                          16-Dec-09          9-Dec-10          Price Performance
Delivery against its 4Q goals should propel KFT shares higher, in our view, by
                                                                                         Source: FactSet
reinforcing visibility to a stronger 2011 and consensus of $2.33 (around 15%             Percentages indicate potential upside/downside from
growth y/y). That is, we see room for KFT’s -6% discount vs peers to narrow              current price.
closer to parity, which would peg near-term upside at around $32-$33. From
there, evidence of cost synergies starting to accrue could drive further multiple        Andrew Lazar
expansion and we see our $35 target as eminently reachable in the process.               1.212.526.4668
Downside is relatively limited, in our view, given the shares’ already discounted        BCI, New York
valuation and especially in light of KFT’s roughly 4% dividend yield. Some
overhangs exist such as the potential for an EPS hit in 2011 due to the removal
of Starbucks coffee from KFT’s portfolio (which could shave $0.02-$0.04 from
EPS, by our math). Should consensus EPS for next year prove overly optimistic
and get revised (say to 9%-11% growth), we would peg potential downside at

Valuation Analysis
KFT shares trade at about the same relative valuation vs peers as they did this
time last year, which is ironic, since we believe there is little investor doubt that
KFT’s portfolio has been “upgraded” via the Cadbury deal since then. Our $35
price target assumes a 15x multiple on our $2.33 EPS estimate for 2011.

CONSUMER | U.S. Homebuilders & Building Products

Lennar Corp. (LEN)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
We believe Lennar is the best positioned builder heading into 2011 as we expect
                                                                                     Sector View                                1-POSITIVE
the company can outperform in a variety of macroeconomic conditions. Should
                                                                                     12-Month Price Target                          USD 21.00
employment and confidence remain depressed in 2011, we expect investors will
                                                                                     Price (09 Dec 2010)                            USD 17.54
continue to prefer builders that have better handled their costs. During 2010,
                                                                                     Potential Upside/Downside                             20%
Lennar delivered the highest average gross margin (ex-charges), helping to drive
positive core operating margins in each quarter. On the other hand, we believe
                                                                                     Market Cap (USD mn)                                   2,695
Lennar will exhibit significant leverage to an improving economy, given its above    Revenue TTM (USD mn)                                  3128
average land supply and Rialto business.                                             Current BVPS (USD)                                    13.53
                                                                                     Return on Equity TTM (%)                               4.03
The Business Drivers
                                                                                     Dividend Yield (%)                                      0.9
Despite closings in the first three quarters of 2010 declining 1.7% y/y, Lennar      Source: FactSet Fundamentals
was able to improve gross margins 700bp on average y/y. Further, SG&A as a
                                                                                     EPS (USD)
percentage of revenues contracted 280bp over the same period. We believe this
                                                                                     FY NOV                     EPS                  P/E
reflects not only management’s focus on cost control, but also a land cost basis
                                                                                     2009                  -2.45A                    NA
that is more reflective of the current housing environment than that of some
                                                                                     2010                   0.32E                   54.8
other builders. As such, we expect core operating margins to continue to
                                                                                     2011                   0.59E                   29.7
outperform in 2011.
                                                                                     Source: Barclays Capital

In addition to the core business, we believe Lennar’s Rialto business is currently
                                                                                     Upside/Downside Scenario
being underappreciated in the market. Lennar has been successful with
                                                                                      30                                                $24
distressed asset investing in the past (e.g., LNR Property Corporation), and we                                              $21
                                                                                      25                                   (19.8%)
believe the application of conservative underwriting standards to its acquisitions    20                           $12
will allow for significant growth in 2011 even amid a relatively flat                 15                        (-31.5%)              Upside
macroeconomic backdrop.                                                               10
                                                                                                                Downside   Target

                                                                                       5                          Case
Upside/Downside Scenarios                                                              0
                                                                                      16-Dec-09          9-Dec-10          Price Performance
Our upside case is $24. Amid an improving macroeconomic backdrop,
                                                                                     Source: FactSet
skepticism surrounding Rialto’s ability to generate consistent profits and for       Percentages indicate potential upside/downside from
those profits to grow wanes. Auditors allow a significant portion of LEN’s           current price.
deferred tax assets to come back onto the company’s balance sheet, and
margins expand from 2010 levels. In this environment, we believe investors           Megan McGrath, CFA
would be willing to assign a 1.6x multiple.                                          1.212.526.5086
Our downside case is $12. An inability to maintain elevated backlog conversion       BCI, New York
rates coupled with declining home prices compromises the company’s ability to
be profitable on a core operating margin basis. This results in renewed
impairment fears and in anticipation of potential book value erosion, investors
could assign a 1.0x multiple.

Valuation Analysis
Our $21 price target is based on 1.4x our book value estimate of $15.10, below
the company’s long-term average of 1.6x. We believe this appropriately
discounts for impairment risk and low profitability while also incorporating the
strong profit growth expected once housing begins to recover.

CONSUMER | U.S. Cosmetics; Household & Personal Care

Newell Rubbermaid Inc. (NWL)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
While likely the most cyclical of the CHPC names, Newell Rubbermaid remains
                                                                                     Sector View                                1-POSITIVE
among the cheapest in the sector despite having better-than-expected revenue
                                                                                     12-Month Price Target                          USD 21.00
and earnings momentum even in the face of a slower-than-expected
                                                                                     Price (09 Dec 2010)                            USD 17.57
macroeconomic recovery. NWL is one of our favorite names into 2011 as its
                                                                                     Potential Upside/Downside                             20%
robust new product pipeline, diligent investments in marketing and selling
capabilities, pared down commodity exposure, and leaner cost structure all
                                                                                     Market Cap (USD mn)                                   5,101
suggest that we should see more predictable and stronger revenue and earnings        Revenue TTM (USD mn)                                  5710
growth from the company than has historically been the case.                         Current BVPS (USD)                                     6.44
                                                                                     Return on Equity TTM (%)                              14.98
The Business Drivers
                                                                                     Dividend Yield (%)                                      1.1
Time has shown that Staples companies that maintain healthy levels of brand          Source: FactSet Fundamentals
investment, especially coupled with frequent and meaningful innovation, are
                                                                                     EPS (USD)
winners in the long run. We believe all three of Newell’s operating divisions
                                                                                     FY DEC                     EPS                  P/E
(Office Products; Tools, Hardware & Commercial; Home & Family) are gaining
                                                                                     2009                   1.31A                   13.4
market share on the back of these investments. New product activity is resulting
                                                                                     2010                   1.50E                   11.7
in material shelf space wins, which is particularly opportune for the Home &
                                                                                     2011                   1.67E                   10.5
Family business as retailers have begun citing some rebound in more
                                                                                     Source: Barclays Capital
discretionary household categories. Separately, with the renewed strength of its
brands and significantly downsized commodity exposure, we believe Newell will        Upside/Downside Scenario
be able to cover sourced goods inflation through modest pricing and mix.              26                                     $21        $21
                                                                                                                           (19.7%)    (19.7%)
                                                                                      21                           $16
Upside/Downside Scenarios
At the core of our upside thesis is the fact that NWL has been comfortably                                                  Price      Upside
                                                                                                                Downside   Target       Case
delivering on its revenue targets, while still expanding gross margins and            11

reinvesting in the business without any help from the economy. Further upside          6
vs our estimates would likely come from any degree of macroeconomic recovery          16-Dec-09          9-Dec-10          Price Performance

as NWL should disproportionately gain from the breadth of its distribution wins      Source: FactSet
as well as an acceleration in its more cyclical businesses. We currently assume      Percentages indicate potential upside/downside from
                                                                                     current price.
sales growth of 4% in 2011, the midpoint of the company’s long-term goals. By
our math, an “extra” point of sales growth would add $0.03 per share to
                                                                                     Lauren R. Lieberman
earnings and is fully within the realm of possibility for next year even with a
stable (i.e., not rapidly growing) economy. Our upside scenario assumes the
stock reaches our price target of $21.                                               BCI, New York

While we believe downside in the stock is limited given already discounted
valuation, a double dip in the economy and significant cost inflation out of China
could pose risks. We estimate a downside scenario of $16 per share as a result of
multiple contraction and lower earnings.

Valuation Analysis
NWL shares are trading at 10.5x our 2011 EPS estimate of $1.67, a 22% discount
to the market (vs about 15% historically) and 16% discount to the small-cap
CHPC peer group (vs about 12% historically). We argue that relative valuation
should, at a minimum, be similar to pre-recession levels, suggesting a P/E
multiple that is in line with both the S&P and peer group. Our $21 price target
implies a roughly 12.6x multiple on our CY11 EPS estimate of $1.67.

CONSUMER | U.S. Beverages & Tobacco

PepsiCo Inc. (PEP)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
At PepsiCo, we believe investors are presented with a solid EPS growth story at a
                                                                                    Sector View                                 1-POSITIVE
very reasonable valuation. In 2011, we envision mid- to upper single-digit
                                                                                    12-Month Price Target                          USD 73.00
business profit growth supported by modest pricing, productivity, and a solid
                                                                                    Price (09 Dec 2010)                            USD 64.72
international snacking business. With share repurchase and corporate expense
                                                                                    Potential Upside/Downside                             13%
leverage, such profit growth should translate into low double-digit EPS growth.
In our view, PepsiCo has made the right investments in the business to support
                                                                                    Market Cap (USD mn)                              102,571
just about 10% EPS growth over the long term.                                       Revenue TTM (USD mn)                              52980
                                                                                    Current BVPS (USD)                                    12.67
The Business Drivers
                                                                                    Return on Equity TTM (%)                              35.97
PepsiCo is a world leader in snacks, foods, and beverages, with the ability to      Dividend Yield (%)                                      3.0
leverage its dominant relative market share in global snacking to extract a         Source: FactSet Fundamentals
disproportionate amount of revenues and profits from the global snacking
                                                                                    EPS (USD)
market. PepsiCo generates revenues of about $60 billion (52% Beverages, 48%
                                                                                    FY DEC                     EPS                 P/E
Snacks; 61% Domestic, 39% International), using the power of its joint food and
                                                                                    2009                   3.71A                   17.4
beverage portfolio to deliver top tier growth.
                                                                                    2010                   4.09E                   15.8

Upside/Downside Scenarios                                                           2011                   4.50E                   14.4
                                                                                    Source: Barclays Capital
We look for PepsiCo to trade in a $64 to $74 range. We view the high end of this
range, $74, as attainable if PepsiCo continues to deliver mid single-digit profit   Upside/Downside Scenario
growth at Frito-Lay North America, posts improving revenue and profit trends in      89                                   $73         $74
its North American beverage business, and registers mid-teens profit growth in       79                           $64   (12.7%)     (14.3%)

                                                                                     69                        (-1.12%)
its international beverage and snacking operations. PEP’s bottom-line growth
should be supported by $400 million in bottler deal cost savings and continued                                 Downside
                                                                                                                           Price     Upside
                                                                                     49                                   Target      Case
share repurchase.                                                                    39

Should PepsiCo fail to deliver consistent snacking profit growth or fail to show     16-Dec-09          9-Dec-10          Price Performance
improvements in its U.S. beverage business, the stock could remain at the low
                                                                                    Source: FactSet
end of our $64 to $74 range.                                                        Percentages indicate potential upside/downside from
                                                                                    current price.
Valuation Analysis
PepsiCo trades at a 7% forward P/E premium to the S&P 500 vs its historical         Michael J. Branca
five-year 16% average premium to the S&P 500. On an absolute P/E basis, PEP
shares are trading at a 14.4x P/E multiple vs a five-year average next 12-month
                                                                                    BCI, New York
P/E of 17.0x. We view these valuation levels as a compelling investment
opportunity, given the positive structural changes occurring in PepsiCo’s
business model.

CONSUMER | U.S. Leisure

Royal Caribbean (RCL)
The Investment Case
                                                                                       Stock Rating                          1-OVERWEIGHT
In 2011, we expect Royal Caribbean to benefit from several factors including
                                                                                       Sector View                                2-NEUTRAL
greater operational leverage to improving net yields, favorable mix shift to
                                                                                       12-Month Price Target                          USD 51.00
Europe, and improving consumer demand and stronger pricing. Risks include
                                                                                       Price (09ec 2010)                              USD 43.59
macroeconomic issues in Europe and the U.S. affecting cruise demand and
                                                                                       Potential Upside/Downside                             17%
weaker-than-expected close-in bookings.
                                                                                       Market Cap (USD mn)                                   9,381
The Business Drivers
                                                                                       Revenue TTM (USD mn)                                  6600
In 2010, cruise demand and pricing trends began to recover, as industry pricing        Current BVPS (USD)                                    36.48
hit bottom and attracted consumers. The excitement generated by RCL’s first            Return on Equity TTM (%)                               6.64
Oasis-class ship which launched a year ago, positively impacted industry               Dividend Yield (%)                                      NA
bookings. Year-to-date, Royal Caribbean has benefitted from these positive             Source: FactSet Fundamentals
factors, which we expect to continue. Beginning in 2Q11, cruise industry
                                                                                       EPS (USD)
capacity is shifting out of the Caribbean and into the higher yielding European         FY DEC                    EPS                  P/E
market, growing 26% by our estimate. For RCL, 31% of its capacity will be in
                                                                                       2009                   0.75A                   56.2
Europe next year, up from 25% this year. This mix shift should benefit net yields
                                                                                       2010                   2.05E                   20.6
as European cruises are not only priced higher than Caribbean cruises (roughly
                                                                                       2011                   3.15E                   13.4
2.5x on average) but tend to be booked farther out. A longer booking curve
should provide RCL with more visibility to yield cabin prices, which is a positive.    Source: Barclays Capital

Royal Caribbean should benefit from the addition of Allure of the Seas which           Upside/Downside Scenario

joined the fleet this month. The 5,400-berth ship is the sister ship to Oasis of the                                           $51
                                                                                        61                                              (28.4%)
Seas which was launched last year and continues to command premium pricing.                                          $45     (16.9%)
                                                                                        51                         (3.2%)
We expect similarly strong pricing for Allure. Given the media and marketing
news surrounding the Oasis-class ship launches, there has been a positive effect        31                        Downside    Price
                                                                                                                             Target       Case
on the other ships in RCL’s fleet and the cruise industry in general. Given the                                     Case
above, we expect net yield growth of 5% for RCL in 2011. We note that RCL               11

enjoys higher operational leverage vs peers, with every 1% change in net yield          16-Dec-09           9-Dec-10         Price Performance

equal to $0.21 of EPS thus providing more upside in an improving environment.          Source: FactSet

Upside/Downside Scenarios                                                              Felicia R. Hendrix
Our price target of $51 is based on 13x our 2012E EPS of $3.90. Trading at 11x
our 2012E EPS, RCL looks attractive. We forecast net yield growth of 5.0% and          BCI, New York
4.5% in 2011 and 2012, respectively. In an upside scenario, if net yields
outperform our current estimates by 1% in each of those years, we estimate that
2012 earnings power could reach $4.32. Applying our current target multiple
derives a stock price of $56. On the other hand, if net yields underperform our
current estimate by 1% in each of those years, we estimate that 2012 EPS power
could be $3.48, suggesting a stock price of $45 based on our current target
multiple. This analysis assumes other variables are unchanged, including fuel
costs and we note that every 10% change in fuel prices equaled about $0.04 of
EPS in 2010.

Valuation Analysis
RCL has historically traded between 8x and 18x forward EPS and is currently
trading at 11x 2012E EPS. We base our $51 target on 13x our 2012E EPS which
reflects the midpoint of the company’s historical range.

ENERGY & POWER | North America Oil & Gas: E&P (Large-Cap)

Apache Corp. (APA)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
We believe Apache has successfully “reloaded” its development portfolio in 2010
                                                                                    Sector View                                2-NEUTRAL
with about $12bn in acquisitions. Production mix remains attractive with almost
                                                                                    12-Month Price Target                      USD 126.00
50% liquids and another roughly 20% international gas. Discounted valuation is
                                                                                    Price (09 Dec 2010)                        USD 114.49
compelling and strong performance could help the multiple converge toward
                                                                                    Potential Upside/Downside                           10%
the group average.
                                                                                    Market Cap (USD mn)                              41,742
The Business Drivers
                                                                                    Revenue TTM (USD mn)                             11213
APA has a strong track record of buying mature properties and extracting value.     Current BVPS (USD)                                  56.75
About $12bn of 2010 purchases complement APA’s core operating base and              Return on Equity TTM (%)                            15.71
allow significant development opportunities. Year-over-year growth in 2011          Dividend Yield (%)                                    0.5
should be well into the double digits with spending likely below cash flow.         Source: FactSet Fundamentals

APA is well diversified with 54% of 2011E volumes in North America, 22% Egypt,      EPS (USD)
11% Australia, 7% North Sea, and 6% Argentina. Liquids are expected to be           FY DEC                     EPS               P/E

close to 50% of 2011E production, while North American gas will represent           2009                   5.61A                 20.4
about one-third (remainder international gas).                                      2010                   9.00E                 12.7
                                                                                    2011                   9.40E                 12.2
Upside/Downside Scenarios                                                           Source: Barclays Capital

APA faces the challenge of delving through recently acquired properties to          Upside/Downside Scenario
determine which projects will see the most investment. Early indications are
“oily” plays such as the Permian and Granite Wash will attract a good amount of      161                                    $126  (24.1%)
                                                                                     141                                  (10.1%)
capital while going forward North American gas spending remains a question                                        $96
mark. The company has given vague guidance for 2011, but we feel production          101
growth could be in the low 20% range year over year.                                  81                       Downside Target
                                                                                      61                         Case

Upside scenario – We view our $126 price target as conservative. It reflects a        41
                                                                                      16-Dec-09         9-Dec-10          Price Performance
6.4x target multiple on 2011E pre-interest cash flow (vs 7.25x average for peers)
using an $85/bbl and $5/mmBtu price deck. A $10 increase in our oil price           Source: FactSet
                                                                                    Percentages indicate potential upside/downside from
assumption would positively impact the stock, suggesting an upside value for
                                                                                    current price.
the stock $142.
                                                                                    Thomas R. Driscoll, CFA
Downside scenario – We estimate if APA were to trade at its historical 5.5x
forward year pre-interest cash flow multiple on mid-cycle price forecasts of
$80/bbl WTI and $4/mmBtu gas, the shares would trade around $96.
                                                                                    BCI, New York

Valuation Analysis
Our price target of $126 is derived by applying a 6.4x multiple to our forward-
year (2011) PICF estimate of $9,196mn to calculate target EV. We have reduced
EV to reflect FAS 143 asset retirement obligation of $1,875mn. We have
subtracted estimated year-end 2010 net debt of $8,930mn (includes
assumption of all acquisition debt and $1.1bn expected convertible preferred
issuance). Our target EV is based on 2011 PICF before hedging impacts; and our
price target treats estimated hedge gains/losses as a financial instrument (i.e.,
valued at one times the forecast gains/losses).

ENERGY & POWER | U.S. Diversified Natural Gas

El Paso Corp. (EP)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
The migration of pipe assets held by El Paso (EP) into El Paso Pipeline Partners
                                                                                      Sector View                                2-NEUTRAL
(EPB) provides an ongoing uplift in valuation. E&P will shift drilling toward high-
                                                                                      12-Month Price Target                          USD 15.00
value liquids plays and reduce exposure to lower-margin conventional gas which
                                                                                      Price (09 Dec 2010)                            USD 13.46
results in a longer duration and more profitable inventory. Cash from drops and
                                                                                      Potential Upside/Downside                             11%
the crossover from cash consumption to free cash generation should allow EP to
pare $6.2bn in HoldCo debt, setting the stage for a ramp in E&P spending or a
                                                                                      Market Cap (USD mn)                                   9,478
split into a high-quality E&P company and a high-growth income vehicle with           Revenue TTM (USD mn)                                  4825
trading value of the component parts to around $20.                                   Current BVPS (USD)                                      4.4
                                                                                      Return on Equity TTM (%)                              25.71
The Business Drivers
                                                                                      Dividend Yield (%)                                      0.3
By the end of 2011, we expect EP to establish multi-year drilling inventories in      Source: FactSet Fundamentals
the Eagle Ford and Wolfcamp. The sale of conventional assets will likely set the
                                                                                      EPS (USD)
stage for high-margin, double-digit volume growth as the E&P unit emerges
                                                                                      FY DEC                     EPS                 P/E
from 2011. We project EP will drop $3bn of assets into EPB in 2011. Rate cases
                                                                                      2009                   1.17A                   11.5
at TGP and EPNG are precursors to begin drops into EPB in 2012. A decrease in
                                                                                      2010                   0.93E                   14.5
pipeline capex post 2011 sets up the option to tender for HoldCo debt and split
                                                                                      2011                   0.84E                   16
or ramp-up E&P spending to pull forward the NPV of its drilling inventory.
                                                                                      Source: Barclays Capital

Upside/Downside Scenarios                                                             Upside/Downside Scenario
Aside from exposure to energy prices (mitigated by hedges: gas 76% at $6.00,           29                                                $24
oil 66% at $85.71), the upside/downside is related to drilling results in the Eagle    24
Ford and Wolfcamp, the magnitude of drops, the size and value of conventional          19                           $12   (11.5%)
asset sales, the progress and results on key rate cases at TGP and EPNG and            14                        (-10.7%)
year-end valuation of publicly traded C-Corp GP comps. The latter is important          9                        Downside
in the context of contemplating a split into an E&P and yield vehicle. The              4
downside case from an operational standpoint also includes a larger-than-              16-Dec-09          9-Dec-10          Price Performance

expected cost overrun on construction of the Ruby pipeline. Capital market            Source: FactSet
access plays a key role in the drop down story as EP needs to sell $1.25bn in EPB     Percentages indicate potential upside/downside from
                                                                                      current price.
equity to fund the drops in our base-case scenario. We estimate downside and
upside scenarios of $12 and $24, respectively.
                                                                                      Richard Gross
Valuation Analysis
We have approached valuation from two angles: First, we assume EP keeps the           BCI, New York
integrated structure, which we estimate trades at 7.5x-9.5x 2012 EBITDA. This
                                                                                      Jim Harmon
equates to $14-$20, with the multiple representing a blend of E&P (5.5x-6.5x)
and pipeline/GP (8.5x-11.5x) valuations, both of which reflect valuations for the
direct peer groups. The integrated entity could support a $0.60 dividend in 2012,     BCI, New York
which capitalized at 5.0% supports a floor price of $12.00. Second, if split, we
project E&P conservatively trades at 5.5x-6.5x 2012 EBITDA, equating to $9.50-
$11.25. E&P would have a competitive cost, volume outlook, and depth of
inventory to warrant an average multiple. As for the pipeline GP, we estimate
YieldCo trades at a 4.0%–5.0% yield given peer group valuations. Based on a
minimum $0.50 dividend, YieldCo would trade at $10.00-$12.50 per share,
culminating in total value of $19.50-$23.75. Our price target of $15 is based on
the shares trading at 98% of our NAV analysis.

ENERGY & POWER | Americas Integrated Oil

Hess Corp. (HES)
The Investment Case
                                                                                   Stock Rating                          1-OVERWEIGHT
Our base case scenario remains that oil prices could surpass $100/b by late
                                                                                   Sector View                                1-POSITIVE
2011/early 2012 while the North American gas market will remain depressed at
                                                                                   12-Month Price Target                        USD 78.00
$4.0-$4.5/mcf through at least the 1H12. Hess’ asset mix should bode well in
                                                                                   Price (09 Dec 2010)                          USD 73.95
this scenario given the company’s high oil leverage and low exposure to the
                                                                                   Potential Upside/Downside                               5%
North American gas market. We believe its exploration backlog is robust and
any potential discoveries could be a major catalyst. We believe the market may
                                                                                   Market Cap (USD mn)                               24,311
have underappreciated Hess’ competitive advantage in its Bakken operation.         Revenue TTM (USD mn)                              33533
                                                                                   Current BVPS (USD)                                    47.88
The Business Drivers
                                                                                   Return on Equity TTM (%)                              16.96
Oil accounts for 73% of its global production while North America gas              Dividend Yield (%)                                      0.5
production represents less than 5%. For every $10/bl change in oil price, annual   Source: FactSet Fundamentals
EPS could be impacted by $1.75, or 2.4% of its share price, the second highest
                                                                                   EPS (USD)
sensitivity in the group. For every $1.5/mcf change in North America gas price,
                                                                                   FY DEC                     EPS                 P/E
we estimate annual EPS will be affected by $0.13. Hess’ exposure in the refining
                                                                                   2009                   2.30A                   32.2
segment is also low. For every $10/bl change in margin, annual EPS impact is
                                                                                   2010                   5.05E                   14.6
estimated at $1.98, or 2.7% of the share price compared with the group’s
                                                                                   2011                   5.85E                   12.6
average sensitivity of 4.2%.
                                                                                   Source: Barclays Capital
Hess’ upstream business strategy has changed over the last couple of years. It
                                                                                   Upside/Downside Scenario
adopted a more balanced approach between high impact drilling programs and
                                                                                    125                                               $100
lower geological risk operations such as the Bakken shale. Over the next five                                              $78      (35.3%)
years, Hess expects to invest $1.5 billion per year to boost its output in the                                           (5.5%)
                                                                                     75                          $50
Bakken, or 25%-30% of its total capital program. Management targets long-                                     (-32.3%)              Upside
                                                                                     50                                 Price
term production growth of more than 3% per year. We estimate Hess could                                                              Case
                                                                                                              Downside Target
grow by 4.1% per year between 2010 and 2014 while oil production could                                          Case
increase at a fast clip of 6.0% annually.
                                                                                     16-Dec-09         9-Dec-10          Price Performance

Upside/Downside Scenarios                                                          Source: FactSet
                                                                                   Percentages indicate potential upside/downside from
Our 12-month price target of $78 is based on $80/b oil. Our upside scenario        current price.
assumes Hess could be worth close to $100 based on a $100/b oil. The shares
could be worth more if Hess is successful in its upcoming high impact drilling     Paul Y. Cheng, CFA
programs in Ghana, Brazil, and northern Red Sea.                                   1.212.526.1884
Our downside scenario assumes an NAV of $50 using a $60/b oil and no               BCI, New York
exploration success from its high impact drilling programs.

Valuation Analysis
We estimate Hess is trading at 6.7x EV/2011 EBIDA compared with the group
at 7.9x 2011 EBIDA. Hess’ results include a hedging loss of approximately $1.00
per share per year between 2010 and 2012. Adjusting for this loss, Hess trades
at 6.3x 2011 EBIDA, a modest discount to the group’s median average.

ENERGY & POWER | U.S. Oil Services & Drilling

National Oilwell Varco (NOV)
The Investment Case
                                                                                     Stock Rating                        1-OVERWEIGHT
We believe a new offshore rig construction cycle is underway and National
                                                                                     Sector View                              1-POSITIVE
Oilwell Varco is best positioned to benefit from this. Customer interest in
                                                                                     12-Month Price Target                        USD 71.00
building rigs has recently surged reflecting increased demand for high-spec
                                                                                     Price (09 Dec 2010)                          USD 62.89
equipment, lower construction costs, attractive financing, and that competition
                                                                                     Potential Upside/Downside                           13%
for new rigs being built has intensified.
                                                                                     Market Cap (USD mn)                                26,391
The Business Drivers
                                                                                     Revenue TTM (USD mn)                               12118
Given the recent surge in new rig orders which is likely to continue into 2011,      Current BVPS (USD)                                  36.47
National Oilwell Varco is poised for significantly higher capital equipment orders   Return on Equity TTM (%)                            11.01
next year. The offshore drilling market is increasingly bifurcating between new,     Dividend Yield (%)                                    0.7
high spec assets and older equipment and this has led to a number of                 Source: FactSet Fundamentals
contractors looking to replace older, less competitive assets with new rigs. With
                                                                                     EPS (USD)
rig construction costs down 15%-20% and growing concern from the major oil
                                                                                     FY DEC                     EPS               P/E
companies over rig capacity in 2012 and beyond, we believe a number of
                                                                                     2009                   3.94A                  16
deepwater rigs will be ordered in the near-to-intermediate term. In addition,
                                                                                     2010                   3.97E                 15.8
indications are that Brazil will move forward with its 28-rig newbuild program.
                                                                                     2011                   3.55E                 17.7
National Oilwell Varco is positioned to win most of these awards given its ability
                                                                                     Source: Barclays Capital
to bid on the entire rig package.
                                                                                     Upside/Downside Scenario
Upside/Downside Scenarios                                                                                                            $90
                                                                                       96                                          (42.9%)
New rig orders represent a significant revenue opportunity for National Oilwell                                            $71
                                                                                                                   $54   (12.7%)
Varco. The revenue potential on a new jackup is $50 million to $75 million. NOV        76
had more than 70% market share for rig packages on new jackups last cycle.             56
                                                                                                                          Price      Case
                                                                                                                Downside Target
Over the last eight weeks there have been 13 orders for new jackups. Most of           36
these orders included options for additional rigs and we believe many of these         16
will be built.                                                                         16-Dec-09         9-Dec-10        Price Performance

                                                                                     Source: FactSet
NOV’s revenue potential on a floating rig order is $200 million to $250 million      Percentages indicate potential upside/downside from
and NOV had over 90% of rig packages on new drillships and semisubmersibles          current price.
last cycle. Since the end of the third quarter, four drillships have been ordered.
Dryships recently reached an agreement with a major South Korean shipyard to         James D. Crandell
secure space for four more drillships, and Seadrill has options for two additional   1.212.526.4865
drillships which we believe will be ordered in 1Q11. Petrobras has received bids
                                                                                     BCI, New York
for the construction of seven drillships and two semisubmersibles and we expect
the company will move forward with construction of these rigs in 1H11. Over          James West
the next 12-18 months, management expects additional new orders from                 1.212.526.8796
Petrobras to unfold. Dependent on the pace of new equipment orders, our    
upside scenario sees a price of $90 and our downside scenario is $54.                BCI, New York

Valuation Analysis
Our price target of $71 is based on 16.6x our 2012 EPS estimate of $4.25. This
represents a 20% premium to the oil service group given our increased
confidence on the strength of the newbuild cycle.

ENERGY & POWER | U.S. Independent Refiners

Sunoco, Inc. (SUN)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
Sunoco remains a restructuring play, in our view. Our sum-of-the-parts analysis
                                                                                     Sector View                               3-NEGATIVE
suggests the stock is inexpensive compared to its underlying asset value and its
                                                                                     12-Month Price Target                          USD 48.00
peers. In addition to the company’s previously announced plan to separate its
                                                                                     Price (09 Dec 2010)                            USD 39.35
SunCoke Energy business, we believe management will revisit its logistics
                                                                                     Potential Upside/Downside                             22%
segment’s organizational structure by late 2011 or early 2012. We think these
two actions could help to more fully realize Sunoco’s hidden asset value.
                                                                                     Market Cap (USD mn)                                   4,745
                                                                                     Revenue TTM (USD mn)                                 34249
The Business Drivers
                                                                                     Current BVPS (USD)                                    24.22
Sunoco is not a pure-play refiner and offers the most product diversification in     Return on Equity TTM (%)                                6.3
the group. That said, refining remains its largest swing factor. Sunoco’s refining   Dividend Yield (%)                                      1.5
operation is concentrated in the Northeast U.S. and the Upper Midwest regions.       Source: FactSet Fundamentals
For every $1/b change in product margin, we estimate that annual EPS could be
                                                                                     EPS (USD)
impacted by $1.23, or 3.1% of its share price compared to the group at 3.8%.
                                                                                     FY DEC                     EPS                  P/E
We estimate that Sunoco’s refining segment will be close to breakeven in 2011
                                                                                     2009                  -0.33A                    NA
and could report positive earnings in 2012 and 2013.
                                                                                     2010                   1.85E                   21.3
Outside refining, Sunoco operates in retail marketing, chemicals (phenol),           2011                   2.10E                   18.7
logistics and SunCoke. From 2005 to 2009, Sunoco’s non-refining businesses           Source: Barclays Capital

reported average net operating income of $272 million annually. We estimate
                                                                                     Upside/Downside Scenario
these businesses could earn $390 million in 2010 and an average of $452 million
                                                                                      72                                                $60
between 2010 and 2014 (including SunCoke).                                                                                            (52.3%)
                                                                                      62                                     $48
                                                                                      52                           $40     (21.9%)
Upside/Downside Scenarios                                                                                        (1.5%)
                                                                                      42                                               Upside
                                                                                      32                                    Price       Case
Our 12-month price target is $48, which conservatively values the refining                                      Downside
                                                                                      22                          Case
business at $0.9 billion (with the Northeast as essentially terminal value).
Assuming the Northeast refining assets as going entities, we estimate the             16-Dec-09          9-Dec-10          Price Performance
refining business at $1.4 billion and Sunoco’s NAV at $53 per share. Finally, if
                                                                                     Source: FactSet
global oil demand proves to be much stronger than expected, the global refining      Percentages indicate potential upside/downside from
market could enjoy a stronger cyclical uptick. Under this upside scenario, we        current price.
think SUN could be worth more than $60 per share.
                                                                                     Paul Y. Cheng, CFA
Conversely, if management decides not to streamline its logistics segment’s          1.212.526.1884
organizational structure and the global economy unexpectedly suffers a severe
double-dip recession, we think Sunoco’s NAV would still be worth $40 per share       BCI, New York
even assuming zero value for its refining operation.

Valuation Analysis
We estimate Sunoco’s NAV at $48-$53 per share, assuming refining at $0.9-$1.4
billion. We base our estimate on three recent M&A transactions: 1) On
December 2, Sunoco announced the sale of its Toledo, Ohio refinery for $400
million upfront plus a potential earn-out of $125 million from 2011 to 2015,
essentially in line with our estimate; 2) Valero Energy sold its Delaware City
refinery after shutting it down, suggesting Sunoco’s Northeast refining system
could be worth at least $400 million even as terminal; and 3) Valero sold its
Paulsboro refinery for $231/daily barrel of complexity, suggesting Sunoco’s
refining assets could be worth $1.4 billion as ongoing operating entities.

ENERGY & POWER | U.S. Oil & Gas: E&P (Mid-Cap)

Whiting Petroleum (WLL)
The Investment Case
                                                                                       Stock Rating                          1-OVERWEIGHT
We believe Whiting Petroleum has a large inventory of oil projects in the Rockies,
                                                                                       Sector View                               1-POSITIVE
Permian Basin, and Mid-Continent that can support attractive, high-margin
                                                                                       12-Month Price Target                     USD 128.00
growth over the next several years. Potential success in several exploration
                                                                                       Price (09 Dec 2010)                       USD 112.16
prospects could act as catalysts for the shares through 2011.
                                                                                       Potential Upside/Downside                           14%
The Business Drivers
                                                                                       Market Cap (USD mn)                                 6,567
WLL’s primary growth drivers have been the development of the Bakken/Three             Revenue TTM (USD mn)                                1381
Forks formations and tertiary recovery projects at North Ward Estes and Postle         Current BVPS (USD)                                  42.11
fields. The company has assembled approximately 552,000 net acres across               Return on Equity TTM (%)                            11.14
nine prospect areas that could hold Bakken/Three Forks potential. Most of the          Dividend Yield (%)                                    NA
activity thus far has been concentrated in the Sanish Field, which lies in the         Source: FactSet Fundamentals
“sweet spot” of the play. In 2011, management plans to accelerate the
                                                                                       EPS (USD)
delineation of the Lewis and Clark prospect (Three Forks), where results from
                                                                                       FY DEC                     EPS               P/E
the first several wells have been encouraging. It estimates the prospect could
                                                                                       2009                   0.13A               862.8
hold 66 MMBOE of unrisked resource (WLL had 275 MMBOE of total proved
                                                                                       2010                   5.40E                 20.8
reserves at year-end 2009). Additional data flow from new completions should
                                                                                       2011                   8.60E                 13.0
help refine reserve expectations. Other oil exploration concepts that could be
                                                                                       Source: Barclays Capital
tested next year include the Starbuck prospect (Bakken Shale/Three Forks) in
Montana and acreage positions in Wyoming and Colorado that could be                    Upside/Downside Scenario
prospective for the Niobrara Shale.                                                                                                    $150
                                                                                        172                                          (34.0%)
We forecast production will grow 14% in 2011, including a 20% increase in oil           132
                                                                                                                    $110     (14.3%)
volumes, which we estimate will account for approximately 94% of total                  112
                                                                                         92                                 Price
wellhead revenues. We estimate the company will generate approximately                                            Downside             Case
                                                                                         72                                Target
$1.26 billion of cash flow next year, which should be sufficient to fund its capital     52
program. As of September 30, 2010, it also had $1 billion of available capacity
                                                                                         16-Dec-09         9-Dec-10          Price Performance
on its credit facility and a relatively low net debt/capital ratio of 22%.
                                                                                       Source: FactSet

Upside/Downside Scenarios                                                              Percentages indicate potential upside/downside from
                                                                                       current price.
We believe share performance will be tied to additional drilling results in the
Lewis and Clark prospect and potential exploration success in other areas which        Jeffrey W. Robertson
could improve future growth visibility. Assuming the shares trade in-line with         1.214.720.9401
the peer average EV/2011E pre-interest cash flow multiple of 7.0x implies a  
                                                                                       BCI, New York
stock price of approximately $150.

In our downside scenario, we believe more muted drilling results and exploration
success could result in the shares trading around its historical cash flow multiple
of 5.2x, which would imply a stock price of approximately $110.

Valuation Analysis
Our price target of $128 is based on a multiple of 6.0x our hedge-adjusted 2011
pre-interest cash flow estimate of $1,365 million less estimated net debt at year-
end 2010 of $672 million plus an estimated value of WLL's ownership stake in
Whiting USA Trust I of $51 million less an estimated derivative loss of $7 million
in 2011 and beyond.

FINANCIAL SERVICES | U.S. Insurance/Non-Life

ACE Limited (ACE)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
ACE Limited has one of the strongest global property-casualty (P&C) insurance
                                                                                      Sector View                                2-NEUTRAL
franchises and benefits from a solid balance sheet and strong management, in
                                                                                      12-Month Price Target                          USD 68.00
our view. Unlike most other P&C insurers, ACE prefers to deploy its excess
                                                                                      Price (09 Dec 2010)                            USD 59.50
capital in accretive acquisitions using existing cash rather than through share
                                                                                      Potential Upside/Downside                              14%
buybacks. ACE has announced three acquisitions recently that extend its
franchise, and in total are expected to be accretive to its 2011 EPS by about
                                                                                      Market Cap (USD mn)                               20,194
$0.37. We estimate ACE still has $4bn to $6bn of excess capital after these           Revenue TTM (USD mn)                                  15928
acquisitions, which could be potentially deployed in further M&A. ACE currently       Current BVPS (USD)                                    67.34
trades at an attractive level of 0.90x book value (in line with peer levels), 1.08x   Return on Equity TTM (%)                              14.72
tangible BV, and 1.02x BV excluding unrealized net investment gains.                  Dividend Yield (%)                                      2.2
                                                                                      Source: FactSet Fundamentals
The Business Drivers
                                                                                      EPS (USD)
ACE Limited, headquartered in Zurich, Switzerland, is one of the world's largest
                                                                                      FY DEC                     EPS                  P/E
providers of property-casualty insurance and, to a lesser extent, reinsurance.
                                                                                      2009                   8.17A                    7.3
ACE has the advantages of global scale and discipline to curtail business volume
                                                                                      2010                   7.55E                    7.9
in a soft property-casualty environment. The company has a strong franchise in
                                                                                      2011                   7.35E                    8.1
global commercial P&C insurance, and a growing presence in accident and
                                                                                      Source: Barclays Capital
health (A&H), as well as international P&C. ACE’s best growth opportunities
appear to be in Latin America, A&H, and global specialty P&C.                         Upside/Downside Scenario

                                                                                       93                                                $76
Upside/Downside Scenarios                                                              83                                     $68      (27.7%)
                                                                                       73                                   (14.3%)
We see upside potential to $76 (1.0x our 2011E BV of $76) and limited downside         63                        (-9.22%)
risk to $54 (0.8x 3Q10 BV of $67 and 0.97x 3Q10 tangible BV, the historical low        53                                    Price
                                                                                       43                        Downside                Case
valuation for ACE). ACE has one of the strongest balance sheets in the industry                                    Case
with solid loss reserves and excess capital. Our 2011 EPS estimate of $7.35            23
includes $360mn of projected favorable loss reserve development (three                 16-Dec-09          9-Dec-10          Price Performance

combined ratio points). Notably, our EPS outlook could have upside if reserve         Source: FactSet
releases exceed our expectations. As a point of reference, each one-point             Percentages indicate potential upside/downside from
                                                                                      current price.
change in ACE’s P&C combined ratio is about $0.30 per share after-tax annually.

Risks to our outlook: ACE faces risks from a soft P&C environment, rising interest    Jay Gelb, CFA
rates, and a weak economic recovery. The company also has exposure to                 1.212.526.1561
natural and man-made catastrophe losses, although ACE typically manages     
                                                                                      BCI, New York
these risks carefully. Lastly, the company could face integration risks related to
recent acquisitions and these deals may not be as accretive to EPS as expected.

Valuation Analysis
We expect ACE to deliver a respectable ROE of 10% in 2011 with less volatility
than peers, which leads us to believe that ACE shares are undervalued. This
result would be below its 15% long-term target, although the challenging P&C
market and low-interest-rate environment present headwinds to achieving this
goal over the next few years, we believe. ACE’s valuation is attractive in our view
at 0.90x BV, which is in line with peers and below its historical median of 1.3x
(historical price-to-book valuation range: 0.8x-2.0x). We also view ACE’s current
P/E valuation of 8.1x our 2011 EPS estimate as depressed. Our 12-month $68
price target implies a multiple of 0.9x our 2011E BV of $76 per share.

FINANCIAL SERVICES | Canadian Financial Services

CI Financial Corp. (CIX.TO)
The Investment Case
                                                                                        Stock Rating                          1-OVERWEIGHT
In our view, CI Financial Corp. is the most efficient mutual fund operator in
                                                                                        Sector View                                1-POSITIVE
Canada that continues to grow market share through outsized sales and strong
                                                                                        12-Month Price Target                          CAD 26.00
investment performance. We believe this should allow CI to outpace its peers’
                                                                                        Price (09 Dec 2010)                            CAD 21.40
earnings growth and allow for significantly greater growth in dividends,
                                                                                        Potential Upside/Downside                             21%
augmenting an already impressive yield. This more than justifies, in our opinion,
its premium valuation relative to its historical levels and against its peers.
                                                                                        Market Cap (CAD mn)                                   6,162
                                                                                        Revenue TTM (CAD mn)                                  1345
The Business Drivers
                                                                                        Current BVPS (CAD)                                      5.6
Earnings are driven by growth in assets under management (AUM). CI’s strong             Return on Equity TTM (%)                              22.37
product line-up and access to internal and external distribution is generating          Dividend Yield (%)                                      3.9
positive net sales, well ahead of most of its peers. This fuels both absolute and       Source: FactSet Fundamentals
relative earnings growth, particularly in the context of a continued rising market
                                                                                        EPS (CAD)
                                                                                        FY DEC                     EPS                  P/E

Scale is a significant factor in overall efficiency, and increased AUM benefits         2009                   0.84A                   25.5
earnings, despite incremental market pressures on marginal revenues. CI’s               2010                   1.15E                   18.6
historical focus on cost benefits it with the greatest efficiency in the industry, in   2011                   1.32E                   16.2
our view. Consequently, each incremental dollar of AUM has a greater marginal           Source: Barclays Capital

impact on its earnings, compounding the benefit of its outsized sales.
                                                                                        Upside/Downside Scenario
Upside/Downside Scenarios                                                                                                                  $30
                                                                                         33                                     $26      (39.8%)
Should markets provide investment returns above the 6% embedded in our                   28                                   (21.2%)
estimates, CI could provide significant earnings leverage and additional dividend        23
                                                                                                                   (-16.0%)               Upside
                                                                                         18                                    Price
growth. The incremental growth and multiple expansion could generate upside                                        Downside   Target
of up to $30. However, should markets perform worse or should CI begin to                                            Case
experience net reductions, a similar decline in earnings and multiple contraction        16-Dec-09          9-Dec-10          Price Performance
could produce a downside of $18.
                                                                                        Source: FactSet
                                                                                        Currency is in Canadian dollars
Valuation Analysis
                                                                                        Percentages indicate potential upside/downside from
At 16.2x our 2011 earnings estimate of $1.32, CI trades at justifiable premiums         current price.

to its historical average of 15.4x and its peers of 13.2x because of its higher
                                                                                        John Aiken, CA, CFA
profitability, stronger earnings outlook, and anticipated dividend increases. While
some additional multiple expansion is possible with continued AUM and
earnings growth, share price growth will likely be driven by earnings and
                                                                                        BCC, Toronto
incremental dividend increases. Its multiple could face significant contraction
should earnings or sales levels experience unexpected headwinds. Our $26 price
target is derived from a 19.8x multiple against our 2011 EPS forecast of $1.32.


Hartford Financial (HIG)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
We believe that renewed interest by top insurance agents and other producers
                                                                                      Sector View                                  1-POSITIVE
doing business with Hartford Financial should increase the company’s top line.
                                                                                      12-Month Price Target                          USD 32.00
In addition, aggressive techniques employed by management to mitigate
                                                                                      Price (09 Dec 2010)                            USD 25.26
product, currency, and macroeconomic risk will likely reduce earnings volatility.
                                                                                      Potential Upside/Downside                           27%
Moreover, the company’s balance sheet is much stronger than it was just a few
months ago, likely enabling Hartford Financial to withstand a steep downturn in
                                                                                      Market Cap (USD mn)                               11,229
equity markets.                                                                       Revenue TTM (USD mn)                              22300
                                                                                      Current BVPS (USD)                                   45.8
The Business Drivers
                                                                                      Return on Equity TTM (%)                             8.43
While we are not yet prepared to state that Hartford Financial is a true              Dividend Yield (%)                                    0.8
turnaround story, its businesses are enjoying a comeback and we acknowledge           Source: FactSet Fundamentals
that the strategy being deployed by new CEO Liam McGee is interesting and it
                                                                                      EPS (USD)
just may work. Mr. McGee’s initiatives involve 1) combining group insurance and
                                                                                      FY DEC            EPS                  P/E
commercial property/casualty insurance sales into a single sales force; 2)
                                                                                      2009              1.85A                13.7
hunting for new affinity relationships to complement the strong relationship that
                                                                                      2010              2.72E                9.3
Hartford Financial has had with AARP for some time; and 3) further reducing
                                                                                      2011              3.92E                6.4
costs and improving efficiency and customer service.
                                                                                      Source: Barclays Capital

Upside/Downside Scenarios                                                             Upside/Downside Scenario
Under our upside scenario life insurance sales increase dramatically, especially in                                                      $38
                                                                                       44                                              (50.4%)
the independent-agent channel. Hartford Financial experiences improving fund                                                  $32
flows in the variable annuity business and elsewhere in its retirement businesses.     34                           $25
                                                                                       29                        (-0.99%)
The currency, macro, and product-specific hedges (for GMWB, GMDB, etc.)                24                                    Price
                                                                                       19                        Downside
continue to perform as expected, further reducing volatility more than the                                         Case
hedges did in the past. These factors would result in a price of $38.                   9
                                                                                       16-Dec-09          9-Dec-10          Price Performance
Under our downside scenario, the hedges employed by Hartford Financial
                                                                                      Source: FactSet
management are not successful, causing capital erosion and significant earnings       Percentages indicate potential upside/downside from
volatility. The international variable annuity business continues to experience       current price.
significant outflows and produces growing losses. Hartford Financial fails to
generate sales momentum, which coupled with further strengthening of the yen          Eric N. Berg, CPA, CFA
and a drop in interest rates cause the company’s life division capital to come        1.212.526.2805
under significant pressure. This would result in a price of $25.            
                                                                                      BCI, New York
Valuation Analysis                                                                    Jay Gelb, CFA
We are valuing Hartford Financial using a mixed approach, weighing each
approach 50%. Book value per share excluding AOCI is $41.72. Our P/BV
                                                                                      BCI, New York
multiple is 0.72x, which represents a 20% discount to peer multiples. This leads
us to a price target of $30. Our residual income model results in a fair value of
$35. We are assigning a weight of 50% to the fair value obtained using our
residual income model. The average of these results in $32.50 per share; our
price target is $32.

FINANCIAL SERVICES | U.S. Brokers, Asset Managers & Exchanges

Invesco Limited (IVZ)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
In our opinion, Invesco is among the best positioned asset managers poised to
                                                                                      Sector View                                2-NEUTRAL
outperform the industry’s long-term growth and to benefit from flows into
                                                                                      12-Month Price Target                          USD 32.00
higher risk/return asset classes, given its full range of diversified products, as
                                                                                      Price (09 Dec 2010)                            USD 23.17
well as global geographical reach. In addition, we view the company as being
                                                                                      Potential Upside/Downside                             38%
innovative in its pursuit of growth, as evidenced by its PowerShares ETF
business, joint venture in China, and solid alternatives offering through WL Ross.
                                                                                      Market Cap (USD mn)                               10,706
                                                                                      Revenue TTM (USD mn)                                  3486
The Business Drivers
                                                                                      Current BVPS (USD)                                    18.41
Invesco recently renewed its sales efforts to focus on delivering more of the         Return on Equity TTM (%)                                5.4
firm’s capabilities to significant institutional clients. While the company has a     Dividend Yield (%)                                      1.9
strong presence among institutions in private equity and real estate, we believe it   Source: FactSet Fundamentals
needs to build on its retail product capabilities acquired with Van Kampen by
                                                                                      EPS (USD)
cross-selling these into the institutional channel, particularly with respect to
                                                                                      FY DEC                     EPS                  P/E
large-cap value product. Within retail, Invesco is looking to expand its presence
                                                                                      2009                   0.76A                   30.5
into model portfolios in the advisor channels, which is more lucrative than
                                                                                      2010                   1.34E                   17.3
simply having a preferred fund on a brokerage platform.
                                                                                      2011                   1.79E                   12.9
While Invesco’s adjusted operating margin is running in the mid-30% range,            Source: Barclays Capital

management believes it can expand with asset growth and get to a high-30%
                                                                                      Upside/Downside Scenario
level. In addition, although management is expense conscious, we believe
                                                                                       50                                                $38
Invesco’s cost structure is ultimately built for a larger asset size.                                                         $32      (64.0%)
Upside/Downside Scenarios                                                              30                           $17
                                                                                       20                        (-26.6%)               Upside
We believe that IVZ deserves a premium to peers because of its highly diversified                                                        Case
                                                                                       10                        Downside
mix of assets across products, customers, distribution channels, and                                               Case
geographies, as well as a proven management team with respect to                       16-Dec-09          9-Dec-10          Price Performance
restructurings and acquisitions. Our upside scenario of $38 assumes a premium
                                                                                      Source: FactSet
to the peer group’s historical P/E average.                                           Percentages indicate potential upside/downside from
                                                                                      current price.
However, Invesco could be vulnerable to a global economic and a market
slowdown, given its concentration in equities at roughly 50% of assets. Our           Roger A. Freeman, CFA
downside scenario is $17 (about -27% from current levels), which corresponds          1.212.526.4662
to the time when the asset managers and the markets were at a 12-month low. 
                                                                                      BCI, New York
Valuation Analysis
                                                                                      Steven M. Truong
Since the recent market lows on July 2, 2010, IVZ has appreciated about 39%, vs       1.212.526.9937
the SPX’s rise of roughly 21%, reflecting the stock’s higher beta nature. In our
opinion, IVZ is attractively priced at a 2011 P/E of 13x, below a peer group          BCI, New York
average of 15x. While IVZ is trading at a discount to peers, we believe shares
have upside (market conditions notwithstanding) from the Van Kampen merger-
related synergies, particularly on the revenue front. Since December 2007 when
IVZ moved its listing to the U.S., the shares have traded at a forward P/E average
of 16x, and within 13x to 19x. Our price target of $32 reflects 18x our 2010
adjusted EPS estimate of $1.79.

FINANCIAL SERVICES | Latin America Banks

Itaúsa (ITSA4.SA)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
Itaú Unibanco (ITUB4, 1-OW, BRL 38.39) is our top pick. Itaú Unibanco is poised
                                                                                      Sector View                                1-POSITIVE
to generate the most sustainable and highest ROE in large-cap Brazilian banks.
                                                                                      12-Month Price Target                           BRL 18.00
We believe the current implied discount for Itaúsa, the holding company, relative
                                                                                      Price (09 Dec 2010)                             BRL 12.52
to its underlying assets is excessive and recommend investors consider Itaúsa
                                                                                      Potential Upside/Downside                             44%
shares as a cheap way to gain exposure to Itaú Unibanco. Our sum-of-the-parts
valuation indicates the current discount is roughly 20%. This discount has been
                                                                                      Market Cap (BRL mn)                                    NA
narrowing the past few years, from a historical high of over 40%. We believe a        Revenue TTM (BRL mn)                                   NA
reasonable holding company discount for Itaúsa should not be in excess of 10%.        Current BVPS (BRL)                                     NA
                                                                                      Return on Equity TTM (%)                               NA
The Business Drivers
                                                                                      Dividend Yield (%)                                     NA
Itaúsa was established in 1965 as a holding company under which the                   Source: FactSet Fundamentals
controlling families of Itaú held their investments. Itaúsa’s investments are
                                                                                      EPS (BRL)
mainly represented by the controlling stake in ITUB4 (36.6% direct and indirect).
                                                                                      FY DEC                     EPS                  P/E

With a renowned management team, solid retail banking franchise, one of the           2009                   0.86A                   14.6
largest card issuers in Brazil, the highest assets under management (over R$300       2010                   1.14E                   11.0
billion), and Itaú BBA, a top Brazilian investment bank in equity capital markets     2011                   1.36E                    9.2
and M&A, Itaú Unibanco is well positioned to generate 15%-20% earnings                Source: Barclays Capital

growth over the next five years.
                                                                                      Upside/Downside Scenario
We believe Itaúsa’s current discount relative to its underlying assets is excessive    25                                                R$20
                                                                                                                              R$18     (59.7%)
for the following reasons: 1) All of the dividends from Itaú Unibanco to Itaúsa are    20                          R$16     (43.7%)
passed on to Itaúsa shareholders. Itaúsa’s dividends are often higher than the
inflow of dividends from Itaú Unibanco. 2) Itaúsa corporate governance                                           Downside
                                                                                       10                                   Target
standards are high; non-voting shareholders benefit from tag-along rights                                          Case

(although we do not expect a change in control to take place). 3) Investors who         5
own Itaúsa shares are gaining exposure to Itaú Unibanco at a deep discount             16-Dec-09          9-Dec-10          Price Performance

(approximately 95% of Itaúsa’s assets are in its stake in Itaú Unibanco). They are    Source: FactSet
also getting a free option on its subsidiaries, Duratex, Itautec, and Elekeiroz.      Percentages indicate potential upside/downside from
                                                                                      current price.

Upside/Downside Scenarios
                                                                                      Roberto Attuch
Our upside scenario assumes that Itaú Unibanco experiences improved asset             +55 11 3757 7335
quality on top of margin improvement along with stronger banking fee        
generation should boost earnings and ROE. Such improved performance would             BBSA, São Paulo
positively impact Itaúsa, suggesting a price of R$20.
                                                                                      Fabio Zagatti
Our downside scenario assumes banks will not manage to sustain                        +55 11 3757 7336
intermediation margins, leading to relatively flat net interest income and lower
                                                                                      BBSA, São Paulo
earnings for Itaú Unibanco, negatively impacting Itaúsa, suggesting a price of

Valuation Analysis
Our SOTP valuation for Itaúsa is based on 1) Itaúsa’s stake in Itaú Unibanco
valued at our price target of R$49; 2) Itaúsa’s subsidiaries valued at market
prices (using the most liquid class of shares); 3) we deduct Itaúsa’s net debt; and
4) apply a 10% holding company discount.


JPMorgan Chase & Co. (JPM)
The Investment Case
                                                                                          Stock Rating                          1-OVERWEIGHT
We expect the shares of JPMorgan Chase to outperform in 2011 benefiting from
                                                                                          Sector View                                1-POSITIVE
its relatively strong fundamentals and significant earnings power. It is in a
                                                                                          12-Month Price Target                          USD 60.00
position to begin returning capital to shareholders; and its strong, stable
                                                                                          Price (09 Dec 2010)                            USD 40.81
management team should aid it in navigating the dynamic financial services
                                                                                          Potential Upside/Downside                             47%
                                                                                          Market Cap (USD mn)                              159,534
The Business Drivers
                                                                                          Revenue TTM (USD mn)                              112368
JPM benefits from a top three position in each of its six key businesses and their        Current BVPS (USD)                                    42.29
related cross-selling synergies; a global presence; and its foresight to continue to      Return on Equity TTM (%)                               9.41
reinvest and grow throughout the downturn. Its Investment Bank (22% of                    Dividend Yield (%)                                      0.5
revenues) is the market leader and it has been a top two player in emerging               Source: FactSet Fundamentals
markets over the past five years. Added capabilities in prime brokerage and
                                                                                          EPS (USD)
commodities, and its new Global Corporate Bank initiative, in addition to positive
                                                                                          FY DEC                     EPS                  P/E
secular capital market trends, should allow for continued growth. Within Retail
                                                                                          2009                   2.24A                   18.2
Financial Services (31%), the acquisition of Washington Mutual, the continued
                                                                                          2010                   3.90E                   10.5
opening of new branches (third largest U.S. network), and the hiring of
                                                                                          2011                   4.95E                    8.2
additional personal bankers, enhance its competitive position and should allow
                                                                                          Source: Barclays Capital
for continued checking account and deposit growth. On the Card (17%) front, it
is the largest Visa credit card issuer and completely redesigned its offering over        Upside/Downside Scenario
the past two years, while many competitors were focused elsewhere.                                                                           $72
                                                                                           80                                     $60      (76.3%)
We expect capital redeployment to be a theme in 2011. We look for its tier 1               60
common ratio to approach 10% (and a 5% reserve, some of which should shift                                                                  Upside
                                                                                           40                        (-26.5%)    Price
back to capital) in 2010, which should facilitate a dividend increase early next                                                Target
                                                                                           20                        Downside
year, in addition to allowing it to accelerate its share repurchase activity.                                          Case
                                                                                           16-Dec-09          9-Dec-10          Price Performance
Upside/Downside Scenarios
                                                                                          Source: FactSet
Our $60 price target implies 10.5x our 2012 EPS estimate of $5.65 and 2.0x                Percentages indicate potential upside/downside from
tangible book of $30. We see the greatest source of potential earnings upside             current price.
driven by higher than forecasted loan growth and capital markets related
revenues in a stronger than anticipated macro environment, as well as a better-           Jason M. Goldberg, CFA
than-expected improvement in asset quality. In addition, improvement in the               1.212.526.8580
regulatory environment and/or the resumption of capital redeployment could      
                                                                                          BCI, New York
lead to multiple expansion. In a more optimistic environment, we see 12x EPS of
$6.00 suggesting a $72 price.

On the flip side, a double-dip recession would put further pressure on its already
stressed housing exposure, in addition to adversely impacting its capital market
business units and hampering balance sheet growth. Mortgage putback risk also
remains difficult to quantity and could become more of an issue. In such a
scenario, JPM could trade back to tangible book of $30.

Valuation Analysis
JPM is trading at 8x our 2011 EPS estimate of $4.95. Its 13-year average is closer
to 12.5x and its max was 18x. It is at its historic low. It is trading at 1.4x tangible
book compared with a historical average of 2.0x.

FINANCIAL SERVICES | U.S. Consumer Finance

MasterCard Inc. (MA)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
We believe that MasterCard is poised to outperform in 2011 due to 1) improving
                                                                                     Sector View                                2-NEUTRAL
spend resulting from a combination of strong global secular trends, a modest
                                                                                     12-Month Price Target                      USD 305.00
global economic recovery, and the fading drag from debit de-conversions; 2)
                                                                                     Price (09 Dec 2010)                        USD 251.22
declining concern around regulatory pressures as we get greater clarity on the
                                                                                     Potential Upside/Downside                           21%
impact of the Durbin amendment and the merchant litigation moves toward a
resolution; and 3) declining concern over the threat of disintermediation as the
                                                                                     Market Cap (USD mn)                               30,782
market gets a better sense of MA’s ability to compete in the emerging payments       Revenue TTM (USD mn)                                5399
space. Trading at less than 15x our 2011 EPS estimate of $17 with the potential      Current BVPS (USD)                                   37.0
for long-term EPS growth of 20%+, we believe the shares are significantly            Return on Equity TTM (%)                            42.81
undervalued, so we see considerable upside as the stock trades closer to its         Dividend Yield (%)                                    0.2
historical multiple of 20x forward EPS.                                              Source: FactSet Fundamentals

The Business Drivers                                                                 EPS (USD)
                                                                                     FY DEC                     EPS               P/E
Spend Growth: Debit de-conversions masked MA’s improving spend trends over
                                                                                     2009                  11.16A                 22.5
the last year. As those de-conversions anniversary in the coming months,
                                                                                     2010                  13.96E                 18
however, and conversions of new accounts kick in, adding to the momentum
                                                                                     2011                  17.00E                 14.8
from strong global secular trends in which card spend continues to gain share
                                                                                     Source: Barclays Capital
from cash and check, transaction volume and revenue growth should accelerate.
                                                                                     Upside/Downside Scenario
Investments: MA’s business generates significant excess cash. Our estimates
assume most of that cash is reinvested in discretionary marketing spend and           395                                    $305  (35.3%)
emerging payments platforms/technologies, but better-than-expected returns                                                 (21.4%)
                                                                                      295                         $220
on investment could enable MA to repurchase stock, boosting EPS growth.               245                       (-12.4%)             Upside
                                                                                      195                                             Case
                                                                                                                Downside Target
Upside/Downside Scenarios                                                             145                         Case
Upside: As spending trends improve and the overhang from interchange                   16-Dec-09         9-Dec-10          Price Performance
reductions and disintermediation risk lifts, we expect the valuation to migrate
                                                                                     Source: FactSet
closer to its historical median multiple of around 20x. Our price target of $305     Percentages indicate potential upside/downside from
assumes MA trades to 18x our 2011 EPS estimate, but if economic growth is            current price.
more robust than we expect (we’re assuming moderate global growth) or the
multiple reverts more quickly, we could see the shares trade through $340.           Bruce W. Harting, CFA
Downside: The shares sold off mid-2Q10 (down 25% vs a 12% drop in the S&P  
500) due to perceived regulatory, legislative, and competitive risks, causing the    BCI, New York
valuation to drop to 15x 2010E EPS and 12x 2011E EPS. Investors were
                                                                                     Mark C. DeVries
concerned that network pricing and growth could come under pressure if               1.212.526.9484
interchange rates are cut significantly or if exclusivity prohibitions increase
competition for processing. Those concerns were compounded by mounting               BCI, New York
sensitivity to the risk of disintermediation from emerging payment technologies.
We expect the concern over these risks to continue to fade, but if it regains
intensity, while we don’t expect it to have a material impact on our estimates, it
could push the stock back to around 13x forward earnings, or about $220.

Valuation Analysis
Our $305 target is 18x our 2011 EPS estimate of $17. MA has historically traded
at around 20x forward EPS, compared with its current depressed multiple of 14x.

FINANCIAL SERVICES | Latin America Non-Bank Financial Institutions

Porto Seguro (PSSA3.SA)
The Investment Case
                                                                                         Stock Rating                          1-OVERWEIGHT
Porto Seguro’s integration of Itaú Seguros de Auto e Residência (ISa+r) reduced
                                                                                         Sector View                                2-NEUTRAL
its expense ratio and raised its operating leverage on solid volume growth.
                                                                                         12-Month Price Target                           BRL 32.00
However, we still expect the kick-off of a more aggressive commercial strategy
                                                                                         Price (09 Dec 2010)                             BRL 26.50
in the branch network and Itaú’s insured fleet to resume growth in the next few
                                                                                         Potential Upside/Downside                             21%
quarters. In addition, selling insurance through the bank branches has offered
the company an opportunity to broaden its national footprint without creating
                                                                                         Market Cap (BRL mn)                                   8,683
higher administrative costs.                                                             Revenue TTM (BRL mn)                                  9289
                                                                                         Current BVPS (BRL)                                    10.96
The Business Drivers
                                                                                         Return on Equity TTM (%)                              20.45
Porto Seguro holds more than 3.5mn insured vehicles, giving it a dominant                Dividend Yield (%)                                      NA
presence in the LatAm auto insurance market and expected volume growth                   Source: FactSet Fundamentals
higher than the industry. In our view, Porto Seguro has the best underwriting
                                                                                         EPS (BRL)
practices. Lower loss ratios and the largest database position the company well           FY DEC                    EPS                  P/E
for growth opportunities. Meanwhile, we believe that Porto Seguro still has more
                                                                                         2009                   1.00A                   26.5
to benefit from the incorporation of ISa+r. Itaú’s fleet should reset growth in
                                                                                         2010                   2.09E                   12.7
2H10; renewed policies have better adequate pricing and should recover
                                                                                         2011                   2.58E                   10.9
profitability; and the presence of Porto Seguro in other regions should grow,
                                                                                         Source: Barclays Capital
with ISa+r essentially providing a larger scale to compete. The deal with Itaú also
offers higher exposure to the fast-growing residential business in Brazil.               Upside/Downside Scenario

                                                                                          43                                                R$35
Upside/Downside Scenarios                                                                 38
                                                                                                                                 R$32     (32.0%)
                                                                                                                      R$28     (20.7%)
                                                                                          33                         (5.6%)
We see medium-term risks for further competition in auto insurance due to an              28
expected continued recovery in underwriting margins in 2011; possible hikes in            23                                    Price      Upside
                                                                                                                    Downside                Case
                                                                                          18                                   Target
interest rates; and the competitive impact of the JV of Banco do Brasil and                                           Case
Mapfre. In this downside scenario, we estimate a stock price of R$28 based on              8
lower growth of ISa+r’s insured fleet, lower prices, and higher loss ratios for the       16-Dec-09          9-Dec-10          Price Performance

auto segment from 2012. In addition, the industry regulator is adjusting its             Source: FactSet
criteria to reflect stricter capital needs, but we see little likelihood of impacts on   Percentages indicate potential upside/downside from
                                                                                         current price.
current capital ratios.

On the flip side, an upside scenario would incorporate higher insured fleet              Henrique Caldeira, CFA
growth rates; better prices from 2011; lower loss ratios after 2012 for the auto         +55 11 3757 7349
insurance line; and lower G&A expense ratio for the company going forward. At
                                                                                         BBSA, São Paulo
the same time, while an inflationary environment and likely higher rates could
lead to deterioration in loss ratios, we think that the net short-term impact of         Roberto Attuch
higher financial income could be positive. Based on the aforementioned                   +55 11 3757 7335
adjustments, we estimate a RoE of 23% with BVPS of 12.17 in 2011, and a stock  
price of R$35.                                                                           BBSA, São Paulo

Valuation Analysis
Porto Seguro trades at a 10.3x 2011E P/E, a discount of around 20% to its global
peers in personal lines insurance. Our price target implies a 2011 P/B of 2.6x our
2011 BPS estimate of R$12.11, offering 21% potential upside. Adjusted for
expected growth, Porto Seguro trades at a 2011 PEG of 0.59x and is attractively
valued relative to the 1.34x of its peers, thus offering a 56% discount.


TCF Financial (TCB)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
We expect TCF Financial to outperform its Mid-Cap bank peers in 2011 as its
                                                                                      Sector View                                2-NEUTRAL
convenience-centric strategy allows for above-peer customer growth, recent
                                                                                      12-Month Price Target                          USD 22.00
acquisitions and initiatives fuel balance sheet expansion, asset quality improves
                                                                                      Price (09 Dec 2010)                            USD 15.45
as recent issues are addressed, and capital redeployment returns.
                                                                                      Potential Upside/Downside                             42%
The Business Drivers
                                                                                      Market Cap (USD mn)                                   2,204
TCB banks a large and diverse Midwest customer base through traditional,              Revenue TTM (USD mn)                                  1648
supermarket, and campus branches that are open seven days a week. This has            Current BVPS (USD)                                    10.49
generated strong deposit and account growth at an interest cost less than peers.      Return on Equity TTM (%)                              10.13
As such, we expect its net interest margin to remain best-in-class, while its asset   Dividend Yield (%)                                      1.4
sensitive balance sheet positions it for eventual interest rate increases. We         Source: FactSet Fundamentals
expect this deposit growth to fund portfolio lending as it benefits from recent
                                                                                      EPS (USD)
organic and acquisition-related expansion of its leasing & equipment finance
                                                                                      FY DEC                     EPS                  P/E
units (26% of loans). TCB is now the 13th largest bank-affiliated leasing
                                                                                      2009                   0.54A                   28.6
company (despite being 23rd in branches), a segment we expect to be one of
                                                                                      2010                   1.08E                   14.3
the first to come back in this economic recovery.
                                                                                      2011                   1.10E                   14.0
We expect revenues to grow in 2010 despite headwinds due to regulatory-driven         Source: Barclays Capital

changes in service charges and note normalized returns in 3Q10 exceeded a
                                                                                      Upside/Downside Scenario
15% ROE and 1.30% ROA, well above peers. Even adjusting for an 80%
                                                                                       35                                                $26
reduction in debit card revenue due to the Durbin Amendment of the Dodd-               30                                     $22      (68.3%)
Frank Act, which TCB is challenging and we view as a worst case scenario, its          25                                   (42.4%)
                                                                                       20                           $12
ROA remains over 1.00%, before any mitigating activities. We also expect capital                                 (-22.2%)
                                                                                       15                                              Upside
redeployment to be a theme in 2011. Results in 3Q10 marked its 62nd                    10                                   Target
consecutive quarter of profitability and its capital ratios are above peers, which      5                          Case
should facilitate a dividend increase in addition to share repurchases.
                                                                                       16-Dec-09          9-Dec-10          Price Performance

Upside/Downside Scenarios                                                             Source: FactSet
                                                                                      Percentages indicate potential upside/downside from
Our $22 price target implies 15x our normalized EPS estimate of $1.45. The            current price.
Durbin Amendment of the Dodd-Frank Act could reduce its $100 million in
annual debit card revenues anywhere from 20%-80%, while our base case                 Jason M. Goldberg, CFA
assumes a 50% hit. A 20% reduction would pick up $0.15 while 80% could lose           1.212.526.8580
an additional $0.15. Asset quality is another pivot. While results have been
                                                                                      BCI, New York
stressed of late, 3Q10 saw its 60-day-plus delinquency rate improve 9bp, while
classified commercial loans declined 3%. Our normalized provision/loan
assumption is 0.50%, although every 10bp change alters EPS by $0.05.

A downside scenario, assuming earnings power of $1.05 (80% debit hit, 1%
provision/loan) and a 12x P/E, gets one to $12. An upside scenario, assuming
earnings power of $1.65 (20% debit hit, 0.40% provision/loan) and a 16x P/E
suggests a $26 price.

Valuation Analysis
TCB is currently trading at 14x our 2011 EPS estimate of $1.10. Its 10-year
average is 14x with a range of 8x to 20x. It is trading at 1.6x tangible book
compared with a historical average of 3.8x.

HEALTHCARE | U.S. Life Science Tools

Agilent Technologies (A)
The Investment Case
                                                                                        Stock Rating                          1-OVERWEIGHT
We believe the Agilent story has plenty of room for the following four reasons: 1)
                                                                                        Sector View                                1-POSITIVE
further margin leverage potential in the Electronic Measurement Group (EMG),
                                                                                        12-Month Price Target                          USD 44.00
driven by revenue tailwinds in the communications end-market; 2) Varian cost
                                                                                        Price (09 Dec 2010)                            USD 38.05
and revenue synergies, which we believe will surprise to the upside; 3) sector
                                                                                        Potential Upside/Downside                             16%
leading exposure to faster growing emerging markets; and 4) potential
deployment of the company’s solid FCF, either via buybacks or acquisitions.
                                                                                        Market Cap (USD mn)                               13,179
                                                                                        Revenue TTM (USD mn)                                  5444
The Business Drivers
                                                                                        Current BVPS (USD)                                      NA
We believe Agilent is one of the best managed companies in the Life Science             Return on Equity TTM (%)                              15.76
Tools space. With the restructuring in EMG complete, the company has seen               Dividend Yield (%)                                      NA
significant margin leverage as end-markets recovered. With an elevated backlog          Source: FactSet Fundamentals
heading into 2011, management has solid, better than normal visibility for the
                                                                                        EPS (USD)
first half of the year. Management commentary on the fiscal 4Q call for top-line
                                                                                        FY OCT                     EPS                  P/E
growth prospects based on new investment cycles in communications and a
                                                                                        2010                   2.00A                   19.0
continuing rebound in demand for core measurement products like
                                                                                        2011                   2.52E                   15.1
oscilloscopes was very positive. We believe management’s tone also reflected
                                                                                        2012                       NA                   NA
confidence in achieving and exceeding operating margin goals outlined at the
                                                                                        Source: Barclays Capital
2010 analyst day (trough 12%, peak 21%, and average 15%).
                                                                                        Upside/Downside Scenario
The second leg of the Agilent story, Varian, is now at the “tipping point,” in our
view. The company has completed front-end integration at an impressive pace,             53                                     $44
and the groundwork is in place to achieve cost synergies ahead of initial                43
expectations (initial $75mn target, now raised to $100mn net of investments).                                      (-21.0%)
                                                                                         33                                    Price      Upside
We believe the real upside potential will come from revenue synergies that will                                               Target       Case
                                                                                         23                        Downside
lead to sustainable and enduring organic growth (e.g., Nuclear Magnetic                                              Case
Resonance R&D investments, leveraging Agilent’s emerging market footprint).
                                                                                         16-Dec-09          9-Dec-10          Price Performance

Upside/Downside Scenarios                                                               Source: FactSet
                                                                                        Percentages indicate potential upside/downside from
In an upside scenario, we assume Varian’s cost and revenue synergies exceed             current price.
Street expectations and come sooner than expected; EMG end-markets hold up
better than Street expectations; China manages to execute a smooth landing,             C. Anthony Butler, Ph.D.
Tools end-markets remain strong; and Agilent deploys its robust free cash flow          1.212.526.4410
to drive EPS upside. We see $47 as achievable.                                
                                                                                        BCI, New York
In the downside case, if EMG end-markets see a significant fall off after the initial
                                                                                        Nandita Koshal
bounce back; Varian integration stumbles on the cost side and proves difficult to       1.212.526.5232
repair the erosion in Varian revenues, let alone generate upside; and China   
suffers a structural slowdown, the stock could touch $30.                               BCI, New York

Valuation Analysis
We view P/E as the best valuation metric for the Tools space. Agilent’s P/E has
been more volatile than Tools peers because of its EMG business, ranging from
the high-single digits to the low 20s. With the most cyclical and/or slow growing
parts of EMG now whittled away, we view a narrower range of low-to-high teens
as more reasonable. Our $44 price target is 17.5x our FY11E EPS of $2.52.

HEALTHCARE | U.S. Health Care Distribution & Technology

Cardinal Health (CAH)
The Investment Case
                                                                                        Stock Rating                          1-OVERWEIGHT
Since the spin-off of CareFusion in 2009, Cardinal Health has emerged with a
                                                                                        Sector View                                2-NEUTRAL
renewed sense of focus in the healthcare supply chain, setting the stage for
                                                                                        12-Month Price Target                          USD 46.00
platform expansion in 2011. Having now boosted its presence in the faster-
                                                                                        Price (09 Dec 2010)                            USD 36.59
growing specialty, generic, and international spaces, and with a continued
                                                                                        Potential Upside/Downside                             26%
interest in alternate site expansion from a still under-levered balance sheet, we
believe Cardinal Health will show better-than-expected progress in closing the
                                                                                        Market Cap (USD mn)                               12,768
margin gap between it and competitors through EPS acceleration in 2011.                 Revenue TTM (USD mn)                               98160
                                                                                        Current BVPS (USD)                                    15.02
The Business Drivers
                                                                                        Return on Equity TTM (%)                              18.53
This renewed focus is partially manifested in the company’s acquisitions in the         Dividend Yield (%)                                      2.1
second half of 2010, which expanded its presence in the faster-growing                  Source: FactSet Fundamentals
specialty (P4 Healthcare), broader wholesaler and generic distribution (Kinray),
                                                                                        EPS (USD)
and international (Yong Yu) spaces. In our view, strengthening Cardinal’s generic
                                                                                        FY JUN                     EPS                  P/E
strategy with the addition of Kinray sets the stage for improved margins as a
                                                                                        2010                   2.22A                   16.5
wave of generic drugs hits the market over the next 2-4 years.
                                                                                        2011                   2.52E                   14.5
We also see opportunities in the medical segment following implementation of            2012                   2.87E                   12.7
the full SAP medical supply chain system, potential for acquisition of additional       Source: Barclays Capital

products and service capabilities, as well as stabilization in the overall healthcare
                                                                                        Upside/Downside Scenario
utilization environment following a sluggish 2010.
                                                                                                                                $46      (36.7%)
Upside/Downside Scenarios                                                                                                     (25.8%)
We see the opportunity for margin expansion in Cardinal’s drug segment to drive          34                                               Upside
potential upside in 2011. In addition, part of the upside story is a potential boost                               Downside   Target       Case
                                                                                         24                          Case
in medical margins in a business that had been increasing operating profits by
more than 20%. The potential for 10%-plus annual operating profit growth                 16-Dec-09          9-Dec-10          Price Performance
could allow for mid-teens EPS growth through FY12 to $3.15, which could
                                                                                        Source: FactSet
support further share gains. And with the announced Kinray deal providing some          Percentages indicate potential upside/downside from
potential incremental upside, we could see real multiple expansion, resulting in a      current price.
price some 16x CY12 EPS of $3.15, or $50.
                                                                                        Lawrence C. Marsh, CFA
That said, continued sluggishness in overall healthcare utilization levels in 2011      1.212.526.5315
could continue to weigh on results for Cardinal’s medical business. The       
significantly larger size of Walgreens and CVS Caremark versus Cardinal could           BCI, New York
also create some imbalance in margin management, and any significant
disruption in margins could represent a lower multiple (about 12x) on slightly
lower CY12 EPS of $2.90, or a stock price of $35.

Valuation Analysis
Cardinal’s enterprise value currently represents 6.5x our CY11E EBITDA of $1.85
billion and 6.0x our CY12E EBITDA of $2.00 billion, while CAH trades at 12.7x
our CY12E EPS. This compares with a 20-year average of trading at roughly
15.5x forward EPS. We would argue that continued top-line visibility, some
margin expansion, and thoughtful use of the balance sheet to drive acquisition
benefits could support multiple expansion. Our price target of $43 represents
14.5x our CY12E EPS of $2.97.

HEALTHCARE | U.S. Medical Supplies & Devices

Covidien Plc (COV)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
Covidien has again positioned itself to meet or beat expectations after some
                                                                                    Sector View                                2-NEUTRAL
disruption in the June quarter. Growth trends in pharma and medical supplies
                                                                                    12-Month Price Target                          USD 51.00
are now stable and we view FY11 guidance as conservative. We think that
                                                                                    Price (09 Dec 2010)                            USD 43.40
improvements in FX, tax, acquisition dilution, and operational trends will likely
                                                                                    Potential Upside/Downside                             18%
put upward pressure on FY11 revenue and profitability targets.
                                                                                    Market Cap (USD mn)                               21,491
The Business Drivers
                                                                                    Revenue TTM (USD mn)                               10392
Covidien is shifting its mix of business by divesting non-core, low-growth, and     Current BVPS (USD)                                      NA
low-margin businesses and focusing on acquisitions of high-growth, high-            Return on Equity TTM (%)                              18.16
margin franchises. Further, the company is making additional investments in         Dividend Yield (%)                                      1.9
R&D in order to bring clinically relevant products to market that drive positive    Source: FactSet Fundamentals
mix and share gains. As a result, continued margin expansion is likely through a
                                                                                    EPS (USD)
combination of these positive shifts, as well as cost cutting. We believe that
                                                                                    FY SEP                     EPS                  P/E
recent and future acquisitions will accelerate growth on the top and bottom lines
                                                                                    2010                   3.38A                   12.8
as the company is able to garner sales synergies as it adds new products to the
                                                                                    2011                   3.51E                   12.4
mix and leverages its sales force and call points.
                                                                                    2012                   3.90E                   11.1
Upside/Downside Scenarios                                                           Source: Barclays Capital

Given the disproportionate amount of revenue and profit derived from the            Upside/Downside Scenario
Medical Devices segment, we view changes in utilization as a key issue facing        67                                                $57
                                                                                                                            $51      (31.5%)
the stock. While we are cautious around volumes and utilization in 2011, we          57                                   (17.6%)
believe that Covidien will grow at or above market rates in Medical Devices as it    47                           $37
operates in attractive markets and will benefit from faster-growing new              37                                    Price
                                                                                                               Downside   Target
acquisitions. Further, while generic competition will likely pressure pharma         27
results for the next few quarters, we note these trends have stabilized, along       17
with medical supplies growth rates and pharma should be helped by growth in          16-Dec-09          9-Dec-10          Price Performance

newer branded products. We view Covidien’s product areas as relatively              Source: FactSet
attractive within MedTech from a pricing standpoint.                                Percentages indicate potential upside/downside from
                                                                                    current price.
Our price target is $51, based on 14x our CY11 estimate of $3.65. Risks include
lower utilization and market share loss in the medical devices segment, generic     Adam Feinstein, CFA
competition in pharma, new product uptake, and pricing pressure. We believe         1.212.526.5496
that the ‘worst case scenario’ downside assuming 10x our CY11 estimate, noting
                                                                                    BCI, New York
10x has been the all-time low multiple for the stock, suggests a $37 price. On
the positive side, we believe that increases in utilization, share take, and        Matthew Taylor
improved operational results from new acquisitions have the potential to move       1.212.526.6965
the multiple higher to 15x-16x, yielding an ‘upside’ price of $57.        
                                                                                    BCI, New York
Valuation Analysis
Since its spin-off in 2007, COV has traded at 10x–18x NTM EPS and is now close
to the low end of the range (or 12x our CY11 EPS estimate of $3.65). The shares
also trade below peers, with the large-cap medical products group average of
13x CY11. Given our view of long-term EPS growth slightly above the group, we
believe that at least an in-line multiple is warranted.

HEALTHCARE | U.S. Major Pharmaceuticals

Merck & Co. (MRK)
The Investment Case
                                                                                        Stock Rating                          1-OVERWEIGHT
We estimate that by year end, Merck will have enrolled about 100,000 patients in
                                                                                        Sector View                                1-POSITIVE
clinical trials supporting its five late-stage cardiovascular drug candidates. In the
                                                                                        12-Month Price Target                          USD 43.00
last two decades, we have never observed such a commitment to a single
                                                                                        Price (09 Dec 2010)                            USD 35.67
therapeutic area as Merck’s commitment to cardiovascular disease. Merck’s
                                                                                        Potential Upside/Downside                              21%
R&D focus on the disease area is unusual as many other pharmaceutical
companies are moving away from it. We believe cardiovascular medicine                   Market Cap (USD mn)                              109,895
remains one of the largest therapeutic areas in terms of revenue opportunity.           Revenue TTM (USD mn)                                  44028
One of those five candidates, Vorapaxar, is expected to reveal its late-stage           Current BVPS (USD)                                    18.05
outcome in 2011. We are optimistic of a positive outcome, yet the stock                 Return on Equity TTM (%)                              20.09
remains quiescent.                                                                      Dividend Yield (%)                                      4.3
                                                                                        Source: FactSet Fundamentals
The Business Drivers
                                                                                        EPS (USD)
Merck’s late-stage opportunities include Vorapaxar (clinical trials TRA2P-TIMI-         FY DEC                     EPS                  P/E
50 and TRA-CER), Vytorin (IMPROVE-IT and SHARP recently had positive
                                                                                        2009                   3.25A                    11
results), Tredaptive (HPS-2-THRIVE), and anacetrapib (REVEAL). Betrixiban has
                                                                                        2010                   3.39E                   10.5
completed a Phase II study, and Phase III trials should commence in 2011.
                                                                                        2011                   3.70E                    9.6
One most interesting compound is known as Vorapaxar. Vorapaxar is being                 Source: Barclays Capital

tested in two studies, evaluating the agent as an add-on to the standard of care
                                                                                        Upside/Downside Scenario
in 1) secondary prevention of cardiovascular events in those who have
                                                                                                                                $43        $43
previously experienced a heart attack or stroke (TRA2P-TIMI-50), and 2) the              50
                                                                                                                              (20.5%)    (20.5%)
primary prevention of ischemic events in patients with acute coronary syndrome           40                           $30
(TRA-CER). Merck intends to file all data with U.S. and EU regulatory authorities        35                        (-15.8%)
                                                                                         30                                    Price      Upside
in 2011 with potential commercialization in 2012. We estimate peak sales for             25                        Downside   Target       Case

Vorapaxar may approach $3.0 billion.                                                     20                          Case
                                                                                         16-Dec-09          9-Dec-10          Price Performance
Upside/Downside Scenarios
                                                                                        Source: FactSet
Two principal risks exist for Merck in 2011. One is the failure of Vorapaxar. We        Percentages indicate potential upside/downside from
estimate that a Vorapaxar failure could mean a downside to earnings per share           current price.
of approximately $0.24 in 2015 to $4.59. A second risk is the resolution of a
contract dispute with Johnson & Johnson over the EU marketing rights for the            C. Anthony Butler, Ph.D.
drug Remicade. We estimate a negative outcome in which Merck must                       1.212.526.4410
relinquish Remicade to JNJ results in a hit of $0.25-$0.30 to earnings per share in
                                                                                        BCI, New York
2011. At Merck’s current value we estimate the downside is $30 should both
events deliver negative outcomes. The upside on positive outcomes could move
the stock to $43.

Valuation Analysis
Within the context of the pharmaceutical industry, historical valuations may be
moot due to possible government regulation. While we believe this is accurately
quantified, the average investor likely incorporates this added risk into
valuations. Thus, some discount to historical multiples might be warranted. At
roughly 12x forward 2011 earnings (our estimate of $3.70 in EPS), Merck could
achieve our price target of $43 based on a positive resolution of the Remicade
contract dispute and positive outcomes for both Vorapaxar trials.

HEALTHCARE | U.S. Biotechnology

Onyx Pharmaceuticals (ONXX)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
Onyx is one of the few profitable mid-cap biotech companies and enjoys a profit
                                                                                      Sector View                                1-POSITIVE
split on a $900mn drug in Nexavar. The profit split on current sales supports a
                                                                                      12-Month Price Target                          USD 42.00
base valuation of $27/share with option value around several key opportunities
                                                                                      Price (09 Dec 2010)                            USD 33.51
in 2011-12. Upside potential could be driven by Nexavar reimbursement in
                                                                                      Potential Upside/Downside                              25%
Taiwan and Korea, which could increase sales by 50%, potential success of
Nexavar in lung cancer, breast cancer, thyroid cancer or early stage liver/kidney
                                                                                      Market Cap (USD mn)                                   2,103
cancer, potential access to a follow-on drug from partner Bayer, or approval of       Revenue TTM (USD mn)                                   323
its myeloma drug carfilzomib with $1bn in incremental sales potential.                Current BVPS (USD)                                    11.25
                                                                                      Return on Equity TTM (%)                           -10.07
The Business Drivers
                                                                                      Dividend Yield (%)                                      NA
Nexavar remains the key driver of near-term value, with approvals in both kidney      Source: FactSet Fundamentals
and liver cancer and $900mn in 2010 sales. Despite approvals of four other
                                                                                      EPS (USD)
related compounds in kidney cancer, Nexavar has maintained sales of around
                                                                                      FY DEC                     EPS                  P/E
$250mn as the drug of choice for sicker later-stage patients. Superior tolerability
                                                                                      2009                   0.89A                   37.7
has established a barrier to entry in sicker liver cancer patients and sales of
                                                                                      2010                   0.87E                   38.5
around $650mn appear secure following failure of competitors. Positive phase II
                                                                                      2011                   0.23E                   145.7
data in lung, breast, thyroid, and early stage liver cancer treatment suggests a
                                                                                      Source: Barclays Capital
reasonable likelihood of success in phase III with data flow beginning in 2012.
                                                                                      Upside/Downside Scenario
Incremental value beyond Nexavar is driven by its recently acquired myeloma
                                                                                       59                                                $49
drug carfilzomib, which will be filed with the FDA for approval in patients that                                              $42      (46.2%)
have failed available treatment options. We believe that likelihood of approval is                                          (25.3%)
                                                                                       39                           $27
high and that peak sales potential of $1bn globally is reasonable.                                               (-19.4%)               Upside
                                                                                       29                                    Price       Case
                                                                                                                 Downside   Target
Upside/Downside Scenarios                                                              19
Upside potential is tied to several potential events in 2011 and 2012. We value        16-Dec-09          9-Dec-10          Price Performance
potential 1H11 reimbursement in Taiwan and South Korea at an NPV of $4 per
                                                                                      Source: FactSet
share and $6 per share, respectively. We value potential YE11 approval of             Percentages indicate potential upside/downside from
carfilzomib at $9 per share, with subsequent EU approval at an NPV of $3 per          current price.
share. Anticipation of potential positive Nexavar phase III data in 2012 is not
reflected in our 2011 outlook. Overall we see upside potential to $49 if              Jim Birchenough, M.D.
everything goes well and downside risk to $27 if nothing goes well.                   1.415.274.5393
We believe that downside risk could emerge from any delay in carfilzomib NDA          BCI, New York
filing, failure to gain reimbursement in Taiwan or South Korea, or clinical trial
                                                                                      Ryan Martins
failure for Nexavar in indications beyond liver and kidney cancer. Additional         1.415.274.5335
competitive data from AVEO in 1H11 is a headline risk; however, we note the 
absence of stock reaction to other competitive data. We believe that in each          BCI, New York
downside scenario, current sales support a level of $27 per share.
                                                                                      Charles J. Whitesell
Valuation Analysis                                                                    1.212.526.6687
ONXX is trading at 5.8x 2010 EV/Sales versus 7.2x for oncology peer CELG. To          BCI, New York
the extent that ONXX revenues are actual JV profits, we believe that ONXX is
attractively valued. We arrive at our $42 price target by applying a 25x multiple
to 2014 EPS of $2.44 and discounting at 20%.

HEALTHCARE | U.S. Diagnostics

The Investment Case
                                                                                       Stock Rating                          1-OVERWEIGHT
Qiagen has felt the impact of high unemployment rates on volumes, and 2009’s
                                                                                       Sector View                                1-POSITIVE
H1N1-related revenues. The company is set to see these tough comparisons roll
                                                                                       12-Month Price Target                          USD 23.00
off over the next couple of quarters. With HPV testing conversion rates
                                                                                       Price (09 Dec 2010)                            USD 19.40
increasing, even in this tough environment, the company could see a resurgence
                                                                                       Potential Upside/Downside                             19%
in organic growth as the U.S. employment picture improves. Currently depressed
valuation (versus historical levels) offers a good entry point, in our view.
                                                                                       Market Cap (USD mn)                                   4,518
                                                                                       Revenue TTM (USD mn)                                  1065
The Business Drivers
                                                                                       Current BVPS (USD)                                    10.44
QGEN has dominant market share in HPV testing, and continues to benefit from           Return on Equity TTM (%)                               6.39
increased preventative testing penetration as physician awareness increases,           Dividend Yield (%)                                      NA
even as volume-related headwinds buffet top-line growth this year. The slowing         Source: FactSet Fundamentals
of what was looked upon as a defensive, high-margin, high-organic-growth
                                                                                       EPS (USD)
business has turned sentiment fairly negative on the name. The company will
                                                                                       FY DEC                     EPS                  P/E
see tough comps roll off over the coming quarters, and as measures to improve
                                                                                       2009                   0.90A                   21.6
job growth begin to have even a modest impact, we believe that benefit,
                                                                                       2010                   0.89E                   21.8
combined with increased penetration rates, has the potential to return this name
                                                                                       2011                   1.02E                    19
to a double-digit organic growth story.
                                                                                       Source: Barclays Capital

Also, while competitive entries in HPV testing will likely continue to get attention
                                                                                       Upside/Downside Scenario
next year (e.g., Gen-Probe’s U.S. launch in late 2011), the real financial impact
will likely be minimal in the medium term. QGEN for its part continues to invest        28                                     $23
                                                                                                                             (18.5%)    (23.7%)
in its platforms, both for the mid-throughput (QIAsymphony) and high-                   23
throughput (QIAensemble) segments, and in menu expansion (e.g., in infectious           18                        (-17.5%)
                                                                                                                              Price      Upside
diseases like CT/GC). The company is also focused on establishing industry                                                   Target       Case
                                                                                        13                        Downside
leadership in areas like throughput and automation. These investments have the                                      Case
potential to further support long-term organic growth in 2012-13, in our view.
                                                                                        16-Dec-09          9-Dec-10          Price Performance

Upside/Downside Scenarios                                                              Source: FactSet
                                                                                       Percentages indicate potential upside/downside from
The upside/downside case at this point hinges on the macro outlook – whether           current price.
further rounds of fiscal and monetary stimulus in the U.S. (and globally) succeed
in creating a faster-than-expected recovery in employment next year, or if             C. Anthony Butler, Ph.D.
unemployment persists at elevated levels for an extended period. We believe            1.212.526.4410
there is room for upside surprise on the organic growth front as increasing  
                                                                                       BCI, New York
penetration in HPV meets even modest improvements in overall volumes.

A reasonable upside scenario for the stock, in our view, is $24, or 22x EPS of
$1.10. If volumes remain depressed, the stock could see a $16 level (17x $0.95).

Valuation Analysis
With one of the highest organic growth rates and margin profiles in the sector,
QGEN has long been viewed as a premium franchise, trading at a premium
multiple in the low 20s over the past several years. Sentiment and the multiple
took a hit with volume-related weakness in recent times, but we think that
negativity may be overdone, and that even modest improvements in volumes
could lead to an upside organic growth surprise and multiple expansion. Our
$23 price target is 23x our FY11 EPS estimate of $1.02 (including ESO expense).

HEALTHCARE | U.S. Specialty Pharmaceuticals

Teva Pharmaceutical (TEVA)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
Teva is the generic drug industry leader and remains our favorite name in the
                                                                                    Sector View                                2-NEUTRAL
space. Driving the attractive investment opportunity is a solid, double-digit
                                                                                    12-Month Price Target                          USD 73.00
long-term growth outlook coupled with valuation at historic lows. We believe
                                                                                    Price (09 Dec 2010)                            USD 52.63
that investor concerns over lack of earnings visibility are overdone, suggesting
                                                                                    Potential Upside/Downside                             39%
limited downside from current levels. With sentiment improvement, which we
expect in the coming year, we envision potential stock upside of nearly 50%.
                                                                                    Market Cap (USD mn)                               49,265
                                                                                    Revenue TTM (USD mn)                               15645
The Business Drivers
                                                                                    Current BVPS (USD)                                    24.16
Teva is the world’s largest generic pharmaceutical company, with brand and          Return on Equity TTM (%)                              14.46
generic products sold globally, top-notch management with a keen strategic          Dividend Yield (%)                                      1.4
focus, strong cash flow/position, and successful M&A record.                        Source: FactSet Fundamentals

In the U.S., Teva has the largest number of generic marketed and pipeline           EPS (USD)
products with limited competition, which drive revenue growth. Ex U.S., where a     FY DEC                     EPS                  P/E

focus on increased generic utilization has created growth opportunities, Teva’s     2009                   3.37A                   15.6
portfolio breadth and depth has been instrumental in the company growing lead       2010                   4.55E                   11.6
market share positions. Teva’s brand business is led by MS drug Copaxone and        2011                   5.25E                   10.0
supported by its respiratory and women’s health business.                           Source: Barclays Capital

                                                                                    Upside/Downside Scenario
Upside/Downside Scenarios
                                                                                     93                                                $77
In our view, investor concerns are currently focused on lack of visibility for       83                                              (46.5%)
earnings drivers. We estimate exU.S. revenues to generate the majority of 2011       73
y/y growth, with economic uncertainty driving some of the concern.                   53
                                                                                                               (-4.81%)               Upside
                                                                                     43                                   Target       Case
On the brand side, Copaxone faces potential generic competition, with timing         33                          Case
uncertain. While Teva guides to peak sales in 2013 (20% of topline in 2009,          23
                                                                                     16-Dec-09          9-Dec-10          Price Performance
Teva estimates 6% contribution in 2015), and we and much of the Street do not
assume generic competition until 2014 or beyond, a very worst case scenario         Source: FactSet
                                                                                    Percentages indicate potential upside/downside from
(less than 10% probability) would assume generic competition in later 2011.
                                                                                    current price.

We are confident in our 2011E EPS, which we believe is sufficiently conservative.
                                                                                    Richard B. Silver
Potential upside of $0.26, due to U.S. generic product launch timings and
competitive delays, leads to 6% upside to our $73 price target, or $77.
Conversely, we estimate EPS downside of $0.30, which reflects no y/y exU.S.
                                                                                    BCI, New York
revenue growth and no generic Lovenox launch. Generic Copaxone competition
could result in $0.18 additional downside. We believe the combined worst case       Ann Trimble
scenario, albeit very unlikely, would result in the stock trading around $50.       1.212.526.9731
Valuation Analysis                                                                  BCI, New York

Our $73 price target is derived by using a 14x multiple on our 2011 EPS
estimate. Teva is currently trading at 10x vs generic group average of 11.7x,
with Teva’s 2010-12 EPS CAGR roughly in line with the group. Teva’s current
P/E (and relative to S&P) are near historic lows. Over 2011, we expect multiple
expansion to be driven by greater earnings visibility from 2011 financial
guidance and solid quarterly results.

HEALTHCARE | U.S. Health Care-Managed Care

UnitedHealth Group (UNH)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
UnitedHealth Group is quietly operating at an accelerated pace while external
                                                                                     Sector View                                1-POSITIVE
market forces continue to pressure the stock’s valuation. The improvements in
                                                                                     12-Month Price Target                          USD 44.00
core business are beginning to materially benefit the company’s financial
                                                                                     Price (09 Dec 2010)                            USD 36.65
performance, and we believe that health reform will be less impactful on the
                                                                                     Potential Upside/Downside                              20%
industry than many expect. Additionally, the company is aggressively pushing a
strategy of differentiation in both its benefits and services business segments.
                                                                                     Market Cap (USD mn)                               40,313
We rate the shares of UNH 1-Overweight and regard it as our top pick in the U.S.     Revenue TTM (USD mn)                                  91909
managed care sector.                                                                 Current BVPS (USD)                                    22.84
                                                                                     Return on Equity TTM (%)                              19.04
The Business Drivers
                                                                                     Dividend Yield (%)                                      1.4
UnitedHealth is the largest managed care organization in the United States           Source: FactSet Fundamentals
based on membership, revenues and market capitalization. In light of health
                                                                                     EPS (USD)
reform, we believe the company will benefit from its scale and further
                                                                                     FY DEC                     EPS                  P/E
consolidation within the industry. We believe the company is well positioned for
                                                                                     2009                   3.24A                   11.3
demographic shifts as the largest Medicare Advantage plan in the U.S., as well as
                                                                                     2010                   3.95E                    9.3
regulatory changes as the largest Medicaid plan. Lastly, UnitedHealth’s
                                                                                     2011                   3.70E                    9.9
investment in technology through its Health Services business is expected to
                                                                                     Source: Barclays Capital
meaningfully contribute to future operating earnings and improve consolidated
operating margins and capital returns.                                               Upside/Downside Scenario
Upside/Downside Scenarios                                                             63                                              (50.2%)
We believe that UnitedHealth’s business operations have substantial upside due        43                           $30
to conservative expectations set by management, recent low medical cost               33
trends, below-average margins and an improved outlook from health reform.             23                        Downside   Target
Under the right scenario with modest upside to our current estimates, we believe      13
that the broader group can trade to 12x projected 2011 EPS, and with a 15%            16-Dec-09          9-Dec-10          Price Performance

premium to that, UNH shares could go to $55 per share.                               Source: FactSet
                                                                                     Percentages indicate potential upside/downside from
Conversely, the downside scenario would result from an acceleration of cost          current price.
trends after a mild 2010, the institution of medical loss ratio minimums that
impact the company’s commercial business more than we anticipate, and a              Joshua R. Raskin, CFA
heavier hand from Centers for Medicare & Medicaid Services (CMS) oversight.          1.212.526.2279
While these factors could continue to pressure sentiment, we believe they have
                                                                                     BCI, New York
been adequately accounted for within the company’s earnings guidance range.
With that, multiple compression back to the range of 8x could result in a price of
$30 per share.

Valuation Analysis
UnitedHealth continues to trade at a significant discount to the broad market,
which we believe is unwarranted. On a forward twelve-month basis, UNH trades
at a P/E multiple of just 9.3x, which represents a slight discount to the broader
managed care group and a 31% discount to the S&P 500, which is trading closer
to 13.5x forward earnings. In addition, this level is a 34% discount from the
stock’s average forward multiple since 2003. Our 12-month price target of $44
represents a target multiple of 11.1x our 2010 EPS estimate of $3.95.

HEALTHCARE | U.S. Health Care Facilities

Universal Health Services (UHS)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
We believe that Universal Health Services' acquisition of Psychiatric Solutions
                                                                                    Sector View                                1-POSITIVE
(PSYS) stands to be a source of significant earnings upside over the next several
                                                                                    12-Month Price Target                          USD 46.00
years, with the psychiatric segment now accounting for 55% of earnings. At the
                                                                                    Price (09 Dec 2010)                            USD 41.20
same time, we believe that this transaction could act as a potential catalyst for
                                                                                    Potential Upside/Downside                             12%
the market to revalue the shares of UHS, suggesting an opportunity for multiple
expansion. We believe that the growth profile and returns of the psychiatric
                                                                                    Market Cap (USD mn)                                   3,704
segment should help to justify a higher-than-normalized multiple.                   Revenue TTM (USD mn)                                  5300
                                                                                    Current BVPS (USD)                                     17.9
The Business Drivers
                                                                                    Return on Equity TTM (%)                              14.64
We view the PSYS acquisition as a game-changing transaction for UHS, with           Dividend Yield (%)                                      0.5
55% of the company’s EBITDA now coming from the psychiatric hospital                Source: FactSet Fundamentals
business. We view the company’s synergy targets as conservative and believe
                                                                                    EPS (USD)
that margin improvement at legacy PSYS facilities will be a significant driver to
                                                                                    FY DEC                     EPS                  P/E
EBITDA for several years. We also expect the PSYS acquisition to be significantly
                                                                                    2009                   2.47A                   16.7
accretive to UHS's results in 2011. Finally, we note that the financing terms of
                                                                                    2010                   2.53E                   16.3
this transaction were more favorable than we initially estimated.
                                                                                    2011                   3.50E                   11.8
Upside/Downside Scenarios                                                           Source: Barclays Capital

Since UHS announced the acquisition, results at PSYS have been stronger than        Upside/Downside Scenario
expected. The improved results imply that UHS is paying only 6.7x EBITDA for                                                           $50
                                                                                                                            $46      (21.1%)
PSYS post-synergies, below our initial estimate of 7.8x, and our increased           54
                                                                                                                  $38     (11.4%)
estimates for PSYS would imply that our 2011 EPS estimate of $3.50 for UHS           44                        (-7.94%)

could have upside of 10%. Given that there are still a number of moving parts        34                                    Price      Upside
                                                                                                               Downside   Target       Case
associated with this transaction, we are maintaining our estimates for UHS. That     24                          Case

said, the very strong results at PSYS in both 2Q10 and 3Q10 provide us with          14
much higher visibility into the combined company’s earnings.                         16-Dec-09          9-Dec-10          Price Performance

                                                                                    Source: FactSet
The largest headwind facing UHS is the pressure from its exposure to the Las        Percentages indicate potential upside/downside from
Vegas market, where visibility for a turnaround remains low. However, the           current price.
underperformance in Las Vegas has reduced the company’s exposure to that
market and suggests that there is little expectation for an improvement included    Adam Feinstein, CFA
in the shares at this time.                                                         1.212.526.5496
Should UHS attain its synergy targets sooner than expected, we estimate that        BCI, New York
the stock could have 20% upside from the current price, to $50. On the
                                                                                    Brendan Strong
downside, if unexpected costs arise from this merger and the Las Vegas              1.617.342.4128
business continues to deteriorate, then we estimate 10% downside, to $38. 
                                                                                    BCI, New York
Valuation Analysis
Although the shares of UHS have traded at a premium to the hospital group
since the PSYS acquisition was announced, we believe that current valuation
levels do not reflect the benefits of the updated business mix. In addition, we
believe that achievement of synergies coupled with continued strength in the
psychiatric hospital business could lead to higher earnings and an expanded
multiple. Our $46 price target represents an EV-to-EBITDA multiple of 7.7x our
2011 EBITDA estimate of $1,160 million (with an EV of $9 billion).


AMR Corp. (AMR)
The Investment Case
                                                                                        Stock Rating                          1-OVERWEIGHT
We believe the combination of an economic recovery and capacity
                                                                                        Sector View                                1-POSITIVE
rationalization could drive the airline industry to record profitability in 2011. The
                                                                                        12-Month Price Target                          USD 18.00
cash generation that results from these profitability levels should dramatically
                                                                                        Price (09 Dec 2010)                             USD 7.96
alter the industry’s capital structure and risk profile. In a group we find very
                                                                                        Potential Upside/Downside                            126%
compelling, we think AMR offers the best cash flow and incremental earnings
potential relative to its market cap.
                                                                                        Market Cap (USD mn)                                  2,651
                                                                                        Revenue TTM (USD mn)                                 21647
The Business Drivers
                                                                                        Current BVPS (USD)                                   -10.93
Industry revenue dynamics are a function of broader economic conditions and             Return on Equity TTM (%)                                NA
industry capacity decisions. While we expect a slow-growth economy during               Dividend Yield (%)                                      NA
2011, acceleration of revenue trends during 2010 sets the table for a better year       Source: FactSet Fundamentals
in 2011 than modest growth would suggest. AMR specifically should enjoy
                                                                                        EPS (USD)
these industry benefits along with benefits from immunized alliances with both
                                                                                        FY DEC                     EPS                 P/E
British Airways and JAL, the lack of which has left AMR at a competitive
                                                                                        2009                  -4.09A                   NA
disadvantage in international service for years. AMR also has a company-
                                                                                        2010                  -1.31E                   NA
specific re-fleeting program that we expect will drive significant P&L and unit
                                                                                        2011                   1.20E                   6.6
cost benefits. Finally, the combination of improving earnings and declining cash
                                                                                        Source: Barclays Capital
flow as AMR gets past the peak of capital investments for re-fleeting should
allow AMR in 2011 to generate more cash as a percentage of its market                   Upside/Downside Scenario
capitalization than any other airline we follow.                                         40                                                $30
                                                                                         35                                              (277%)
Upside/Downside Scenarios                                                                25
Our base target on AMR assumes non-fuel unit cost reductions as a function of            15                           $5
                                                                                                                               Price      Case
re-fleeting, which we believe is the largest driver of difference between our            10                        (-37.1%)
estimates and consensus along with less than average unit revenue gains as a              0
result of higher capacity growth. Our 2011 forecasts along with the historical           16-Dec-09          9-Dec-10          Price Performance

relationship between margins and multiples as well as our projected 2011                Source: FactSet
margin for AMR would imply a share price of $18.                                        Percentages indicate potential upside/downside from
                                                                                        current price.
An upside scenario for AMR would include a few points of relative improvement
in revenue generation as well as slightly lower energy prices resulting in upside       Gary Chase
to $30 per share. A downside scenario would reflect RASM decline combined               1.212.526.5752
with rising fuel prices and a failure to generate unit cost reductions from the
company’s re-fleeting program, resulting in a $5 share price.                           BCI, New York

Valuation Analysis
Based on our 2011 projections, AMR currently trades below historical
EV/EBITDAR multiples, with valuation at approximately 4.3x. Given our margin
projections for 2011 and the historical relationship between multiples and
margins, we would expect AMR to trade at roughly 6x. We value the stock using
our proprietary option valuation framework. Based on an assumption of a 2013
expiration year, 2011 EBITDAR of $2.9bn, and EBITDAR volatility of 53%, we
obtain an option valuation of approximately $18, which translates into an
enterprise valuation multiple of 69% of our 2011 revenue forecast with a
historical band of 80%-120%.

INDUSTRIALS | U.S. Packaging

Crown Holdings Inc. (CCK)
The Investment Case
                                                                                        Stock Rating                          1-OVERWEIGHT
Crown Holdings remains our favorite packaging idea. Our favorable view of the
                                                                                        Sector View                                2-NEUTRAL
company is supported by 1) solid fundamentals in the beverage can and food
                                                                                        12-Month Price Target                          USD 37.00
can markets, 2) strong free cash flow, 3) very strong emerging market growth,
                                                                                        Price (09 Dec 2010)                            USD 32.12
4) buybacks/financial re-engineering opportunities, 5) select opportunistic
                                                                                        Potential Upside/Downside                             15%
acquisition opportunities, and 6) attractive valuation. Despite further debt
reduction and the funding of growth projects, we believe CCK will generate
                                                                                        Market Cap (USD mn)                                   5,118
enough free cash flow by the end of 2012 to fund an additional $600mn                   Revenue TTM (USD mn)                                  7909
buyback. CCK used about $250mn to retire 5% of the float during 2010.                   Current BVPS (USD)                                     0.65
                                                                                        Return on Equity TTM (%)                              824.1
The Business Drivers
                                                                                        Dividend Yield (%)                                      NA
CCK is a pure-play metal container manufacturer with considerable expansion             Source: FactSet Fundamentals
opportunities in emerging market regions. CCK is expanding its beverage can
                                                                                        EPS (USD)
volumes by 23% between 2009 and 2012. The company’s products, such as
                                                                                        FY DEC                     EPS                  P/E
beverage cans and food cans, primarily serve defensive end markets. The
company mitigates commodity price risk through contractual pass-throughs to             2009                   2.01A                   16.0
customers.                                                                              2010                   2.17E                   14.8
                                                                                        2011                   2.60E                   12.4
We believe CCK will be a beneficiary of an ongoing shift toward one-way
                                                                                        Source: Barclays Capital
packaging within the emerging markets. We view management to be good
operators, and an effective allocator of capital. Management is focused on              Upside/Downside Scenario
wealth creation in its core competency (metal packaging) with a proven track                                                               $45
record of growing in emerging markets with very high ROIC performance.                   51

                                                                                         41                                   (15.4%)
Upside/Downside Scenarios                                                                                          (-12.6%)
                                                                                         31                                               Upside
                                                                                                                               Price       Case
The upside scenario includes: a) good execution and possible upside to the 23%           21                        Downside   Target
growth in unit volumes between 2009 and 2012, b) potential for CCK to                    11
complete a $600mn buyback authorization in 2011/2012, c) upside earnings                 16-Dec-09          9-Dec-10          Price Performance
risk if the dollar devalues (resulting in favorable translation of offshore profits),   Source: FactSet
and d) potential for acceleration of rising standards of living in the emerging         Percentages indicate potential upside/downside from
markets with a further shift toward one-way packaging. Our upside scenario              current price.

could potentially result in a price of $45.
                                                                                        Peter Ruschmeier
The downside scenario includes: a) potential for execution risk of CCK’s growth         1.212.526.9898
plans, b) competitive risk of an unforeseen shift away from metal packaging, c)
macro risk of a strong dollar and weak translation effect of offshore profits, and      BCI, New York
d) potential for rising cost of capital to outpace the earnings improvement due
to fixed-margin contracts. But given the current positive momentum, we believe
the downside risk is limited to $28 per share.

Valuation Analysis
Our $37 price target is supported by DCF and based on a 7.7x multiple on mid-
cycle EBITDA of $1.248bn less adjusted net debt of $3.930bn divided by 155mn
shares outstanding (pro forma for buybacks). Adjusted net debt of $3.930bn
includes reported 3Q net debt of $2.814bn plus present value of future asbestos
payments of $205mn plus underfunded pension of $548mn plus OPEB liability
of $511mn minus $148mn for the tax deductibility of the pension liability.

INDUSTRIALS | U.S. Autos & Auto Parts

Dana Holding Corp. (DAN)
The Investment Case
                                                                                       Stock Rating                          1-OVERWEIGHT
Dana Holding is one of the most compelling investments in our coverage, in our
                                                                                       Sector View                                2-NEUTRAL
view. We expect Dana Holding to benefit from any broader economic rebound
                                                                                       12-Month Price Target                          USD 19.00
given its large operating leverage to recovering volumes in three end-markets:
                                                                                       Price (09 Dec 2010)                            USD 16.38
autos, commercial truck, and off-highway vehicles. The stock continues to trade
                                                                                       Potential Upside/Downside                             16%
at a material discount to its peers, despite its strong outlook for earnings growth,
and has one of the strongest balance sheets and generates some of the highest
                                                                                       Market Cap (USD mn)                                   2,313
margins in the industry.                                                               Revenue TTM (USD mn)                                  6043
                                                                                       Current BVPS (USD)                                     6.59
The Business Drivers
                                                                                       Return on Equity TTM (%)                             -10.56
We view Dana’s main axle and drivetrain supply business as one with solid              Dividend Yield (%)                                      NA
potential for pricing and margin power, due to its high concentration. There is        Source: FactSet Fundamentals
only one other large independent light vehicle axle supplier (American Axle) and
                                                                                       EPS (USD)
only one other large commercial axle supplier (ArvinMeritor) in North America.
                                                                                       FY DEC                     EPS                  P/E

This market structure gives us solid confidence in Dana Holding’s ability to           2009                  -1.07A                    NA
expand its EBITDA margin to the double-digits in 2011, and then further toward         2010                   0.60E                   27.3
12%, as volumes continue to pick up. Dana Holding’s margin goals are also              2011                   0.80E                   20.5
consistent with its direct competitors. American Axle has outstanding guidance         Source: Barclays Capital

of EBITDA margins of 12%-15% over the 2010-13 timeframe, and ArvinMeritor
                                                                                       Upside/Downside Scenario
is guiding to mid-term margins in the double digits.
                                                                                        34                                                $27
                                                                                        29                                              (64.4%)
Upside/Downside Scenarios                                                                                                      $19
Our earnings estimates and $19 price target are based on very conservative              19                                              Upside
                                                                                        14                                               Case
assumptions for 2011 U.S. SAAR of 12.0 million and Class 8 build of 220,000, as                                   Downside
                                                                                         9                                   Target
well as limited multiple expansion. Our upside scenario, assuming a 13.0 million                                    Case
U.S. SAAR (in line with consensus) and Class 8 build of 250,000, and a 5.5x             16-Dec-09          9-Dec-10          Price Performance
multiple (in line with current peer average) gets us to $27.
                                                                                       Source: FactSet
                                                                                       Percentages indicate potential upside/downside from
We believe the downside risk from current levels is much more limited. Even if         current price.
Dana Holding’s earnings in 2011 ended up flat with 2010 (assuming no
additional recovery at all in industry volumes), applying the current forward          Brian A. Johnson
multiple would get us to a $13 value.                                                  1.212.526.5627
Valuation Analysis                                                                     BCI, New York
Despite a very strong performance in the past few months, the stock is trading         Emmanuel Rosner, CFA
at 4.3x our 2011 EBITDA estimate, a material discount vs peers as well as its          1.212.526.8047
historical EV/EBITDA multiple of around 6.0x-6.5x. Our $19 price target is based
on a 4.7x multiple of our 2011 EBITDA estimate of $685 million, well below its         BCI, New York
auto peers and historical average. As investors get more familiar with the story,
we would expect Dana Holding’s multiple to continue to expand, suggesting
large upside potential on top of our price target.

INDUSTRIALS | North America Airfreight & Ground Transportation

FedEx Corp. (FDX)
The Investment Case
                                                                                         Stock Rating                          1-OVERWEIGHT
We want to own FedEx shares with expectations that both earnings and returns
                                                                                         Sector View                                2-NEUTRAL
across the cycle will impress to the upside. Continued expansion in the high
                                                                                         12-Month Price Target                      USD 106.00
return international Express and domestic U.S. Ground package businesses
                                                                                         Price (09 Dec 2010)                          USD 94.09
should combine to drive improved earnings and shareholder returns. Further,
                                                                                         Potential Upside/Downside                           13%
improved competitive dynamics within the domestic U.S. package market
following last year’s DHL exit should support improved pricing for FedEx. We
                                                                                         Market Cap (USD mn)                              29,605
believe the combination of FedEx’s cyclical leverage with rising returns is a good       Revenue TTM (USD mn)                              36182
recipe for shareholder equity gains.                                                     Current BVPS (USD)                                  45.1
                                                                                         Return on Equity TTM (%)                            9.88
The Business Drivers
                                                                                         Dividend Yield (%)                                   0.5
FedEx is a globally integrated transportation provider. The company’s prime              Source: FactSet Fundamentals
business segment, Express, provides door-to-door transportation of small
                                                                                         EPS (USD)
packages both within the U.S. and globally. FedEx also maintains valuable
                                                                                         FY MAY                     EPS               P/E
domestic U.S. Ground package and Freight trucking businesses.
                                                                                         2010                   3.77A                 25.0
Given the significantly fixed cost nature of on-demand time-definite                     2011                   5.26E                 17.9
transportation networks, FedEx is subject to significant near-term operating             2012                   6.35E                 14.8
leverage. As the global industrial economy continues to post signs of                    Source: Barclays Capital

improvement, we believe FedEx will benefit from a favorable demand
                                                                                         Upside/Downside Scenario
environment in 2011 driving our forecast earnings improvement. Long term, we
                                                                                          155                                              $128
believe the larger story for FedEx is the ability to continue growth in the relatively                                                   (36.1%)
                                                                                          135                                    $106
higher return segments of the company, international Express & Ground.                    115                                  (12.7%)
                                                                                           95                       (-10.6%)
Upside/Downside Scenarios                                                                  75                                 Price       Case
                                                                                                                    Downside Target
                                                                                           55                         Case
Our upside scenario assumes FedEx can achieve better-than-forecast package
pricing in the Express segment, driving a 2% increase in segment margins and               16-Dec-09         9-Dec-10          Price Performance
also assumes the Freight segment can achieve profitability nearing 3% margins
                                                                                         Source: FactSet
sooner than expected. The potential improvement in Express and Freight could             Percentages indicate potential upside/downside from
create an earnings outcome near $6.60 for FedEx, which applied to our valuation          current price.
methodology suggests a share price of $128.
                                                                                         Gary Chase
The downside scenario for FedEx assumes that fuel prices rise in a slowing               1.212.526.5752
economy, driving margin pressure for the Express segment. Further, our         
downside scenario assumes the Freight restructuring will fail to benefit earnings.       BCI, New York
We believe this scenario would yield close to $4.00 in earnings for FedEx and
applying our valuation methodology suggests a share price of near $84.

Valuation Analysis
We value FedEx shares at $106, which is an average of 7x EV/EBITDA and 19x
our FY11 EPS estimate of $5.26 vs a historical range of 15x-20x. Our forecast
valuation translates to a multiple of 11.8x our FY11 EBIT forecast of $2.7 billion
vs a historical range of 11x-13x.

INDUSTRIALS | U.S. Engineering & Construction

Fluor Corp. (FLR)
The Investment Case
                                                                                       Stock Rating                          1-OVERWEIGHT
We believe Fluor shares are poised to rise significantly as commodity markets
                                                                                       Sector View                                1-POSITIVE
and the global macro economy continue to improve. We think that the recent
                                                                                       12-Month Price Target                        USD 61.00
upticks in backlog from several segments suggest a positive inflection in end-
                                                                                       Price (09 Dec 2010)                          USD 62.03
market activity and that bookings momentum should continue into 2011.
                                                                                       Potential Upside/Downside                            -2%
Looking forward into 2011, we maintain our thesis that strength in the industrial
& infrastructure (I&I) segment (e.g., mining and U.S. transportation-related
                                                                                       Market Cap (USD mn)                               11,090
infrastructure) could continue to support a higher level of backlog while global       Revenue TTM (USD mn)                              21062
oil & gas markets incrementally improve.                                               Current BVPS (USD)                                  19.68
                                                                                       Return on Equity TTM (%)                            11.72
The Business Drivers
                                                                                       Dividend Yield (%)                                    0.8
We think Fluor is the bellwether of the engineering & construction (E&C) group         Source: FactSet Fundamentals
as the largest publicly traded company with exposure to most E&C end markets
                                                                                       EPS (USD)
(oil & gas, power, industrial, infrastructure, and the federal government). Fluor is
                                                                                       FY DEC                     EPS               P/E
a tier-1 contractor in most of its markets with an extensive history of solid
                                                                                       2009                   3.75A                 16.5
execution in both the U.S. and overseas, and it relies on its good reputation to
                                                                                       2010                   2.05E                 30.3
win multi-billion-dollar project-management and construction contracts around
                                                                                       2011                   3.40E                 18.2
the world. We believe FLR warrants a premium valuation versus its peers due to
                                                                                       Source: Barclays Capital
its 1) significant exposure to what we think are faster-growing and recovering oil
& gas and mining markets; 2) diversification across geographies and end                Upside/Downside Scenario
markets; and 3) better visibility on earnings conversion from its sizeable backlog.     100                                               $80
                                                                                         90                                             (28.9%)
                                                                                         80                                     $61
Upside/Downside Scenarios                                                                70                                  (-1.69%)
In an upside scenario, the global recovery continues or accelerates, leading to          50
                                                                                                                  (-25.8%)              Upside
                                                                                                                            Price        Case
further multi-billion-dollar projects in oil & gas, mining, and power-related            40                       Downside Target
                                                                                         30                         Case
infrastructure as commodity prices remain stable or rise. Fluor’s backlog                20
continues to rise through 2011, surpassing the previous peak of $36bn in 2008            16-Dec-09         9-Dec-10          Price Performance

from megaproject awards, especially from faster-growing regions such as the            Source: FactSet
Middle East, South America, and Asia. We believe the 2011 consensus earnings           Percentages indicate potential upside/downside from
                                                                                       current price.
expectation could rise, especially if FLR books higher-margin oil & gas projects in
late 2010/early 2011 and if it keeps the fixed-price wind farm project in check.
                                                                                       Andy Kaplowitz
We think FLR shares could trade toward $80 based on a high-teens to 20x
multiple on $4.00+ of earnings power in 2012.                                
                                                                                       BCI, New York
In a downside scenario, the global economic recovery remains uneven, with the
risk of a double-dip recession owing to uncertainty in European debt markets
and choppy growth in emerging markets such as China. Oil prices fall,
prompting customers to delay projects and pressuring Fluor’s backlog. Fluor
incurs further charges on its fixed-price Greater Gabbard offshore wind project,
and the shares fall to $46 or 11.5x 2011 EPS of $3.40 plus $7 in excess cash.

Valuation Analysis
FLR trades at around 18x our 2011E EPS versus around 15x for its peers and 14x
for the S&P 500, in line with its historical premium versus its peers. We believe
FLR could continue to enjoy a high-teens to low 20x forward P/E multiple with
continued end-market improvement in 2011. We rate FLR 1-Overweight with a
price target of $61, or 16x our 2011E EPS of $3.40 plus $7 in excess cash.

INDUSTRIALS | U.S. Machinery

Illinois Tool Works Inc. (ITW)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
We view Illinois Tool Works as well positioned over the coming cycle for growth
                                                                                      Sector View                                2-NEUTRAL
through both acquisition and base revenue expansion. We believe that the
                                                                                      12-Month Price Target                          USD 62.00
80/20 framework remains an important tool for margin growth and that its
                                                                                      Price (09 Dec 2010)                            USD 50.48
principles could, along with portfolio evolution to higher-growth markets, help
                                                                                      Potential Upside/Downside                             23%
deliver higher base revenue growth over the coming cycle. We believe ITW’s
strong framework for identifying and acquiring targets remains a key point of
                                                                                      Market Cap (USD mn)                               25,035
strategic differentiation for the company, and that acquisitions are likely to ramp   Revenue TTM (USD mn)                              15459
up in FY11, which we view as a key catalyst for the shares. With valuations near      Current BVPS (USD)                                    17.91
multi-year lows, we view the stock as highly attractive at current levels.            Return on Equity TTM (%)                              19.05
                                                                                      Dividend Yield (%)                                      2.7
The Business Model
                                                                                      Source: FactSet Fundamentals
ITW is defined by a strong framework for building a diverse set of strong
                                                                                      EPS (USD)
platforms through acquisitions and a culture unified by its 80/20 principles that
                                                                                      FY DEC                     EPS                 P/E
have, over time, driven robust operational improvements, particularly for newly
                                                                                      2009                   1.78A                   28.4
acquired businesses. We see the organization focusing more closely on organic
                                                                                      2010                   3.10E                   16.3
growth going forward, which we believe could complement continued strong
                                                                                      2011                   3.80E                   13.3
focus on growth through acquisitions and on the culture of 80/20.
                                                                                      Source: Barclays Capital

We believe that ITW’s early cycle businesses could show top-line growth ahead
                                                                                      Upside/Downside Scenario
of expectations in spite of increasingly challenging comps, and that some of its
later cycle end markets, such as Welding and Test & Measurement, could                 80                                  $62         (45.5%)
continue to see momentum build. We believe that the organization could show                                      (22.3%)
signs of traction with efforts to enhance its organic growth profile as well as        50                                              Upside
direct internal investments with an eye toward creating a higher growth                40
organization.                                                                          30
                                                                                       16-Dec-09          9-Dec-10          Price Performance
Upside/Downside Scenarios
                                                                                      Source: FactSet
We believe upside could come from a more robust ramp in M&A. We also                  Percentages indicate potential upside/downside from
believe that base revenue growth could surprise to the upside in 2H, which could      current price.
give investors greater comfort around the organization’s later cycle exposure
and organic growth initiatives. Our upside value is $69.                              Meredith Taylor
We see risk that some of ITW’s end markets remain challenged, especially    
Construction. We also recognize that if valuations for acquisitions remain            BCI, New York
challenging and M&A is slow to ramp, investors could question ITW’s ability to
drive growth through acquisition this cycle. Our downside value is $58.

Valuation Analysis
The stock is currently trading close to 10-year lows on the basis of both
EV/EBITDA and P/E, with concerns around organic growth, the pace of the
ramp in acquisitions and the early cycle nature of the portfolio defining the
overhang on valuation. We believe that the overhang associated with these
issues could abate in FY11. Our $62 price target reflects the normalized
earnings power of the organization, which we believe is $4.35 in 2012
discounted back one year at 10% with a 16.5x multiple.

INDUSTRIALS | U.S. Multi-Industry

Rockwell Automation (ROK)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
In our view, Rockwell Automation is operating at a technological and strategic
                                                                                     Sector View                                1-POSITIVE
advantage to its competitors. The Logix integrated architecture represents a
                                                                                     12-Month Price Target                        USD 84.00
“game changing” technology that has positioned ROK for accelerating sales in
                                                                                     Price (09 Dec 2010)                          USD 69.57
expanding served markets. Focusing more on intellectual property and away
                                                                                     Potential Upside/Downside                           21%
from commodity hardware, we believe ROK continues to invest in innovation to
deliver a strong value proposition to customers that ultimately could continue to
                                                                                     Market Cap (USD mn)                                 9,864
drive margin and valuation multiple expansion.                                       Revenue TTM (USD mn)                                4857
                                                                                     Current BVPS (USD)                                    NA
The Business Drivers
                                                                                     Return on Equity TTM (%)                            31.72
We believe that ROK is the only automation provider to have developed a single       Dividend Yield (%)                                    2.0
integrated and highly scalable operating system that can seamlessly transition       Source: FactSet Fundamentals
across control disciplines, making its value proposition very attractive. Instead
                                                                                     EPS (USD)
of selling components on price, ROK is selling solutions on IRR, potentially
                                                                                     FY SEP                     EPS               P/E
pulling through components at attractive prices. With the sale of its motors
                                                                                     2010                   3.05A                 22.8
business and a move into the adjacent middleware space, the company has
                                                                                     2011                   4.20E                 16.6
begun to evolve from a supplier of industrial components toward a high
                                                                                     2012                       NA                NA
technology software and solutions company.
                                                                                     Source: Barclays Capital

The Logix integrated architecture has dramatically expanded ROK’s served
                                                                                     Upside/Downside Scenario
market beyond discrete automation to the $20.0bn Process Automation market,
the $17.0bn OEM Machine Builder market, and the $3.5bn Safety market. ROK             102                                    $84
continues to reinvest in enhancing its product capabilities and in its vertical        82                          $61
expertise in order to maintain its technology leadership position. We believe that                              (-12.1%)
                                                                                       62                                 Price     Upside
ROK’s differentiated technology, presence in emerging markets, and                                              Downside Target      Case
fundamental trends in manufacturing bode well for its growth outlook.                                             Case
                                                                                       16-Dec-09         9-Dec-10          Price Performance
Upside/Downside Scenarios
                                                                                     Source: FactSet
Given the importance of industrial production and capacity utilization, a sudden     Percentages indicate potential upside/downside from
drop off in the highly profitable Maintenance, Repair, and Operations business       current price.
could be the biggest near-term risk. ROK will need to strike a balance between
investment spending and delivering on earnings expectations. In a downside           Robert T. Cornell
scenario, ROK could report flat y/y EPS, suggesting to us a $61 stock price.         1.212.526.2498
Management has guided to 25%-38% EPS growth in FY11 despite an additional            BCI, New York
$70mn of investment spend. Management has typically been conservative with
its initial FY guidance. In an upside scenario, we believe core growth could
exceed management’s 8%-12% guidance and reach north of 15%, resulting in
earnings power of approximately $4.50, or a $90 stock price.

Valuation Analysis
Over the past 10 years, ROK has traded at an average one-year forward P/E of
19x. Given the company’s evolution toward a high technology company with a
robust growth outlook, high teens operating margins, and solid free cash flow,
we believe a multiple expansion is warranted. Based on a 20x P/E and our FY11
EPS estimate of $4.20, we arrive at our price target of $84.

INDUSTRIALS | U.S. Aerospace & Defense

United Technologies (UTX)
The Investment Case
                                                                                    Stock Rating                         1-OVERWEIGHT
With the recovery in both the industrial and aerospace sectors, we believe
                                                                                    Sector View                               1-POSITIVE
investors have been focused on short-cycle industrials and pure-play aerospace
                                                                                    12-Month Price Target                        USD 86.00
companies. As a mostly late-cycle global industrial company, we believe United
                                                                                    Price (09 Dec 2010)                          USD 77.63
Technologies Corporation, or UTC, is rapidly approaching the time when each of
                                                                                    Potential Upside/Downside                           11%
its businesses are likely headed upward and with that expansion a multi-year
period of outperformance.
                                                                                    Market Cap (USD mn)                             71,684
                                                                                    Revenue TTM (USD mn)                            53557
The Business Drivers
                                                                                    Current BVPS (USD)                                  23.06
The story at UTC, in our view, is one of structural cost and productivity           Return on Equity TTM (%)                            21.37
improvements taken during the recent downturn being combined with revenue           Dividend Yield (%)                                    2.2
upswings in each of UTC’s operating units. Among the segments, we look for          Source: FactSet Fundamentals
margin and revenue improvements at Pratt & Whitney and Hamilton Sundstrand
                                                                                    EPS (USD)
fuelled by a pickup in both OE build rates and increased aftermarket sales. We
                                                                                    FY DEC                     EPS               P/E
think Sikorsky is poised to see further margin improvement and continued
                                                                                    2009                   4.12A                 18.8
international growth opportunities (notably India and Saudi Arabia) over the
                                                                                    2010                   4.70E                 16.5
intermediate term. In the commercial businesses, Fire & Security is expected to
                                                                                    2011                   5.40E                 14.4
benefit from further efficiency-based margin improvements and the ongoing
                                                                                    Source: Barclays Capital
integration of GE Security. Although Otis may face continued softness in North
American new equipment sales in 2011, steady growth in contractual                  Upside/Downside Scenario
maintenance and modernization together with continued growth in emerging                                                           $100
market new equipment sales should support the Otis revenue and margin                111                                   $86   (29.0%)
outlook next year and into 2012. We expect Carrier, which has seen significant        91                        (3.2%)

restructuring and divestiture over the last two years, to see a modest rebound in     71                                           Upside
                                                                                                               Downside Price       Case
residential HVAC sales and a continued strong upturn in transport refrigeration       51                         Case   Target

sales. Our forecast is that each of the UTC businesses should see growth in           31
2011 and then see that growth accelerate in 2012.                                     16-Dec-09         9-Dec-10         Price Performance

                                                                                    Source: FactSet
Upside/Downside Scenarios                                                           Percentages indicate potential upside/downside from
                                                                                    current price.
In our view, several scenarios could drive UTC earnings performance above our
current expectations. These potential outcomes include: a more robust
                                                                                    Joseph F. Campbell, Jr.
aerospace aftermarket recovery and better-than-expected margin performance
from recent restructuring combined with favorable commodity and FX impacts.
In such a scenario, we could see the stock price rise to $100, which represents     BCI, New York
16x 2012 EPS of $6.25.
                                                                                    Harry Breach
In a downside scenario, we see the possibility for UTC stock to trade at $80,       +44 (0)20 3134 7533
representing about 14x 2012 EPS of $5.80. Conditions that could lead to the
realization of the downside scenario include: a sluggish aerospace aftermarket      Barclays Capital, London
recovery, adverse FX or commodity headwinds, and a weaker-than-expected             Carter Copeland
recovery in UTC’s commercial businesses if the recovery in the global economy       +1.212.526.1661
lags current expectations.                                                
                                                                                    BCI, New York
Valuation Analysis
We believe UTC shares can trade at a premium to peers, particularly when all the
segments are contributing. In our view, UTC can trade at ~14x P/E on our 2012
EPS estimate of $6.00, which yields our price target of $86.

INTERNET & MEDIA | U.S. Cable & Satellite Communications

The Investment Case
                                                                                        Stock Rating                          1-OVERWEIGHT
DIRECTV combines a strong U.S. business capable of modest growth even in a
                                                                                        Sector View                                2-NEUTRAL
difficult U.S. pay TV market; a rapidly growing Latin American business; and an
                                                                                        12-Month Price Target                          USD 50.00
aggressive capital-return plan. The combination of these three positives
                                                                                        Price (09 Dec 2010)                            USD 40.14
generates strong cash flow growth and a declining share count, and supports
                                                                                        Potential Upside/Downside                             25%
our 2010-2013 CAGR forecast of 33% FCF per share.
                                                                                        Market Cap (USD mn)                               33,466
The Business Drivers
                                                                                        Revenue TTM (USD mn)                               23462
DTV’s U.S. business has successfully targeted the high end of the market, with          Current BVPS (USD)                                     1.69
premium content offerings (particularly in sports), tight credit screening, and         Return on Equity TTM (%)                              47.42
effective targeted marketing, which have kept churn under control and allowed           Dividend Yield (%)                                      NA
continued subscriber growth, even given minimal pay TV market growth. Going             Source: FactSet Fundamentals
forward, we view DTV as well-positioned to maintain its status as the premier
                                                                                        EPS (USD)
U.S. pay TV operator, even in an intensely competitive market, with continued
                                                                                        FY DEC                     EPS                  P/E
FCF growth even as top-line growth slows.
                                                                                        2009                   0.95A                   42.3
In Latin America, we see clear potential for continued growth, driven by low pay-       2010                   2.37E                   16.9
TV penetration and DTV’s strong position in its key markets, particularly Brazil.       2011                   3.61E                   11.1
The company’s key challenge is successfully expanding into mid-market                   Source: Barclays Capital

segments without cannibalizing from high-end, high-ARPU customers. We view
                                                                                        Upside/Downside Scenario
prepaid (currently around 10% of LatAm subs) as a key driver for the company’s
                                                                                         75                                                $60
LatAm growth, as it enables DTV to serve (with attractive ROIs) midrange                                                        $50      (49.7%)
customers whose income won’t support a traditional subsidy model.                        50                           $32
Upside/Downside Scenarios                                                                25
                                                                                                                   Downside   Target
We view multiple-based scenarios as the best upside/downside analysis, as the
impact of results variations in the near term is primarily felt in the change in         16-Dec-09          9-Dec-10          Price Performance
investors’ long-term expectations (as reflected by multiples), since the actual
                                                                                        Source: FactSet
result variations tend to be small, given the low variability nature of the business.   Percentages indicate potential upside/downside from
                                                                                        current price.
On the upside, if investors become less concerned about market competition in
the U.S. and more comfortable with DTV’s long-term growth, and DTV were to              James M. Ratcliffe
trade at its current 14.8x multiple on 2010E FCF at year-end 2011 (i.e., no             1.212.526.0293
multiple compression), we estimate the shares would be worth $60 vs our $50   
price target. On the downside, if DTV were to be viewed as not substantively            BCI, New York
different from DISH (the other U.S. satellite TV provider), with little competitive
or branding advantage, the multiple could contract to DISH’s current 7.6x
multiple on 2011E FCF, implying a $32 DTV share price.

Valuation Analysis
DTV shares trade at 9.0x 2011E fully taxed FCF, slightly below Comcast and
Time Warner Cable, even though DTV’s 2010-13E FCF CAGR of 16% is well
above Comcast’s at 5% and Time Warner Cable’s at 9%. Our $50 price target
implies 11.3x 2011E fully taxed FCF of $2.8 billion, a 3.6-turn compression from
2010, as we expect FCF per share growth to slow after 2011 as the buyback
slows. We view DTV shares as having strong downside protection (particularly
in a weak market), as the company’s buyback represents 6-8% of daily volume.

INTERNET & MEDIA | U.S. Entertainment

Walt Disney Co. (DIS)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
Disney has a high quality asset portfolio as owner of ESPN, the Walt Disney
                                                                                      Sector View                                2-NEUTRAL
Pictures film studio, and Disney theme parks. Disney is able to maximize the
                                                                                      12-Month Price Target                          USD 42.00
return on its content by distribution through its integrated ecosystem (Cable,
                                                                                      Price (09 Dec 2010)                            USD 36.74
Broadcast, Film, Theme Parks, Consumer Products, and Interactive Services). A
                                                                                      Potential Upside/Downside                             14%
best-in-class management team and favorable return of capital policy further
enhance the equity story.
                                                                                      Market Cap (USD mn)                               69,570
                                                                                      Revenue TTM (USD mn)                                 38063
The Business Drivers
                                                                                      Current BVPS (USD)                                    19.78
As the economic recovery marches on, advertising revenues at ESPN and ABC             Return on Equity TTM (%)                              11.12
stand to benefit. We see multiple expansion for public cable TV networks assets,      Dividend Yield (%)                                      1.1
which imply that Disney’s cable TV networks, including ESPN, are worth roughly        Source: FactSet Fundamentals
$23 per share. We also anticipate Filmed Entertainment to outperform, driven by
                                                                                      EPS (USD)
a strong release slate in 2011. Parks bookings for 4Q10 will likely be surprisingly
                                                                                      FY SEP                     EPS                  P/E
stable; while discounting has been prevalent, we think margins have stabilized
                                                                                      2010                   2.13A                   17.2
and we are near an inflection point in the business.
                                                                                      2011                   2.45E                   15.0

Upside/Downside Scenarios                                                             2012                       NA                   NA
                                                                                      Source: Barclays Capital
Our upside case sees a stock price of $45. Disney could achieve increased
earnings power if the recovery at Parks & Resorts is more robust than                 Upside/Downside Scenario
anticipated, or if the 2011 film slate outperforms at the box office. Also, given      54                                                $45
Disney’s exposure to the consumer, increased consumer confidence would                                                      (14.4%)
                                                                                       44                           $33
boost attendance at Parks and sales at Consumer Products.                                                        (-10.1%)
                                                                                       34                                              Upside
Our downside case assumes a stock price of $33. This could occur if a                  24
                                                                                                                 Downside   Target      Case
challenging operating environment results in weaker advertising revenue for the
ABC network and ABC TV station groups. Deteriorating consumer confidence               16-Dec-09          9-Dec-10          Price Performance
could impede the consumer's ability to spend on Disney vacations, impact
                                                                                      Source: FactSet
advertising trends at ABC and ESPN, and/or impact Consumer Products. Disney           Percentages indicate potential upside/downside from
could struggle to produce successful movie/TV content. Finally, Disney could be       current price.
vulnerable to the structural shift of media properties from TV to the internet.
                                                                                      Anthony J. DiClemente, CFA
Valuation Analysis                                                                    1.212.526.1341
We use sum-of-the-parts analysis to arrive at a blended EBITDA target multiple
                                                                                      BCI, New York
of 9.7x for Disney’s consolidated operations, which gets us to a price target of
$42. Using a multiples-based valuation approach, our price target is
approximately 16.5x our CY11E EPS estimate of $2.45. DIS trades at roughly a
5% premium to the S&P 500, which is slightly less than its historical average.
Our target valuation is also supported by a ten-year DCF analysis.

INTERNET & MEDIA | U.S. Internet

Yahoo! Inc. (YHOO)
The Investment Case
                                                                                       Stock Rating                          1-OVERWEIGHT
Yahoo! is our top pick in the internet sector based on five key points: 1) Yahoo! is
                                                                                       Sector View                                1-POSITIVE
a prime beneficiary of branded advertising dollars moving online and we expect
                                                                                       12-Month Price Target                          USD 21.00
solid display growth; 2) we think revenue-per-search benefits from outsourcing
                                                                                       Price (09 Dec 2010)                            USD 16.95
search to Microsoft should materialize in 2011; 3) key investment spending
                                                                                       Potential Upside/Downside                             24%
should slow in mid-2011 and we project several hundred basis points of margin
expansion over the next few years; 4) Yahoo! has significant value in Asian
                                                                                       Market Cap (USD mn)                               22,094
assets (conservatively about $5.40 per share) that we believe will ultimately be       Revenue TTM (USD mn)                                  6532
recognized; and 5) valuation is compelling at 6.7x 2011E EBITDA of $1.760bn.           Current BVPS (USD)                                    9.28
                                                                                       Return on Equity TTM (%)                              8.85
The Business Drivers
                                                                                       Dividend Yield (%)                                     NA
Yahoo! operates one of the largest internet portals with more than 600mn global        Source: FactSet Fundamentals
unique visitors and nearly 100bn monthly page views per comScore. Yahoo!’s
                                                                                       EPS (USD)
scale and industry-leading position in key online verticals such as news, finance,
                                                                                       FY DEC                     EPS                  P/E
and sports make it the leader in display advertising.
                                                                                       2009                   0.42A                   40.4
Yahoo! maintains a nearly 17% share of the domestic search market and                  2010                   0.87E                   19.5
outsourcing search technology to Microsoft should increase profitability going         2011                   0.75E                   22.6
forward. We currently project about 400 bps of EBITDA margin expansion in              Source: Barclays Capital

2011 and we believe this trend should continue going forward.
                                                                                       Upside/Downside Scenario
Upside/Downside Scenarios                                                                                                                 $25
                                                                                                                               $21      (47.6%)
We believe the risk/reward on Yahoo! shares is favourable, with downside likely                                              (24.0%)
limited to about $14 per share (-12%) given valuation support at around 4.5x                                      (-17.3%)               Upside
                                                                                        16                                    Price
2011 EBITDA compared with our $21 price target (+33%) and potential upside                                                                Case
                                                                                                                  Downside   Target
at $25 (+58%) with potential Asian asset monetization.                                                              Case
                                                                                        16-Dec-09          9-Dec-10          Price Performance
Yahoo! remains a show-me story with unfavorable sentiment given what has
been low revenue growth, significant re-investment, management turnover, and           Source: FactSet
                                                                                       Percentages indicate potential upside/downside from
increasing competition in display from Google and Facebook. However, we
                                                                                       current price.
believe the Yahoo! story is strengthening into 2011. We project operating
income and GAAP earnings will double in 2010 and we expect 8% EBITDA                   Douglas Anmuth
growth in 2011 on display strength, search monetization benefits, and the mid-         1.212.526.0879
year wind-down of heavy investments related to platform build-outs for global
products and display advertising. Asian asset monetization could be a catalyst         BCI, New York
for Yahoo! at some point, but timing remains uncertain and we believe Yahoo!
shares can appreciate based on the core business.

Valuation Analysis
We project 2010-13 CAGRs of 1% for revenue and 8% for EBITDA. Yahoo!
shares trade at 6.7x 2011E EBITDA, a discount to most internet peers and also
traditional media companies. Despite muted top-line growth, we believe margin
expansion from the mid-30s to mid-40s can drive upside to current Street
expectations. Our $21 price target is based on a combination of roughly 7.0x
2011E EBITDA of $1.76bn yielding $17, and our DCF which yields $23. We
believe Yahoo! shares can trade above $20 on core business strength and
execution, and above $25 with Asian asset monetization.


AES Corp. (AES)
The Investment Case
                                                                                       Stock Rating                          1-OVERWEIGHT
AES Corp. is a global power and utility company that has de-levered and plans to
                                                                                       Sector View                                2-NEUTRAL
deploy its substantial cash balance of $2.8bn (as of 9/30/10) and expected
                                                                                       12-Month Price Target                          USD 15.00
consolidated free cash flow of $4bn over the next two years through
                                                                                       Price (09 Dec 2010)                            USD 11.35
development and acquisitions. The company has identified 2015 EPS scenarios
                                                                                       Potential Upside/Downside                             32%
of $1.85 and $1.99 with reinvestment of parent cash at 12% and 15% after-tax,
respectively, and an even distribution of debt repayment and reinvestment with
                                                                                       Market Cap (USD mn)                                   8,945
proportional free cash. Without progress on growth, we see a more aggressive           Revenue TTM (USD mn)                               16104
return of capital to shareholders vs the 2010 stock buyback of $500mn.                 Current BVPS (USD)                                     8.68
                                                                                       Return on Equity TTM (%)                               6.25
The Business Drivers
                                                                                       Dividend Yield (%)                                      NA
AES has a 2,704 MW development backlog that adds $0.14-$0.18 to 2012 EPS               Source: FactSet Fundamentals
and requires less than $100mn of investment to complete. Targeted areas of
                                                                                       EPS (USD)
expansion are Latin America, Southeast Asia, and renewable solar and wind. In
                                                                                       FY DEC                     EPS                  P/E
2011, Brazil’s national development bank could also exercise drag-along rights
                                                                                       2009                   1.08A                   10.5
to AES to buy its stake in Brasiliana or sell to another bidder as AES has the right
                                                                                       2010                   0.87E                   13.0
of first refusal. AES’s Brasiliana stake of Eletropaulo and Tiete is $1.75bn.
                                                                                       2011                   1.07E                   10.6
AES has little downside to dark spread in the United States, although it is levered    Source: Barclays Capital

to a weak U.S. dollar. A 10% weakening of the U.S. dollar vs the Brazilian real is
                                                                                       Upside/Downside Scenario
equivalent to $0.04 per share; vs the euro is $0.02 per share; and vs the
                                                                                        24                                                $19
Columbian peso is $0.01 per share on an unhedged basis.                                                                                 (67.5%)
                                                                                        19                                     $15
Upside/Downside Scenarios                                                               14                           $10
                                                                                                                  (-11.8%)              Upside
                                                                                                                              Price      Case
The upside case in 2012 is $19 per share, or a power average multiple of 12.3x           9                        Downside   Target
EPS of $1.54. The $1.54 in 2012 ($1.20 currently) comes from redeploying                                            Case
parent cash of $1.42bn, which adds $0.28 to EPS, and completion of the                  16-Dec-09          9-Dec-10          Price Performance
buyback at $11 per share.
                                                                                       Source: FactSet
                                                                                       Percentages indicate potential upside/downside from
The downside case is $10 per share, or the market cap of the Latin America
                                                                                       current price.
publicly traded holdings of $4.8bn ($3.1bn for AES Gener and $1.75bn for
Brasiliana), $1.13bn at 1.5x year-end 2009 Indianapolis Power & Light book             Gregg Orrill
value, $1.7bn of proportional cash and 794mn shares.                                   1.212.526.0865
Valuation Analysis                                                                     BCI, New York
AES is a high-beta stock at 1.46, with 68% of forecast proportional 2011 EBITDA        Daniel Ford, CFA
abroad (38% in Latin America). It is levered to the capital markets and currency       1.212.526.0836
but with little downside exposure to U.S. gas prices. At the low end, AES tracks a
simple sum-of-the-parts and free cash yield. The sum-of-parts is tied to cash,         BCI, New York
U.S. utility book value, and publicly traded stakes in Latin America. As a U.S.
equity, the base-case comps are U.S. power companies using a P/E primarily.
However, AES is likely to prove whether it can be a growth company in the next
two years. If it can grow more than 15%, then we think it should trade at a
multiple of its growth. If it cannot, then total return may be the key with a
different investor base. Our $15 price target reflects an average of $15 for asset
value; $15 for a P/E of 12.3x 2012E EPS of $1.20; and $14 for 6.5x 2012
proportional EBITDA of $3.3bn less net debt of $9.9bn and 794mn shares.

POWER & UTILITIES | U.S. Utilities

ITC Holdings (ITC)
The Investment Case
                                                                                        Stock Rating                          1-OVERWEIGHT
ITC Holdings is a stand-alone transmission-only utility operating in the Midwest
                                                                                        Sector View                               1-POSITIVE
and Plains states. The company has top-in-class regulation and is leveraged to
                                                                                        12-Month Price Target                        USD 69.00
the build-out of renewable resources and infrastructure investment into the
                                                                                        Price (09 Dec 2010)                          USD 60.37
electric grid. ITC’s subsidiaries are regulated by the Federal Energy Regulatory
                                                                                        Potential Upside/Downside                           14%
Commission (FERC) with a fully reconciling forward test year at incentivized
ROEs between 12.16% and 13.88% at a 60% equity ratio. This leads to lower
                                                                                        Market Cap (USD mn)                                 3,058
relative risk than the typical utility company. Guidance is for earnings per share      Revenue TTM (USD mn)                                 664
growth of 15-17% per year through 2015. This high growth rate at lower                  Current BVPS (USD)                                  21.49
relative risk leads, in our view, to a compelling opportunity at current levels.        Return on Equity TTM (%)                            13.71
                                                                                        Dividend Yield (%)                                    2.2
The Business Drivers
                                                                                        Source: FactSet Fundamentals
ITC Holdings is subject to incentive-based regulation from the FERC to drive
                                                                                        EPS (USD)
investment into high-voltage transmission infrastructure. The current five-year
                                                                                        FY DEC                     EPS               P/E
capital plan calls for $3.9 billion in spending with an opportunity to capture a
                                                                                        2009                   2.58A                 23.4
portion of an identified $2.4 billion in potential projects in the next five years.
                                                                                        2010                   2.81E                 21.5

Upside/Downside Scenarios                                                               2011                   3.27E                 18.5
                                                                                        Source: Barclays Capital
Execution of projects on time and on budget is essential to delivering on the
earnings growth forecast. Siting for projects remains a risk, as this is usually the    Upside/Downside Scenario
lengthiest part of the project-approval process and the most probable stage to                                                          $80
                                                                                                                                $69   (32.5%)
cause delays. That said, the $2.4 billion in potential projects, of which ITC could       84
                                                                                                                      $60     (14.3%)
capture a part, provides a pool from which to fill the gap should any projects in                                  (-0.56%)
the current $3.9 billion plan be delayed.                                                 54                                 Price
                                                                                                                   Downside             Case
                                                                                          44                                Target
In an upside case, ITC executes on its current capital plan and captures a portion        34
of the $2.4 billion project potential. If we assume that a third of that potential is     16-Dec-09         9-Dec-10          Price Performance
captured by the company, it would increase its project spending over five years
                                                                                        Source: FactSet
by $800 million. If this increase could be funded with 30% new equity, it could         Percentages indicate potential upside/downside from
lead to approximately $1.00 in EPS upside in 2015, which would imply a                  current price.
valuation of approximately $80 per share.
                                                                                        Daniel Ford, CFA
In a downside case, ITC could experience siting delays or outright cancelation of       1.212.526.0836
projects, specifically in the upper Midwest, and would not be able to fill any of
the gap from the $2.4 billion of potential projects. This could lead to $0.60 of        BCI, New York
EPS exposure in 2015, which would imply a valuation of $60 per share. Another
                                                                                        Ross A. Fowler, CFA
potential downside risk would be if FERC lowers the company’s return on equity,         1.617.330.5893
which we view as unlikely. Regardless, a 100bp lower ROE would lower 2015     
EPS by approximately $0.55 and imply a valuation of around $61 per share.               BCI, New York

Valuation Analysis
We value the stock versus European electric transmission companies, motorway
companies, and U.S. water utilities given the similarities in business models. The
2012 P/E multiple of this comparable group stands at 14.3x and has ranged
from a low of approximately 11x in 2008 to a high of approximately 16x in 2007.
We apply this multiple to our 2015E EPS of $6.04 and discount to 2012, which
leads to our price target of $69.

POWER & UTILITIES | Latin America Power & Utilities

Sabesp (SBSP3.SA)
The Investment Case
                                                                                       Stock Rating                          1-OVERWEIGHT
Positive news flow defining long-term ROA-based regulation and a more rational
                                                                                       Sector View                                2-NEUTRAL
capital structure and investment policy management under the upcoming
                                                                                       12-Month Price Target                           BRL 50.00
Alckmin administration should lead to positive momentum for Sabesp. Trading
                                                                                       Price (09 Dec 2010)                             BRL 41.20
at an average 2011-12E EV/EBITDA of 4.5x vs a historical 7.0x, with 1) positive
                                                                                       Potential Upside/Downside                             21%
political and regulatory news flow ahead; 2) a likely 10%-15% increase in 2010-
11 consensus EBITDA; and 3) FY11 news flow from potential approval of Draft
                                                                                       Market Cap (BRL mn)                                   9,387
Law #730/07 (exempting water companies from PIS/COFINS taxes), we believe              Revenue TTM (BRL mn)                                  7182
there is little downside for this compelling risk-reward investment.                   Current BVPS (BRL)                                    50.92
                                                                                       Return on Equity TTM (%)                              13.39
The Business Drivers
                                                                                       Dividend Yield (%)                                      NA
Sabesp is a state-controlled company that provides retail water and sewage             Source: FactSet Fundamentals
services in the state of São Paulo, Brazil’s largest state in terms of GDP. Sabesp’s
                                                                                       EPS (BRL)
water coverage ratio is 100% of the population in its concession area and its
                                                                                       FY DEC                     EPS                  P/E
sewage coverage ratio is 81% as of 3Q10.
                                                                                       2009                   6.03A                    6.8
We believe drivers for Sabesp shares are a more rational capital structure and         2010                   5.91E                    7.0
investment policy management under the upcoming Alckmin administration,                2011                       NA                   NA
which would lead to an optimization of capital expenditure investments and/or          Source: Barclays Capital

an increase in dividends. In addition, an economically driven ROA-based
                                                                                       Upside/Downside Scenario
regulation should be defined in 1H11. Implementing ROA-based rates in
                                                                                        85                                                R$68
sanitation should lead to higher growth for Sabesp; the company should see a            75                                              (65.0%)
substantial upward shift in its multiple, toward a premium to electricity               65                                     R$50
                                                                                                                    R$43     (21.3%)
distribution companies.                                                                                            (4.3%)
                                                                                        45                                               Upside
                                                                                        35                                    Price       Case
Upside/Downside Scenarios                                                               25                          Case

Our R$50 price target assumes no PIS/COFINS tax exemption (9.25% bracket)               16-Dec-09          9-Dec-10          Price Performance
and higher tariffs on ROA-based regulation are passed through over a four-year
                                                                                       Source: FactSet
period. Our upside case assumes the potential approval of Draft Law #730/07            Percentages indicate potential upside/downside from
and the one-off 2011 implementation of a ROA-based regulation, which would             current price.
increase growth levels as sizable capital expenditures are added to Sabesp’s
asset base (average 8%-10% annual growth), suggesting a DCF value of R$68.             Felipe Mattar
                                                                                       +55 11 3757 7339
Inversely, as long as tariff regulation is not implemented, Sabesp’s capital 
expenditure would continue to present lower returns (4.5% IRR) versus its cost         BBSA, São Paulo
of capital and be financed by retained dividends and expensive debt, suggesting
                                                                                       Sergio Conti
a DCF value of R$43.                                                                   +55 11 3757 7342
Valuation Analysis
                                                                                       BBSA, São Paulo
Our price target of R$50 is based on our DCF model. Our estimated average
                                                                                       Bruno Pascon
2011-12 EV/EBITDA for Sabesp is 4.5x vs 4.7x for Brazilian water peer Copasa           +55 11 3757 7346
and 6.0x for our Brazilian Utilities universe. Sabesp’s multiple should gradually
trade toward a premium to the Brazilian electricity distributors following the         BBSA, São Paulo
implementation of a long-term ROA-based regulation for Sao Paulo sanitation
companies, given the inelastic nature of water consumption, higher long-term
asset base growth for sanitation/environmental targets, and capital
expenditures on water production/sewage treatment.


CB Richard Ellis Group, Inc. (CBG)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
Commercial real estate markets appear to be inflecting on several fronts and we
                                                                                    Sector View                                2-NEUTRAL
think CB Richard Ellis Group is highly levered to this cyclical recovery.
                                                                                    12-Month Price Target                          USD 25.00
Specifically, we expect significant improvement in leasing and investment sales
                                                                                    Price (09 Dec 2010)                            USD 19.70
volumes to continue. In addition, CBG’s outsourcing businesses are benefitting
                                                                                    Potential Upside/Downside                             27%
from secular trends toward global, institutionally owned real estate portfolios.
                                                                                    Market Cap (USD mn)                                   6,361
The Business Drivers
                                                                                    Revenue TTM (USD mn)                                  4761
We believe CBG and other real estate brokers are positioned to benefit from         Current BVPS (USD)                                     2.39
improving fundamental and transactional real estate markets faster than REITs.      Return on Equity TTM (%)                              28.82
Leasing and investment sales brokerage, which account for roughly half of CBG’s     Dividend Yield (%)                                      NA
revenues, are growing rapidly (albeit off of easy comparisons) and are high-        Source: FactSet Fundamentals
margin businesses with a more immediate earnings impact. CBG is the largest
                                                                                    EPS (USD)
firm in the industry and enjoys the most recognizable global brand, a significant
                                                                                    FY DEC                     EPS                 P/E
competitive advantage when securing assignments and cross-selling products.
                                                                                    2009                   0.39A                   50.5
Based on our macro outlook, we project nearly 20% year-over-year growth in          2010                   0.69E                   28.6
CBG’s leasing revenue in 2011 and 38% growth in investment sales revenue,           2011                   0.92E                   21.4
driving 33% adjusted earnings per share (AEPS) growth. Our five-year (2010-         Source: Barclays Capital

15) AEPS compound annual growth rate is 20%.
                                                                                    Upside/Downside Scenario
Upside/Downside Scenarios                                                            31
                                                                                                                       (26.9%)       (32.0%)
                                                                                     26                        (16.8%)
The long-term outlook for real estate outsourcing services is good, in our view,
reflecting structural change in the industry, and we expect relatively stable                                              Price     Upside
                                                                                     16                        Downside
growth. However, commercial real estate leasing and investment sales markets                                     Case     Target
will likely drive the stock in the near term as those businesses continue to
experience rapid year-over-year improvement. We like the brokerage segment           16-Dec-09          9-Dec-10          Price Performance
overall, and think that CBG may have more near-term upside than its peers
                                                                                    Source: FactSet
primarily because of its larger platform and slightly greater operating leverage.   Percentages indicate potential upside/downside from
                                                                                    current price.
We think leasing and investment sales are most likely to drive outperformance or
underperformance in 2011, given CBG’s high projected growth rates (and high         Ross L. Smotrich
margins and volatility). We believe our model reflects a base-case scenario and     1.212.526.2306
may even be conservative in terms of potential margin expansion. That said, if
we were to lower our leasing and investment sales growth rate assumptions by        BCI, New York
10% per year (-110bp leasing and -200bp sales), then our model suggests a
stock price of $23, still above the current price. Meanwhile, assuming our base-
case growth forecasts are accurate, but operating margins come in 25bp better
in each region and each period, then our model suggests a stock price of $26.

Valuation Analysis
Given the 20% annual earnings growth we expect over the next few years, we
think CBG shares are a compelling investment at 19.6x our 2011 AEPS estimate
of $0.92. This represents a premium to JLL, but we think CBG has slightly better
momentum and operating leverage going into 2011. Our price target of $25 is
based on a DCF of $25.28 (75%), and a sentiment/regression value of $22.19
(25%), implying a target multiple of 27.3x our 2011 AEPS estimate of $0.92.

RETAIL | U.S. Apparel, Footwear & Textiles

Coach, Inc. (COH)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
We believe the Coach brand remains strong with its solid balance sheet, strong
                                                                                    Sector View                                2-NEUTRAL
free cash flow, proven management team, and continued high levels of
                                                                                    12-Month Price Target                        USD 60.00
profitability. In addition, we believe the shares of Coach offer compelling value
                                                                                    Price (09 Dec 2010)                          USD 57.12
at current levels.
                                                                                    Potential Upside/Downside                               5%
The Business Drivers
                                                                                    Market Cap (USD mn)                               16,929
We believe that Coach’s diversified business model, by channel and geography,       Revenue TTM (USD mn)                                  3758
positions the company well for continued strong top-line growth. The company        Current BVPS (USD)                                     5.35
remains focused on innovation in its product line and we believe the                Return on Equity TTM (%)                              45.74
merchandising, marketing, and pricing strategies put into place in FY10 will        Dividend Yield (%)                                      1.1
continue to drive growth in the foreseeable future from both market share gains     Source: FactSet Fundamentals
globally and category growth (roughly 5%-10%). Overall, we believe these
                                                                                    EPS (USD)
factors will allow the business to grow at a double-digit pace as the company
                                                                                    FY JUN                     EPS                 P/E
continues to expand its global presence.
                                                                                    2010                   2.33A                   24.5

Upside/Downside Scenarios                                                           2011                   2.85E                   20.0
                                                                                    2012                   3.25E                   17.6
Upside Case: $80. Our upside scenario assumes that Coach customers’ future          Source: Barclays Capital
purchase intent is at its highest level in years. Continued gains in handbag
penetration rates should provide a positive tailwind for trends in Average Unit     Upside/Downside Scenario
Retail (AUR). We assume there is opportunity for AUR to approach $300, up             97                                               $80
from $280, and could provide upside to our earnings estimates.                        77                                    $60
Downside Case: $45. A downturn in the overall condition of the economy and            57                       (-21.1%)              Upside
consumer spending could present challenges for Coach. The company is also                                                Price        Case
                                                                                      37                       Downside Target
susceptible to currency fluctuations as it expands its businesses abroad.                                        Case
                                                                                      16-Dec-09         9-Dec-10          Price Performance
Valuation Analysis
                                                                                    Source: FactSet
At current levels, the shares are trading at 20.0x our FY11 EPS estimate of $2.85   Percentages indicate potential upside/downside from
and 17.5x our FY12 EPS estimate of $3.25. Our price target of $60 reflects 18.5x    current price.

our FY12 EPS estimate of $3.25. Currently, Coach is trading above its five year
forward P/E average of 17.5x, but at a discount to the global luxury group          Robert S. Drbul
average forward P/E of 25.3x.
                                                                                    BCI, New York

RETAIL | U.S. Restaurants

Darden Restaurants (DRI)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
With our outlook for a slow but steady improvement in the macro environment
                                                                                     Sector View                                2-NEUTRAL
throughout 2011, we prefer the more discretionary casual dining segment of the
                                                                                     12-Month Price Target                          USD 57.00
restaurant industry. We continue to believe Darden delivers the strongest
                                                                                     Price (09 Dec 2010)                            USD 49.63
fundamentals, culminating in 12%-15% long-term EPS growth, with industry-
                                                                                     Potential Upside/Downside                             15%
leading revenue (i.e., comp and unit) growth, effective cost control, and a strong
balance sheet, all while still the lowest valuation in the segment.
                                                                                     Market Cap (USD mn)                                   6,870
                                                                                     Revenue TTM (USD mn)                                  7186
The Business Drivers
                                                                                     Current BVPS (USD)                                    13.51
Darden’s fundamental competitive advantages are significant, in our view.            Return on Equity TTM (%)                              23.98
Specific to revenues, both comp and unit growth continues to lead the casual         Dividend Yield (%)                                      2.6
dining industry, supporting our expectation for 6%+ annual growth. On comps,         Source: FactSet Fundamentals
we expect 2%+ growth near term, led by Olive Garden and LongHorn. On units,
                                                                                     EPS (USD)
we expect industry-leading 4% annual growth, driven by the brand portfolio.
                                                                                     FY MAY                     EPS                  P/E

Our forecast is for continued restaurant margin expansion, with Darden’s             2010                   2.91A                   17.1
diversified commodity basket and significant purchasing power allowing for           2011                   3.35E                   14.8
ongoing cost of sales leverage, while positive comps should drive leverage on its    2012                   3.85E                   12.9
fixed costs. Also, below the line, we expect ongoing aggressive share                Source: Barclays Capital

repurchase of more than $300mn to support earnings growth, while its 2.5%+
                                                                                     Upside/Downside Scenario
dividend yield remains among the strongest in the U.S. restaurant industry.
                                                                                      76                                                $64
                                                                                                                             $57      (28.9%)
Upside/Downside Scenarios                                                             66                           $50     (14.8%)
                                                                                      56                         (0.7%)
While we expect the shares to outperform in an improving macro environment,           46                                               Upside
two concerns remain. First, investors are looking for an improvement in Red           36                        Downside
Lobster fundamentals, where comps are still challenged. We expect trends to
improve, with support from the upcoming three-year system remodel program.            16-Dec-09          9-Dec-10          Price Performance
Second, with comps and margins at relative peaks, investors have shown a
                                                                                     Source: FactSet
preference for companies with greater fundamental upside and therefore               Percentages indicate potential upside/downside from
outperformance (i.e., beta). We see continued comp outperformance and                current price.
further margin expansion with less risk relative to peers.
                                                                                     Jeffrey A. Bernstein
Leverage from ongoing comp improvement and/or incremental cost savings               1.212.526.3855
create the greatest opportunity for EPS and stock-price outperformance. On 
comps, we assume 2% growth, with each incremental percentage point (pp) of           BCI, New York
comp worth $0.13 to annual EPS. On margins, we assume 75bp of expansion,
with each incremental 25bp worth $0.10 to annual EPS. Based on our 16x target
multiple, an incremental 2pp of comp and 50bp of margin (in either direction)
would be worth a combined $7 (or a roughly 13% move in the shares), implying
upside to $64 and downside to $50.

Valuation Analysis
Darden is trading at a 14x forward P/E and 7.5x fiscal 2011 EBITDA. This
compares to its 5.5-15.5x three-year range and 11.5x average, and is well below
its casual dining peer group at 20x. We question the magnitude of the premium
afforded its former high-growth peers, and prefer the more mature casual
diners. Our price target is $57 or 16x our calendar 2011 EPS estimate of $3.55.

RETAIL | U.S. Department Stores/Broadlines

Kohl's Corp. (KSS)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
We continue to believe that the Kohl's format and competitive positioning
                                                                                      Sector View                                2-NEUTRAL
remain solid and still offer above-average long-term industry growth. Also, we
                                                                                      12-Month Price Target                          USD 65.00
believe Kohl’s offers an increasingly attractive free cash flow profile and strong
                                                                                      Price (09 Dec 2010)                            USD 54.22
balance sheet. We believe the company has a talented and experienced
                                                                                      Potential Upside/Downside                             20%
management team who will continue to navigate toward further market-share
gains and higher profitability.
                                                                                      Market Cap (USD mn)                               16,699
                                                                                      Revenue TTM (USD mn)                               18035
The Business Drivers
                                                                                      Current BVPS (USD)                                    25.58
We believe Kohl’s continues to navigate a volatile and challenging U.S. retail        Return on Equity TTM (%)                              13.96
environment, near the top of its class. Kohl’s continues to meet and exceed high      Dividend Yield (%)                                      NA
expectations with impressive and consistent execution throughout its                  Source: FactSet Fundamentals
operations, in our view. As the consumer continues to search for value, Kohl’s
                                                                                      EPS (USD)
continues to offer a compelling private and exclusive brand assortment that is
                                                                                      FY JAN                     EPS                  P/E
resonating well, which should continue to benefit both sales and margins going
                                                                                      2009                   3.23A                   16.8
forward in this environment.
                                                                                      2010                   3.74E                   14.5
We continue to be pleased with the gross margin expansion and note that many          2011                   4.45E                   12.2
of the gross-margin drivers from past years remain intact this year, including        Source: Barclays Capital

inventory management and control, size optimization, markdown optimization,
                                                                                      Upside/Downside Scenario
exclusive and private brands expansion, and increased scale and volume.
                                                                                       92                                                $75
                                                                                       82                                     $65      (38.5%)
Upside/Downside Scenarios                                                              72                                   (20.1%)
                                                                                       62                           $48
In an upside scenario, we estimate the stock could trade to $75, which implies a       52                        (-11.3%)               Upside
17.0x multiple on our 2011 EPS estimate of $4.45. This multiple represents a           42                        Downside   Target

slight discount to the five-year high of 19.2x. As the sourcing environment is                                     Case
expected to become more challenging, we believe Kohl’s, with its many drivers,         16-Dec-09          9-Dec-10          Price Performance
is well-positioned to perform at the top of its class in gross margin. Accordingly,
                                                                                      Source: FactSet
with the significant uncertainty, we forecast flat gross margins next year, which     Percentages indicate potential upside/downside from
we are optimistic could prove conservative and provide an opportunity for             current price.
upside to our estimates.
                                                                                      Robert S. Drbul
In a downside scenario, we estimate the stock could trade to $48, which implies       1.212.526.4714
an 11.0x multiple on our 2011 EPS estimate of $4.45. This multiple represents a
slight premium to the five-year low of 8.8x. As the consumer environment              BCI, New York
remains challenging, we believe that Kohl’s faces the risk of slowing demand.
Also, due to strong comp sales performance at the end of 2009 and beginning of
2010, the company faces tougher comparisons than many of its peers and it
could be difficult to continue meeting comp sales growth expectations.

Valuation Analysis
The shares currently trade at 14.5x our 2010 EPS estimate of $3.74, and 12.2x
our 2011 EPS estimate of $4.45. Our price target of $65 reflects 14.6x our 2011
EPS estimate of $4.45. At 14.5x 2010 EPS, Kohl’s is trading at a slight discount
to its forward P/E three-year average of 15.2x, and a more substantial discount
to its five-year average of 16.5x.

RETAIL | U.S. Retail Hardlines

PetSmart (PETM)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
PetSmart is our 2011 retail hardlines top pick. We believe the company will be
                                                                                     Sector View                                2-NEUTRAL
able to sustain roughly 15%-20% EPS growth over the next few years and likely
                                                                                     12-Month Price Target                          USD 45.00
higher growth in a moderate economic recovery scenario. In 2011, the company
                                                                                     Price (09 Dec 2010)                            USD 38.87
should experience moderate unit growth in consumables sales (currently 50% of
                                                                                     Potential Upside/Downside                             16%
sales), which should be bolstered by subtle price increases stemming from
commodity inflation. Moreover, there should be a procyclical lift in the
                                                                                     Market Cap (USD mn)                                   4,571
company’s hardgoods category, which should boost its gross margin. In the            Revenue TTM (USD mn)                                  5579
event that the economic recovery stalls, PetSmart should perform better than         Current BVPS (USD)                                     9.98
other retailers by virtue of the stability of its pet food products.                 Return on Equity TTM (%)                              19.11
                                                                                     Dividend Yield (%)                                      1.3
The Business Drivers
                                                                                     Source: FactSet Fundamentals
PetSmart’s business model features retail and services segments. The company
                                                                                     EPS (USD)
runs 1,172 stores that account for 87%-90% of revenue. Retail revenue is
                                                                                     FY JAN                     EPS                  P/E
further segmented into consumables sales (pet food, treats, litter), hardgoods
                                                                                     2010                   1.59A                   24.4
sales (pet supplies and other goods), and pets sales which represent, on average,
                                                                                     2011                   2.00E                   19.4
88%, 11%, and 1% of total retail sales, respectively. Within the services segment,
                                                                                     2012                   2.42E                   16.1
the company runs 172 PetsHotels, which provide day and overnight care for cats
                                                                                     Source: Barclays Capital
and dogs and represent roughly 10%-12% of total revenue.
                                                                                     Upside/Downside Scenario
Upside/Downside Scenarios
                                                                                      62                                              (44.1%)
Under our upside scenario, the pet care industry will continue to experience                                                 $45
                                                                                      52                                   (15.8%)
improving demand trends which would benefit PETM’s retail and services                                             $30
segment. In addition, PetSmart should experience a favorable mix shift toward         32
its hardgoods products as the consumer spending environment improves. Since           22
                                                                                                                Downside   Target
these products carry a higher margin, the company’s overall profit rate is likely     12
to rise. Consumables could also benefit from moderate unit growth coupled with        16-Dec-09          9-Dec-10          Price Performance

slight price increases. Finally, services should grow as pet boarding increases in   Source: FactSet
tandem with human travel. In this case, we believe the consensus 2011 EPS            Percentages indicate potential upside/downside from
                                                                                     current price.
should move higher than our $2.42 estimate (the consensus is currently $2.32)
and the stock should be awarded a higher multiple, driving the price to $56.
                                                                                     Michael Lasser, CFA
Our downside scenario for the company is that the pet care market weakens due        1.212.526.1292
to a slowdown in the pace of the economic recovery. Hardgoods penetration  
                                                                                     BCI, New York
would remain weak, limiting margin growth, and consumables price hikes could
be too aggressive, leading to volume disruptions. In this case, we believe that
there would be modest downside risk to 2011 EPS and the multiple, resulting in
a share price of $30.

Valuation Analysis
PETM shares trade at 16.1x our CY11 EPS estimate of $2.42 and 6.0x our CY11
EBITDA estimate of $740mn. While PETM trades at a higher P/E ratio than other
names in our sector, we believe that the more relevant valuation method is cash
flow due to PETM’s transition from a growth to a cash-flow story. Our $45 price
target equates to 7.5x our CY11 EBITDA estimate of $740mn.

SERVICES | U.S. Education Services

DeVry Inc. (DV)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
The proprietary higher education industry faces significant short-term
                                                                                    Sector View                                2-NEUTRAL
challenges, including looming regulatory changes and increased Congressional
                                                                                    12-Month Price Target                          USD 60.00
scrutiny. These issues have hurt perception among potential students. As a
                                                                                    Price (09 Dec 2010)                            USD 44.06
result, we expect 2011 to be a transition year in which financial performance
                                                                                    Potential Upside/Downside                             36%
suffers as the industry takes steps to comply with the new regulations.

While DeVry is not immune to these issues, we believe it is among the best          Market Cap (USD mn)                                   3,087
                                                                                    Revenue TTM (USD mn)                                  2006
positioned to meet changing regulations while continuing to grow its business.
                                                                                    Current BVPS (USD)                                    17.42
Combined with arguably the industry’s best student outcomes, a diversified
                                                                                    Return on Equity TTM (%)                              27.14
business, healthy cash flows, and around $6.50 per share of net cash, we find
                                                                                    Dividend Yield (%)                                      0.5
the stock attractive. DV remains our top education services pick.
                                                                                    Source: FactSet Fundamentals

The Business Drivers                                                                EPS (USD)
We expect mid-single-digit or better student population growth over the next 2-     FY JUN                     EPS                  P/E

3 years driven by campus, online, and programmatic expansion. This is likely to     2010                   3.87A                   11.4
be bolstered by margin expansion as the company benefits from efficiency gains      2011                   4.45E                    9.9
driven by a new student information system and further real estate optimization     2012                   4.77E                    9.2
efforts, although margins will likely be pressured slightly in the short term.      Source: Barclays Capital

We estimate that earnings growth will decelerate to +15% and +8% y/y in FY11        Upside/Downside Scenario
and FY12, respectively, as DeVry makes adjustments to comply with new                88
regulations. However, this is strong relative performance vs most peers, which       78                                     $60
                                                                                     68                                   (36.1%)
face falling y/y profits. In addition, with around $6.50 per share of net cash,      58                           $39
DeVry could bolster profits through share repurchases or accretive M&A, which        48                        (-11.4%)    Price      Upside
                                                                                     38                                                Case
we do not currently estimate.                                                        28
                                                                                                               Downside   Target
Upside/Downside Scenarios                                                            16-Dec-09          9-Dec-10          Price Performance

In a positive scenario, regulatory pressures ease after final regulations are       Source: FactSet
                                                                                    Percentages indicate potential upside/downside from
published in early 2011 and DeVry needs only modest adjustments to comply.
                                                                                    current price.
In this scenario, DeVry continues to generate healthy revenue and earnings
growth, and steadily repurchases its shares. Multiple expansion to 13x CY11         Gary E. Bisbee, CFA
EPS of $5.00 (vs our official $4.63) would yield a $65 share price.                 1.212.526.3047
In a negative scenario, the regulatory environment and public perception of for-
                                                                                    BCI, New York
profit schools remains challenged, and enrollment growth decelerates more than
current expectations. In this scenario, CY11 earnings could be flat y/y at $4.32.
At the group average 9x P/E multiple, this would indicate downside to $39.

With a 4:1 ratio of potential upside to downside risk, we find DeVry shares
attractive. Our $60 price target equates to 13x our CY11 EPS estimate of $4.63.

Valuation Analysis
DeVry trades at 10.2x our CY10E EPS of $4.32 and 9.6x our CY11E EPS of $4.63,
and at a 10% free cash flow yield. This is a roughly 2% P/E premium and 25%
free cash flow yield discount vs peers, and a 28% P/E discount vs the S&P 500.
Historically, DV has traded at a 10%-15% premium vs peers and a 20%
premium vs the S&P 500. We believe a larger premium vs peers is warranted.

SERVICES | U.S. Business & Professional Services

Manpower Inc. (MAN)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
Despite only a gradual employment recovery in the U.S. and Europe,
                                                                                      Sector View                                2-NEUTRAL
Manpower’s cyclical upturn remains strong. Employer caution has benefitted
                                                                                      12-Month Price Target                        USD 70.00
demand for temporary staffing, and the company's permanent-placement
                                                                                      Price (09 Dec 2010)                          USD 62.88
offerings are surprisingly strong. We expect this environment to drive continued
                                                                                      Potential Upside/Downside                           11%
healthy revenue growth and attractive incremental margins, allowing for a steep
profit ramp to new peak EPS levels in 2013. We rate MAN 1-Overweight.
                                                                                      Market Cap (USD mn)                                 5,129
                                                                                      Revenue TTM (USD mn)                             18070
The Business Drivers
                                                                                      Current BVPS (USD)                                  33.95
Manpower is dependent upon the health of global employment markets. While             Return on Equity TTM (%)                             4.35
employment has returned to positive growth in the U.S. and Europe, the pace of        Dividend Yield (%)                                    1.2
full-time employment remains weak.         However, trends in temporary               Source: FactSet Fundamentals
employment have been robust in all major geographies, and have begun to drive
                                                                                      EPS (USD)
a strong rebound in Manpower’s revenue and profits.
                                                                                      FY DEC                     EPS               P/E

We believe that businesses remain hesitant to more aggressively hire full-time        2009                   0.62A                101.4
employees due to uncertainty about the economic outlook and public policy,            2010                   1.66E                 37.9
and expect this hesitation to remain a driver of strong demand for temp staffing.     2011                   2.82E                 22.3
And, when full-time employment eventually strengthens, Manpower’s                     Source: Barclays Capital

permanent-placement business is positioned to benefit, in our view.
                                                                                      Upside/Downside Scenario
The company’s branch network and fixed costs would need only modest                                                                     $86
incremental investments as revenue expands over the next 18-24 months, which                                                  $70
                                                                                        80                                  (11.4%)
should allow for attractive incremental margins on revenue growth. As a result,                                     $51
                                                                                        60                       (-18.8%)             Upside
we expect EPS to grow at a 53% CAGR from $1.66 in 2010 to $5.91 in 2013.                                                   Price       Case
                                                                                        40                       Downside Target
Upside/Downside Scenarios                                                               20
                                                                                        16-Dec-09         9-Dec-10          Price Performance
In an upside case, we believe that Manpower shares can trade up to $86, or 18x
2012 EPS of $5.25 (vs our $4.48 estimate), discounted back one year at the            Source: FactSet
                                                                                      Percentages indicate potential upside/downside from
company’s roughly 10% cost of capital. This scenario could occur if U.S. and
                                                                                      current price.
European economic growth and employment markets accelerated more than
consensus expectations in 2011-12.                                                    Gary E. Bisbee, CFA
In a downside case, we could see MAN falling to $51, or a 14x P/E on 2012
earnings of $4.00 (vs our $4.48 estimate), discounted back one year at a 10%
                                                                                      BCI, New York
cost of capital. This scenario could occur if U.S. and European economic growth
remains anemic and the U.S. dollar continues to appreciate against the euro.

With more than a 2:1 ratio of upside potential to downside risk, we find MAN
highly attractive. Our price target of $70 equates to 17x our 2012 EPS estimate
of $4.48, discounted back one year at 10%, and offers 12% potential upside.

Valuation Analysis
MAN trades at 11.4x prior peak EPS of $5.39 (LTM through 3Q08), 22x our 2011
EPS estimate of $2.82 and 13.5x our 2012E EPS of $4.48. We expect Manpower
to exceed its prior peak EPS level in 2013, which at the midpoint of the historical
14x-18x P/E range would generate 50% upside vs the current share price, a
strong potential return over the next two years.

SERVICES | U.S. Business & Information Services

The Geo Group (GEO)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
The Geo Group is the No. 2 player in the private prison space and benefits from
                                                                                     Sector View                                2-NEUTRAL
the industry’s long-term growth opportunities in the United States. Less
                                                                                     12-Month Price Target                          USD 30.00
understood by investors, however, is that GEO is the only company to have an
                                                                                     Price (09 Dec 2010)                            USD 25.38
international presence as well, a market with around 27,000 potential bed
                                                                                     Potential Upside/Downside                             18%
awards from the UK, New Zealand, and South Africa over the next couple of
years. In addition, GEO is in the early stages of its integration with Cornell
                                                                                     Market Cap (USD mn)                                   1,636
Companies (CRN), the No. 3 player it acquired in August 2010, which should           Revenue TTM (USD mn)                                  1206
provide cost synergies (above the guided $12-$15 million) and various cross-         Current BVPS (USD)                                    15.34
selling opportunities via an expanded customer base.                                 Return on Equity TTM (%)                               6.81
                                                                                     Dividend Yield (%)                                      NA
The Business Drivers
                                                                                     Source: FactSet Fundamentals
GEO and Corrections Corporation of America (CXW), which together control
                                                                                     EPS (USD)
nearly 90% of the market, are the only two U.S. operators that have the available
                                                                                     FY DEC                     EPS                  P/E
liquidity and access to financing to participate in the potential growth in U.S.
                                                                                     2009                   1.36A                   18.7
private prisons. Going forward, we assume that both companies get their fair
                                                                                     2010                   1.45E                   17.5
share of new contracts, which we have not priced into our estimates.
                                                                                     2011                   1.68E                   15.1
We expect mid-to-high single digit or better revenue growth over the next 2-3        Source: Barclays Capital

years driven by U.S. and international awards. This is likely to be bolstered by
                                                                                     Upside/Downside Scenario
margin expansion as the company benefits from utilization gains over time. Our
                                                                                      50                                                $40
current estimates, including the CRN acquisition, are as follows: 1) Revenue                                                          (57.4%)
                                                                                      40                                     $30
growth of 24.5% in FY11 and 6.1% in FY12; 2) EBITDA growth of 39.0% in FY11                                                (18.0%)
                                                                                      30                           $20
and 8.1% in FY12; and 3) EPS growth of 15.6% in FY11 and 8.7% in FY12.                                          (-21.2%)               Upside
                                                                                      20                                    Price       Case
                                                                                                                Downside   Target
Upside/Downside Scenarios                                                             10
In a positive scenario, should expected contracts come to fruition in a timely        16-Dec-09          9-Dec-10          Price Performance
manner, we estimate that GEO’s EPS and EBITDA could see an incremental 20%
                                                                                     Source: FactSet
bump, which could along with some multiple expansion yield a $40 share price.        Percentages indicate potential upside/downside from
                                                                                     current price.
In a negative scenario, state budgetary concerns could stall new contract awards
and put pressure on pricing, which along with a few lost rebids could pressure       Manav Patnaik
the multiple as well. In this scenario, we believe the stock would find support at   1.212.526.2983
$20 (also where share buybacks have been implemented in the past).         
                                                                                     BCI, New York
With a 3:1 ratio of upside potential to downside risk, we find GEO shares
attractive. Our $30 price target equates to 9.6x our CY11 EBITDA estimate of
$303 million.

Valuation Analysis
GEO trades at 15.1x and 8.7x our CY11 EPS and EBITDA estimates, respectively.
This compares with its five-year average of around 20x on P/E and 10-11x on
EBITDA. FCF yield is also a healthy 10%. We believe that GEO has done a good
job in narrowing the gap with CXW relative to size, margin mix, and most
importantly the cost of debt. We believe this, along with the diversification of
the business, appears justification enough for a valuation at par with CXW
(trading at 17.4x and 9.0x our CY11 EPS and EBITDA estimates, respectively).


Apple, Inc. (AAPL)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
We continue to believe that Apple's valuation is attractive and that the shares
                                                                                    Sector View                                1-POSITIVE
can benefit from strong iPad and iPhone demand, significant international
                                                                                    12-Month Price Target                     USD 390.00
expansion, and additional new products expected in 2011. Apple is quite
                                                                                    Price (09 Dec 2010)                       USD 319.76
unusual, in our view, given its strong organic growth, large cash balance ($55 in
                                                                                    Potential Upside/Downside                           22%
net cash per share), and international expansion opportunities.
                                                                                    Market Cap (USD mn)                             293,316
The Business Drivers
                                                                                    Revenue TTM (USD mn)                             65225
We believe consumers are buying more laptops, tablets and handheld devices          Current BVPS (USD)                                    NA
and increasingly “logging in” to apps and corporate networks. This trend            Return on Equity TTM (%)                            37.06
suggests that the key to success over the long term is strength in consumer         Dividend Yield (%)                                    NA
devices that are used every day. Consumer purchases of laptops, tablets, and        Source: FactSet Fundamentals
smartphones (all key areas of Apple’s strength) are starting to dominate the
                                                                                    EPS (USD)
industry while direct sales of corporate products have shorter and smaller
                                                                                    FY SEP                     EPS               P/E
upgrade cycles. This trend benefits companies with strong consumer appeal and
                                                                                    2010                  15.15A                 21.1
reputations for customer service. The rise of ultra-mobile and low power devices
                                                                                    2011                  18.30E                 17.5
has also put more emphasis on design, brand, and innovation. We believe Apple
                                                                                    2012                  21.25E                 15.0
is driving this trend, which presents challenges for traditional PC vendors.
                                                                                    Source: Barclays Capital
Consumer enthusiasm around Apple’s new products, such as the iPad, also
appears to benefit its older products, such as the Mac. Finally, we believe         Upside/Downside Scenario
Apple’s stream of innovation still has plenty of legs.                                                                                $500
                                                                                     495                                    $390
Upside/Downside Scenarios                                                                                                 (21.8%)
                                                                                     395                         $275
Apple has solid prospects for high organic growth, in our view, with open-ended                                (-14.0%)             Upside
                                                                                     295                                 Price       Case
potential to gain share in mobile phones, tablets, and Macs and to expand            195                       Downside Target
internationally. We believe that Macs (still at just 5% worldwide share), iPhones     95
(Verizon, China Mobile still to come), and iPads (only on first-generation            16-Dec-09         9-Dec-10          Price Performance

product) all have the potential for upside long term. We view Apple’s upside        Source: FactSet
scenario at about $500, which is based on 23x our FY12 EPS estimate of $21.25       Percentages indicate potential upside/downside from
                                                                                    current price.
(23x is Apple’s five-year forward PE average and is also the company’s one-year
forward P/E high; 35x is Apple’s five-year high).
                                                                                    Ben A. Reitzes
Longer term, we believe the biggest issues facing the stock center around the       1.212.526.9517
overall economy, given the company’s premium-priced products; the market- 
                                                                                    BCI, New York
share battle between Apple’s iOS and Google’s Android for mobile devices; and
very high expectations, especially with regard to the iPad and iPhone. We view
Apple’s downside scenario at around $275, which is based on about 13x our
FY12 EPS estimate of $21.25 (13x is Apple’s five-year trough multiple).

Valuation Analysis

Our price target for Apple is $390 based on 15x our FY12 EPS estimate of $21.25
excluding interest income ($0.30) but adding back forward 12-month cash
($75). We continue to believe that Apple deserves a higher multiple relative to
both the group and the market given it is the best growth story in IT hardware
over the long term, in our opinion.

TECHNOLOGY | U.S. Display & Lighting

Corning Inc. (GLW)
The Investment Case
                                                                                      Stock Rating                          1-OVERWEIGHT
Corning remains our top pick within the U.S. Display & Lighting sector,
                                                                                      Sector View                                2-NEUTRAL
supported by: 1) our expectations for double-digit LCD glass volume growth in
                                                                                      12-Month Price Target                          USD 24.00
2011/2012; 2) Corning’s ability to return to its pricing strategy of 1%-2% q/q
                                                                                      Price (09 Dec 2010)                            USD 19.00
ASP declines; 3) the emergence of Gorilla Glass as a strong earnings contributor,
                                                                                      Potential Upside/Downside                             26%
with sales potential of approximately $1 billion in 2011; and 4) the stock’s
propensity to seasonally outperform in the first half, driven by panel inventory
                                                                                      Market Cap (USD mn)                               29,695
restocking and consensus estimates likely moving higher in 1H11.                      Revenue TTM (USD mn)                                  6399
                                                                                      Current BVPS (USD)                                    11.81
The Business Drivers
                                                                                      Return on Equity TTM (%)                              19.49
In LCD Glass, Corning continues to benefit from the industry’s three-player           Dividend Yield (%)                                      1.1
oligopoly, whose more rational approach to capacity adds in recent years has          Source: FactSet Fundamentals
enabled a more consistent 1%-2% quarterly ASP decline and Corning’s superior
                                                                                      EPS (USD)
LCD gross margin of 60%-plus. We view these levels as sustainable over the
                                                                                      FY DEC                     EPS                  P/E
next several years, supported in particular by double-digit LCD volume growth as
                                                                                      2009                   1.35A                   14.1
well as the move to thinner glass.
                                                                                      2010                   2.05E                    9.3
In Gorilla Glass, management is only now beginning to provide granularity             2011                   2.00E                    9.5
around the margin structure, with gross margins largely dependent on the              Source: Barclays Capital

handheld/IT/TV product mix; we see potential for $0.10-plus in earnings power
                                                                                      Upside/Downside Scenario
over the next year or so. Layer in Corning’s current monopoly in Gorilla TV cover
                                                                                       32                                                $26
glass, and we see Gorilla Glass emerging as a strong new growth driver for the                                                $24
                                                                                       27                                   (26.3%)
company in 2011 and beyond.
                                                                                       22                           $16
                                                                                                                 (-15.7%)               Upside
Upside/Downside Scenarios                                                              17                                    Price
                                                                                       12                        Downside
The key issues facing the stock include: 1) concern around a panel inventory                                       Case
correction lasting into 1H11; 2) plateauing LCD volume growth, leading to              16-Dec-09          9-Dec-10          Price Performance
margin erosion; 3) continued share headwind due to lack of revenue/EPS
                                                                                      Source: FactSet
guidance; and 4) limited progress in returning cash to shareholders. While the        Percentages indicate potential upside/downside from
lack of guidance will likely remain a headwind for the shares, we see potential for   current price.
an increased buyback or dividend program following Corning’s recent $1 billion
cash repatriation and the $1.2 billion dividend pay-out from SCP. Assuming 4Q         C.J. Muse
sell-through meets expectations, we see a strong likelihood for the 4Q10 to           1.212.526.8945

mark the trough for the industry.                                           
                                                                                      BCI, New York
Our CY11 EPS estimate of $2.00 and $24 price target (12x multiple) assumes
17% combined glass volume growth and roughly 8% ASP declines for the year.
Assuming actual volume growth is a more muted 10% and LCD gross margins
remain in the low 60s, we see earnings downside at roughly $1.75 and share
downside at roughly $16. Alternatively, assuming upside on both LCD volumes
and Gorilla Glass coupled with a lower-than-expected tax rate, we see an upside
scenario of $26 based on earnings upside to approximately $2.15.

Valuation Analysis
The shares trade at 9.5x our CY11 EPS of $2.00, compared with the SPX multiple
of 13x, implying a 29% discount which we view as unwarranted given Corning’s
diversified end markets and strong visibility to multi-year earnings growth.

TECHNOLOGY | U.S. Data Networking & Wireline Equipment

Juniper Networks (JNPR)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
Data traffic on carrier networks continues to grow rapidly given rising demand
                                                                                    Sector View                                2-NEUTRAL
for video, music, messaging, and file sharing. Thus, Juniper’s carrier router
                                                                                    12-Month Price Target                          USD 37.00
markets should grow faster than the overall communications equipment
                                                                                    Price (09 Dec 2010)                            USD 35.75
markets, in our view. In the enterprise market, Juniper’s share continues to rise
                                                                                    Potential Upside/Downside                               3%
with new products and an improved sales force. We believe a healthy revenue
and margin picture should drive Juniper’s shares higher.
                                                                                    Market Cap (USD mn)                               18,704
                                                                                    Revenue TTM (USD mn)                                  3845
The Business Drivers
                                                                                    Current BVPS (USD)                                    12.12
In service provider (two-thirds of sales), Juniper should benefit from solid IP     Return on Equity TTM (%)                               9.11
next-generation spending. Particularly in mobile, Juniper expects to release the    Dividend Yield (%)                                      NA
evolved packet core element of Project Falcon in 2011. Juniper has already seen     Source: FactSet Fundamentals
healthy traction with the MX 3D router and Traffic Direct software elements of
                                                                                    EPS (USD)
Project Falcon. The proliferation of smartphones and increasing data traversing
                                                                                    FY DEC                     EPS                 P/E
them should continue to drive robust demand for these solutions. In enterprise
                                                                                    2009                   0.92A                   38.9
(one-third of sales), we are optimistic that key products like the EX can drive
                                                                                    2010                   1.27E                   28.1
ongoing share gains independent of market growth. Project Stratus for the data
                                                                                    2011                   1.60E                   22.3
center is expected to begin recognizing sales in 2011 and could fuel growth.
                                                                                    Source: Barclays Capital

Upside/Downside Scenarios                                                           Upside/Downside Scenario
Juniper has committed to 20% top-line growth over a multi-year horizon.                                                                $46
                                                                                     51                                              (28.5%)
Investors are more conservative given an easier comparison in 2010. This is                                                 $37
                                                                                     41                                   (3.4%)
particularly true in 1H11 before Projects Falcon and Stratus gain momentum.                                       $27
Given some revenue slippage from 3Q10 to 4Q10, 1Q11 may decline more than            31                        (-24.5%)              Upside
                                                                                                                           Price      Case
seasonally. We and consensus thus model 19% and 17% growth in 2011,                  21                        Downside   Target
respectively. Of course, 20% growth would imply upside to estimates. We              11
model 2011 EPS of $1.60 vs the consensus estimate of $1.53.                          16-Dec-09          9-Dec-10          Price Performance

                                                                                    Source: FactSet
In an upside case, we estimate 23% sales growth if Juniper posts an above-          Percentages indicate potential upside/downside from
seasonal 2H11 driven by Project Falcon and/or Stratus. With higher-margin           current price.
products coming on-line, Juniper could lift its 66%-68% gross margin target.
Above a 68% gross margin, plus 23% sales growth, would yield EPS of $1.77 on        Jeff Kvaal
a 27% operating margin, or a $46 stock price (26x 2011 EPS; 25x consensus’          1.212.526.2216

2012 EPS of $1.84). We view the upside case as more likely than the downside.
                                                                                    BCI, New York
In a downside case, Project Stratus and/or Falcon may take longer to ramp up,
driving a seasonal 2H11 at best. Competitive pressure in enterprise, edge
routing, and core routing (Cisco’s CRS-3) are also areas of risk and could affect
margins. We estimate downside 2011 EPS of $1.42, or a $27 stock price (20x
EPS) based on 15% growth and a 23% operating margin (vs our 25%+ target).

Valuation Analysis
Juniper’s average forward-two-year P/E over the last five years is 22x excluding
recession lows. Our $37 price target is 23x our CY11E EPS of $1.60. Carrier
infrastructure peers trade at 15x, and high-growth networking peers 35x.
Juniper’s healthy growth prospects warrant a multiple between these two, in our
view, or roughly the mid-20s range.

TECHNOLOGY | U.S. Clean Technology

MEMC Electronic Materials (WFR)
The Investment Case
                                                                                    Stock Rating                          1-OVERWEIGHT
The risk-reward for MEMC shares remains constructive, in our view, for the
                                                                                    Sector View                                2-NEUTRAL
following reasons: 1) Within semis, the company remains well positioned to gain
                                                                                    12-Month Price Target                          USD 16.00
market share and improve costs through the ongoing restructuring program; 2)
                                                                                    Price (09 Dec 2010)                            USD 12.08
Within solar, the company remains well positioned to increase vertical
                                                                                    Potential Upside/Downside                             32%
integration and overall margins; and 3) Within SunEdison, the company is poised
to benefit from the overall backlog growth and decline in module prices.
                                                                                    Market Cap (USD mn)                                   2,747
Currently, MEMC does not have an in-house wafering facility, and needs to use       Revenue TTM (USD mn)                                  1746
third-party wafer suppliers to convert poly into wafers. These additional costs     Current BVPS (USD)                                     9.82
have been rising over the past few quarters, and have negatively impacted the       Return on Equity TTM (%)                               0.68
company’s margin outlook. We expect this dynamic to change once MEMC                Dividend Yield (%)                                      NA
brings wafering in-house from 2011. We believe that the net positive earnings       Source: FactSet Fundamentals
impact from bringing wafer capacity in-house could equate to around $0.55-
                                                                                    EPS (USD)
$0.60, which is not currently fully priced into the shares, in our view.
                                                                                    FY DEC                     EPS                  P/E
The Business Drivers                                                                2009                  -0.30A                    NA
                                                                                    2010                   0.48E                   25.2
MEMC is a global manufacturer of polysilicon and wafers for the solar energy
                                                                                    2011                   1.30E                    9.3
and semiconductor industry. The company has been serving the semi industry
                                                                                    Source: Barclays Capital
for more than 50 years and over the past decade has expanded its product
offering to support the solar energy industry as well. In 2009, the company         Upside/Downside Scenario
purchased SunEdison, a leading installer of solar energy systems in both the U.S.                                                      $20
and globally. We expect this business to improve top-line growth and overall                                                         (65.8%)
                                                                                     19                                   (32.6%)
visibility in the solar wafer segment.                                                                           $13
                                                                                     14                                               Upside
We expect the key driver for 2011 earnings upside to be the company’s internal                                 Downside
                                                                                                                           Price       Case
                                                                                      9                                   Target
poly wafer ramp. By the end of 2011, MEMC expects to have more than 1GW of                                       Case
solar wafer capacity, compared with no internal capacity currently. We expect
                                                                                     16-Dec-09          9-Dec-10          Price Performance
additional internal supply to improve the company’s overall margin structure, as
                                                                                    Source: FactSet
the company no longer needs to pay a premium for third-party products.
                                                                                    Percentages indicate potential upside/downside from
                                                                                    current price.
Upside/Downside Scenarios
We expect a number of drivers to impact our 2011 EPS estimate of $1.30. On          Vishal Shah
the solar materials segment, we expect wafer ASPs to be $0.72/W exiting 2011,       1.212.526.4378
representing a decline of more than 20%. We also expect the cost to       
                                                                                    BCI, New York
manufacture solar wafers to decline to $0.44/W from $0.60/W at the end of
2010. These numbers could prove to be conservative as the company continues
to ramp up its internal wafer facilities. Assuming wafer prices remain relatively
stable and the company is able to ramp up its internal wafer supply ahead of
schedule, we expect earnings upside to $1.60, implying a stock price of $20. If
wafer prices fall as expected and the internal wafer ramp falls behind schedule,
we expect earnings downside to $1.00, implying a stock price of $13.

Valuation Analysis
Our DCF price target of $16 is based on 15x our 2011 EPS estimate of $1.30
discounted by 20%. The shares currently trade at around 12x consensus 2011
EPS of $1.03, and 9x our 2011 EPS estimate of $1.30. Over the past two years,
the shares have traded between 12x and 27x next-12-month EPS.

TECHNOLOGY | U.S. Software

Oracle Corp. (ORCL)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
Given an expanding portfolio of integrated software and hardware assets, we
                                                                                     Sector View                                1-POSITIVE
believe multiple product cycles should fuel an acceleration in organic growth for
                                                                                     12-Month Price Target                          USD 34.00
Oracle in 2011, driving market-share gains, license acceleration, and higher
                                                                                     Price (09 Dec 2010)                            USD 29.26
earnings. With the stock trading at an attractive 14.1x P/E and a discount to its
                                                                                     Potential Upside/Downside                             16%
20% long-term earnings growth rate, we look for multiple expansion as a key
share driver as investors begin to appreciate Oracle’s organic growth prospects.
                                                                                     Market Cap (USD mn)                              147,093
                                                                                     Revenue TTM (USD mn)                               29269
The Business Drivers
                                                                                     Current BVPS (USD)                                     6.39
We view Oracle as one of the best-positioned companies in large-cap                  Return on Equity TTM (%)                              21.85
technology, with a growing portfolio of enterprise software and hardware assets      Dividend Yield (%)                                      0.7
poised for market-share gains. In software, the launch of Fusion Applications in     Source: FactSet Fundamentals
1QC11 should commence a multi-year acceleration in application license
                                                                                     EPS (USD)
spending while stimulating demand for Oracle databases and middleware. In
                                                                                     FY MAY                     EPS                  P/E
development over the past five years, Fusion Apps is Oracle’s next-generation
                                                                                     2010                   1.67A                   17.5
enterprise applications platform. We believe the Fusion Apps release is coming
                                                                                     2011                   2.00E                   14.6
at an opportune time as applications spending, which is late cycle, was
                                                                                     2012                   2.20E                   13.3
highlighted in our October 2010 CIO survey as the top IT spending priority for
                                                                                     Source: Barclays Capital
2011.      In hardware, we expect continued improvements in operating
performance from the former Sun business and look for engineered systems like        Upside/Downside Scenario
Exadata Database, Exalogic Elastic Cloud and a new line of SPARC Solaris servers                                             $34        $34
to drive incremental share gains, better scale and improving margin.                  35
                                                                                                                           (16.2%)    (16.2%)
                                                                                      30                        (-11.1%)
Upside/Downside Scenarios                                                             25                                    Price      Upside
                                                                                      20                        Downside   Target       Case
Our $34 price target implies 16% upside from current levels and is in line with       15                          Case

our upside scenario for the stock. At 14.7x FY11 EPS (13.3x FY12) and 14.1x           10
CY11 EPS, we believe the risk/reward is attractive with earnings likely to power      16-Dec-09          9-Dec-10          Price Performance

higher as Oracle’s multiple product cycles begin to ramp up over the next few        Source: FactSet
quarters. We also believe the launch of Fusion Apps in 1QCY11 and its potential      Percentages indicate potential upside/downside from
                                                                                     current price.
to drive sustained double-digit license growth over a multi-year period has yet to
be fully appreciated by the market.
                                                                                     Israel Hernandez
Given Oracle’s largely recurring high-margin software model, we see limited          1.415.274.5395
downside to our/consensus earnings estimates over the next few quarters. A 
                                                                                     BCI, New York
major acquisition or delays in expected product launches such as Fusion
Applications could impact investor sentiment while a deterioration in the macro
environment and subsequent contraction in global IT spending could impact
Oracle’s ability to drive new license and hardware sales, the key drivers of
valuation, in our view. We see downside to $26, or 12.5x CY11 EPS of $2.08,
which would represent a normalized trough valuation for the stock.

Valuation Analysis
Our $34 price target is based on a P/E of 16x our CY11 EPS estimate of $2.08.
We believe that positive consensus earnings revisions and multiple expansion
resulting from the launch of Fusion Applications in 1QC11 will be the primary
catalysts for the shares in 2011.

TECHNOLOGY | U.S. Semiconductors

The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
Within our U.S. semiconductor universe, we believe that QUALCOMM may be
                                                                                     Sector View                                2-NEUTRAL
well positioned to benefit from secular growth trends in mobile data, with
                                                                                     12-Month Price Target                          USD 55.00
impressive positioning in its licensing and chipset businesses; leverage to the
                                                                                     Price (09 Dec 2010)                            USD 49.08
accelerated global embrace of smartphones, 3G and connected devices; and
                                                                                     Potential Upside/Downside                             12%
commitment to delivering double-digit revenue and earnings growth for the next
five years.
                                                                                     Market Cap (USD mn)                               79,397
                                                                                     Revenue TTM (USD mn)                                 10991
The Business Drivers
                                                                                     Current BVPS (USD)                                      NA
We believe that QUALCOMM should benefit from the expansion of 3G wireless            Return on Equity TTM (%)                              15.77
networks and mobile data, with global handset units forecast to grow 13% in          Dividend Yield (%)                                      1.6
CY10 and smartphones expected to grow 45% in CY10 and 40% y/y in CY11.               Source: FactSet Fundamentals
We continue to be encouraged by QUALCOMM’s prospects as a supplier to
                                                                                     EPS (USD)
smartphone and tablet players with leverage to ARM and Android expansion, as
                                                                                     FY SEP                     EPS                  P/E
well as Apple.
                                                                                     2010                   2.46A                   20.0
Furthermore, we expect chipset sales expansion outside of the traditional            2011                   2.75E                   17.8
handset market to help support growth. QUALCOMM has seen solid traction              2012                       NA                   NA
with its integrated family of Snapdragon chips, with 55 devices available and        Source: Barclays Capital

more than 125 devices in design, including tablets with 10 OEMs. More broadly,
                                                                                     Upside/Downside Scenario
QUALCOMM has seen leadership with Android-based devices and with the
                                                                                      75                                                $60
entire Windows 7 Phone family. We also believe that QUALCOMM has                                                             $55      (22.1%)
established early technology leadership in Long Term Evolution (LTE), with initial    55
volumes in 1HFY11.                                                                    45
                                                                                                                            Price     Upside
                                                                                      35                        Downside               Case
Upside/Downside Scenarios                                                             25                          Case

We believe visibility on QUALCOMM’s competitive position has improved                 16-Dec-09          9-Dec-10          Price Performance
following the planned exit of major competitors such as Texas Instruments and
                                                                                     Source: FactSet
given the company’s solid product roadmap. Moreover, we believe QUALCOMM             Percentages indicate potential upside/downside from
has a solid balance sheet with about $18 billion in cash and investments and         current price.
strong cash flow generation. In a scenario where WCDMA growth drives
significant upside, we could see upside to $60, or around 21x CY11 EPS.              Tim Luke
We believe the biggest risk to QUALCOMM’s revenue growth may be the        
potential for average selling price (ASP) erosion and lower chipset margins.         BCI, New York
While there is long-term risk to ASPs, we believe that ASPs may benefit from
strength in high-tier smartphones and the expansion of the smartphone market
into high-volume, mass-market mid- and low-tier applications. In a downside
scenario where increased ASP pressure is coupled with lower chipset margins,
we believe a $45 valuation or 16x CY11 EPS may be justified.

Valuation Analysis
QUALCOMM shares are currently trading at around 17x our CY11 EPS estimate
of $2.80 vs a five-year average of around 18x with peak and trough five-year
averages of 22x and 14x, respectively. Our price target of $55 is 16x our CY11
EPS estimate of $2.80 plus $11.35 per share in cash.

TECHNOLOGY | U.S. IT Consulting & Computer Services

Western Union Co. (WU)
The Investment Case
                                                                                        Stock Rating                          1-OVERWEIGHT
Western Union has among the best risk/reward profiles in our space, with low
                                                                                        Sector View                                2-NEUTRAL
valuation relative to its historical multiple and transaction processing peers;
                                                                                        12-Month Price Target                          USD 24.00
greater management focus on higher multiple growth initiatives, margin
                                                                                        Price (09 Dec 2010)                            USD 18.60
expansion, and shareholder returns than historically; and upside to our model
                                                                                        Potential Upside/Downside                             29%
and company guidance from improvement in global remittance trends.
                                                                                        Market Cap (USD mn)                               12,199
The Business Drivers
                                                                                        Revenue TTM (USD mn)                                  5136
We anticipate solid secular growth in WU’s core C2C business, driven by                 Current BVPS (USD)                                    0.67
strength in the higher-margin domestic business, geographic expansion, and              Return on Equity TTM (%)                          232.82
agent growth in incremental classes of trade (e.g., retail in Europe, banks in U.S.).   Dividend Yield (%)                                     1.3
Macro improvements may present further upside, while WU’s leading position in           Source: FactSet Fundamentals
a highly fragmented market should enable continued share gains.
                                                                                        EPS (USD)
While the emergence of electronic channels for money transfer is sometimes              FY DEC                     EPS                  P/E

thought of as a significant risk to WU, we believe the company has a number of          2009                   1.29A                   14.4
core competitive advantages in this space, including expertise in cross-border          2010                   1.39E                   13.4
security, high interoperability among its diverse payment systems, and a trusted        2011                   1.59E                   11.7
brand. We think WU’s fast-growing prepaid card operation has the potential to           Source: Barclays Capital

build out faster than any other competitor, given its global scale.
                                                                                        Upside/Downside Scenario

Upside/Downside Scenarios                                                                32
                                                                                                                                $24      (50.3%)
Mix shift toward the domestic business and improved agent economics in                   27                                   (28.8%)
                                                                                         22                           $15
Europe are likely to drive margins higher. Our model does not account for                                                                Upside
                                                                                         17                        (-19.4%)    Price
meaningful economic improvement, lower investments, or a pick-up in bill pay.                                                             Case
                                                                                                                   Downside   Target
We believe these factors could add a point of revenue growth and 50bp margin                                         Case
expansion to our estimate. In a positive economic environment, WU shares have            16-Dec-09          9-Dec-10          Price Performance
traded to as high as 21x-22x forward EPS. We believe a more conservative
                                                                                        Source: FactSet
upside scenario is a $28 stock using 17x, slightly higher than the historical           Percentages indicate potential upside/downside from
multiple, justified in our view due to the higher growth profile of prepaid and         current price.
electronic channels.
                                                                                        Darrin D. Peller
Our downside scenario assumes C2C transaction growth drops to its low of ~4%            1.212.526.7144
(during 2009, the most challenging year in WU’s history), vs nearly 8.5% C2C  
transaction growth in our model for 2011, with only half our expected margin            BCI, New York
expansion for 2011. This would impact our 2011 EPS estimate by ($0.09),
suggesting a $15 stock using a historical trough valuation of roughly 10x.

Valuation Analysis
WU trades below 12x our 2011 estimate, compared with a mid-teens median
forward P/E multiple over its four-year trading history and representing a three-
point discount to the transaction processing industry median forward multiple.
At this low multiple, we consider economic risks mostly priced-in, and concerns
around regulation and/or disintermediation likely overdone. Given a greater
focus on margin expansion, growth in higher multiple initiatives such as prepaid,
and an eventual pick-up in employment, our 12-month price target of $24,
based on 15x our 2011 EPS estimate of $1.59 seems conservative to us.

TELECOMMUNICATIONS | Latin America Telecom & Media

Brasil Telecom SA (BTM)
The Investment Case
                                                                                         Stock Rating                          1-OVERWEIGHT
Brasil Telecom trades at a significant discount to telecom peers and to its direct
                                                                                         Sector View                               3-NEGATIVE
parent, Telemar Norte Leste (TMAR), and to the group’s holding company, Tele
                                                                                         12-Month Price Target                          USD 32.00
Norte Leste (TNE), primarily due to corporate governance risk. We see Portugal
                                                                                         Price (09 Dec 2010)                            USD 20.51
Telecom’s (PT) planned March 2011 entry into the control group as a major
                                                                                         Potential Upside/Downside                             56%
catalyst, as it could be the first step toward improved governance. Moreover, we
see the possible buy-in of the 51% of BTM that TMAR does not already own as
                                                                                         Market Cap (USD mn)                                   2,732
the best use of cash after PT’s planned R$8bn capital injection into TMAR.               Revenue TTM (USD mn)                                  5878
                                                                                         Current BVPS (USD)                                    35.86
The Business Drivers
                                                                                         Return on Equity TTM (%)                                2.8
Strategically, the company appears well positioned as a vertically integrated            Dividend Yield (%)                                      NA
provider, and it operates in the southern region of Brazil, where fixed line             Source: FactSet Fundamentals
competition is already entrenched (and thus less disruptive) and where
                                                                                         EPS (USD)
economic activity has historically been more robust and stable. BTM faces
                                                                                         FY DEC                     EPS                  P/E
significant secular pressure from declining fixed lines in service, partly offset by
                                                                                         2009                  -2.76A                    NA
broadband and mobile growth. The company recently launched a new bundled
                                                                                         2010                   3.59E                    5.7
offering, which we expect will help it gain share in the mobile market, consistent
                                                                                         2011                   4.28E                    4.8
with parent company experience in the northern region.
                                                                                         Source: Barclays Capital

Upside/Downside Scenarios                                                                Upside/Downside Scenario
The stock is poorly covered because parent company TMAR was planning to                                                          $32
                                                                                          40                                              (80.4%)
acquire 100% in a share swap, but the merger process was put on hold in June                                                   (56.0%)
2010, leaving a 51% float at BTM. However, the capital infusion from PT is a                                           $14
                                                                                          20                                               Upside
game-changer in that the control group (including PT) would emerge with a                                           (-31.7%)    Price
50.1% stake in TMAR, thus securing voting control. We anticipate that this may            10                        Downside
pave the way to an eventual ownership structure simplification and listing on the          0
Novo Mercado, reducing corporate governance risks for BTM. Moreover, with                 16-Dec-09          9-Dec-10          Price Performance

R$8bn in cash from the capital increase, we expect that TMAR may use cash                Source: FactSet
instead of shares to buy-in the remaining 51% of BTM that it does not already            Percentages indicate potential upside/downside from
                                                                                         current price.
own. Given BTM’s large valuation discount to TNE and the potential to unlock
the value of fiscal credits, we would view this as the best use of cash for TMAR.
                                                                                         Michel Morin, CFA
Our price target of US$32 per ADR implies 56% upside and is based on our DCF,            1.212.526.4919
which assumes 2% revenue growth, 30% terminal EBITDA margins, and capex/       
                                                                                         BCI, New York
sales of 16%-17% in 2011-12 declining to 12% by 2022. We see downside risk
to $14 per ADR assuming a 2011 EV/sales ratio of 0.8x, at the low end of the
historical range and well below the rest of the group, and giving no credit for
inter-company loans nor tax credits. In contrast, we see potential upside to $37
should the shares revalue toward a sector median of 4.0x EV/EBITDA and after
including the fair value of intercompany loans and tax credits.

Valuation Analysis
BTM trades at a trailing 12-month EV/sales of 0.8x. The stock has rarely traded
below that level, and the historical average is 1.0x. Brazilian sector peers all trade
above this level, with Telecomunicações de São Paulo (TSP) at 1.6x, TNE at 1.2x,
TMAR5 at 1.3x, Vivo Participações (VIV) at 1.4x, and TIM Participações (TSU) at
1.2x. Indeed, Brazilian telcos have rarely traded below 1.0x.

Barclays Capital | Global Top Picks 2011


                                      We asked our fundamental analysts across EMEA to provide their single best alpha-
                                      generating stock idea for 2010. We have not attempted to impose a top-down macro view
                                      on their selection; the only constraint we placed on the teams (in addition to mandating
                                      that the stocks they chose had a 1-Overweight rating), was that there should be sufficient
                                      liquidity for the average investor. To this point, the average market cap of the 28 stocks
                                      presented in this section exceeds €24 billion, with an average daily trading volume of €165
                                      million. The list offers an average 18.2% potential upside from current price levels to our
                                      currently published price targets and the average name is trading on a 12.8x forward P/E
                                      multiple (versus the Stoxx600 currently on more than 10.7x).

                                      As evidenced in the figure below, our analysts' recommendations offer both defensive
                                      opportunities with a higher concentration of the potential total return from dividends, as
                                      well as more aggressive growth ideas with a majority of the total return projected to come
                                      from share price upside. Further, screening our ideas against additional fundamental and
                                      strategic variables, we note the following:

                                      Ten of our top picks belong to sectors rated as 1-Positive: Rolls-Royce, Tesco, Vinci, Xstrata,
                                      Tecnicas Reunidas, Temenos, Telenor, British Airways, Rosneft and Israel Chemicals.

                                      Three of our top picks are within a sector that is rated 1-Positive by our fundamental
                                      analysts and recommended as Overweight by our European Equity Strategy team: Tesco
                                      (within Food Retail), Xstrata (within Metals and Mining) and Temenos (in IT Software and

Potential Total Return of Top Picks

 Dividend Yield
                                                                       Internet & Media
       3.0%                                                 Retail
                                                                                  Basic Industries
       1.0%        Technology                    Energy
              0%                      10%                      20%                        30%                        40%
                                                          Potential Price Appreciation
Source: Barclays Capital

BASIC INDUSTRIES | European Chemicals

Clariant (CLN.VX)
Radical restructuring programme still underestimated
                                                                                     Stock Rating                          1-OVERWEIGHT
Based on our analysis, Clariant’s radical restructuring programme remains
                                                                                     Sector View                                1-POSITIVE
underestimated by many – it is likely to continue to drive margins and returns
                                                                                     12-Month Price Target                          CHF 24.00
higher over the next three years. Clariant also has better pricing power than
                                                                                     Price (09 Dec 2010)                            CHF 18.14
many believe. It remains the cheapest large cap European chemical company
                                                                                     Potential Upside/Downside                             32%
under our coverage.
                                                                                     Market Cap (CHF mn)                                   4,175
The Business Drivers
                                                                                     Revenue TTM (CHF mn)                                  7130
Clariant’s “GANO” programme of site/plant rationalisation (30 affected) begins       Current BVPS (CHF)                                     7.96
now, and delivers in full in 2013. We estimate CHF200m pa (2.8%/sales) of            Return on Equity TTM (%)                               3.53
aggregate savings, with half underpinned by redundancies (1100-1200) alone.          Dividend Yield (%)                                      NA
Lower fixed costs, and better utilisation, should deliver at least the remainder.    Source: FactSet Fundamentals
We are confident that Clariant’s guidance of CHF100m “minimum” savings is
                                                                                     EPS (CHF)
conservative. GANO builds on 3k of redundancies since end 2008 (which partly
                                                                                     FY DEC                     EPS                 P/E
explains the 330bps improvement in EBITDA margin 2010 v 2008), and should
                                                                                     2009                   0.50A                   36.3
help keep net working capital/sales to at least 20% (down from 26% in 2007).
                                                                                     2010                   1.78E                   10.2
Clariant now has a three-year record (shared by many in the industry) of             2011                   2.00E                   9.1
successfully managing prices and gross margins. This was starkest in Q3 2008         Source: Barclays Capital

when inputs rose 20%, yet were offset with price rises that kept gross margins
                                                                                     Upside/Downside Scenario
flat. However, it remains a contentious issue – we are confident that discipline
                                                                                      40                                             CHF29.8
will be maintained, underpinned by product differentiation, mindset and                                                              (64.2%)
structural change (eg, the exit of Ciba). Indeed, in our view, Clariant’s comments    30
                                                                                                                CHF17.3 (32.3%)
on 2011 pricing are even more proactive and aggressive.                               20                        (-4.63%)
                                                                                                                Downside               Case
                                                                                      10                                   Target
Upside/Downside Scenarios                                                                                         Case
Our upside scenario (which gives a DCF of CHF29.8) extends GANO savings to            16-Dec-09          9-Dec-10          Price Performance
CHF300m, and includes less conservative volume growth assumptions for 2011
                                                                                     Source: FactSet
(4.5% v 2.4%). Note that emerging markets are now c.40% of Group sales.              Percentages indicate potential upside/downside from
                                                                                     current price.
Our downside (DCF CHF17.3) scenario limits GANO savings to just CHF100m,
2011 volume growth of 0.7%, and includes price (-0.8% pa) and hence margin           James Knight
pressure from 2012.                                                                  +44 (0)20 3134 7591
Valuation Analysis                                                                   Barclays Capital, London
Our base case DCF and target is CHF24.0. Clariant currently trades on a 2011E        Gunther Zechmann
P/E of 9.0x, EV/EBITDA of 4.5x, with an EV/IC of just 0.7x (post-tax ROIC of         +44 (0)20 3134 5837
9.8%). Multiples are towards the low-end of a 10-year range, reflecting a de-
rating which we believe deserves now to at least partly reverse.                     Barclays Capital, London

BASIC INDUSTRIES | Israel Chemicals & Food

Israel Chemicals Ltd. (ICL.TA)
Price leverage to the fore in 2011
                                                                                          Stock Rating                       1-OVERWEIGHT
We believe ICL will once again outperform the Israeli market in 2011. If 2010 was
                                                                                          Sector View                              1-POSITIVE
about the return of volumes to the potash industry, we believe 2011 will be about
                                                                                          12-Month Price Target                         ILS 65.00
price leverage. We expect ICL to outperform in 2011, as we believe that it gained
                                                                                          Price (09 Dec 2010)                           ILS 56.50
market share in 2010 in key emerging markets and that its non-fertilizer segments
                                                                                          Potential Upside/Downside                           15%
provide it with good balance in a volatile sector. We foresee strong fertilizer
fundamentals, including growing demand trends, low inventories, and supportive
                                                                                          Market Cap (ILS mn)                             71,591
agricultural prices, providing ICL with positive momentum heading into 2011.              Revenue TTM (ILS mn)                                5551
                                                                                          Current BVPS (USD)                                    1.9
The Business Drivers
                                                                                          Return on Equity TTM (%)                            40.12
ICL’s core market is potash, in which we see several competitive advantages for           Dividend Yield (%)                                    6.1
ICL. 1) proximity to India specifically where its market share has been at or             Source: FactSet Fundamentals
above 20% for most of 2010; 2) a direct selling strategy in China that has
                                                                                          EPS (USD)
boosted its market share there to over 15%; 3) and an ability to constantly
                                                                                          FY DEC                     EPS               P/E
produce potash at low cost given its Dead Sea location that uses evaporation for
                                                                                          2009                   0.60A                 26.0
potash extraction and allows for zero cost storage of inventory.
                                                                                          2010                   0.83E                 18.8
We see ICL’s non-fertilizer units as providing ICL with a differentiated model. Its       2011                   1.07E                 14.6
position as the number one global producer of elemental bromine leaves it well            Source: Barclays Capital

positioned in a supply-constrained market that is experiencing positive pricing
                                                                                          Upside/Downside Scenario
and volume trends. In addition, its integrated business model in the phosphate
market makes its performance products segment a steady opportunity as well.                                                   ILS65   ILS70
                                                                                            80                                       (23.8%)
                                                                                                                       ILS48 (15.0%)
Upside/Downside Scenarios                                                                   60                       (-15.0%)
                                                                                            40                                 Price     Upside
We believe that our model is robust enough to capture the nuances of all aspects                                     Downside Target      Case
                                                                                            20                         Case
of ICL’s business exposures. Our current model assumes average potash pricing in
2011 of $435/tonne. An increase in that to $475 could see upside for the shares to          16-Dec-09         9-Dec-10        Price Performance
ILS 70, in our view. We expect this would be driven by high-end volume demand at
                                                                                          Source: FactSet
the 60 million tonne level and continued momentum on pricing.                             Percentages indicate potential upside/downside from
                                                                                          current price.
Our downside scenario sees the share price potentially at around ILS 48 if potash
volumes were to deteriorate to lower than 2010 levels with the price staying at the       Joseph Wolf
current $350. While we do not expect potash pricing to fall in 2011, it would             972.3.623.8746
clearly be a downside catalyst were it to occur.                                
                                                                                          Barclays Capital, London
Valuation Analysis
We value ICL using a DCF model based on a WACC of 9.7%, terminal growth of
3%, and a long-term tax rate of 20%. We use EV/EBITDA multiples on a
comparable basis to compare ICL to its global peers. At 10.0x 2011 EV/EBITDA the
stock is in the middle of its historical range of 7-13x and is currently trading at the
higher end of the range of the peer group. ICL trades at a reasonable discount on
an EV/EBITDA basis to industry leader Potash Corp (~11.8x). It trades equal, or at a
premium, to other stocks in the sector. We believe that this premium is justified by
its strong market share in emerging markets, its ability to meet demand from a
large reserve of inventory, and its industry-high dividend payout (70% of net
income) and yield (c6% for ICL vs <1% for Potash and 1-2% for its peer group).

BASIC INDUSTRIES | European Metals & Mining

Xstrata plc (XTA.L)
Leveraged to ongoing recovery
                                                                                         Stock Rating                          1-OVERWEIGHT
Xstrata is one of the world’s largest mining companies. The company should
                                                                                         Sector View                                1-POSITIVE
generate about 40% of its EBIT from copper and 35% from coal (mostly thermal
                                                                                         12-Month Price Target                          GBP 18.00
coal) on a normalized basis. Copper and coal are two of our preferred
                                                                                         Price (09 Dec 2010)                            GBP 14.20
commodities. Xstrata also produces zinc, nickel, ferrochrome/other alloys, and
                                                                                         Potential Upside/Downside                              27%
platinum group metals. Because of its relatively high net debt and relatively high-
cost base metals and alloys businesses, we believe Xstrata offers investors
                                                                                         Market Cap (GBP mn)                               42,099
substantial leverage to the ongoing global economic recovery.                            Revenue TTM (GBP mn)                                  25942
                                                                                         Current BVPS (USD)                                    11.62
The Business Drivers
                                                                                         Return on Equity TTM (%)                              10.63
Xstrata is a company that has been built on M&A as it was a very aggressive acquirer     Dividend Yield (%)                                      0.6
in the last cycle. In our view, the company’s strategy was to first acquire relatively   Source: FactSet Fundamentals
low-quality assets that would not attract the interest of the majors. This enabled
                                                                                         EPS (USD)
Xstrata to buy assets relatively cheaply and to achieve the scale and diversification
                                                                                         FY DEC                     EPS                  P/E
(both across commodities and geographies) that management believes it needs to
                                                                                         2009                   1.05A                   21.3
compete with the majors. The second phase of Xstrata’s development has been its
                                                                                         2010                   1.73E                   12.9
focus on operational improvements, as the company has found low-hanging fruit
                                                                                         2011                   2.97E                    7.5
cost-cutting opportunities and has had good success pushing its assets down the
                                                                                         Source: Barclays Capital
cost curve. The third, and so far unproven, phase of Xstrata’s development is to
deliver the organic volume growth potential within its portfolio. In our view, the       Upside/Downside Scenario
market gives the company very little credit for the value of this growth.                 35                                                £26
                                                                                          30                                              (83.0%)
Despite the improvements Xstrata has made to the quality of its portfolio assets,         25                                     £18
the company is still built for the bull market, in our view. Xstrata shares should                                     £10
                                                                                          15                        (-29.5%)
offer investors high leverage to prices of our preferred commodities as well as an        10                                    Price       Case
                                                                                                                    Downside   Target
embedded option on the company’s underappreciated pipeline of growth                       5                          Case
projects. In addition, our analysis indicates that Xstrata should increasingly be
                                                                                          16-Dec-09          9-Dec-10          Price Performance
viewed as a relative deep value play within our coverage universe.
                                                                                         Source: FactSet

Upside/Downside Scenarios                                                                Percentages indicate potential upside/downside from
                                                                                         current price.
We believe the biggest risk to the Xstrata share price is macro risk, as a double-dip
recession or a hard economic landing in China would likely be a significant negative     Christopher LaFemina, CFA
for highly leveraged miners such as Xstrata. In a bear market, Xstrata shares would      +44 (0)20 3134 5009
likely perform poorly as earnings downgrades would be disproportionately high  
                                                                                         BCI, New York
versus most other large miners – fair value in downside case of £10. In our view, our
model reflects a reasonable “base case” scenario for Xstrata with our £18 price          Seth Rosenfeld, CFA
target. In an upside case scenario, however, we would expect significant consensus       +44 (0)20 7773 3020
EPS upgrades and strong share price performance for Xstrata, as we believe the 
company is very well positioned for an upside market – fair value in upside case of      Barclays Capital, London
£26 per share.

Valuation Analysis
On our estimates, Xstrata is trading at just 7.7x 2011 earnings (versus the sector at
8.2x) and 4.6x 2011 EV/EBITDA versus the sector at 4.6x. These valuations are near
the bottom end of Xstrata’s historical range and among the cheapest in our
European mining coverage. If we use our upside case commodity assumptions,
Xstrata would be at a P/E of less 5x. On the other hand, Xstrata shares trade at 20x
our downside case EPS estimate.

CONSUMER | European Beverages

Anheuser-Busch InBev NV (ABI.BR)
Scale, cost savings and cash generation drive premium valuation
                                                                                       Stock Rating                          1-OVERWEIGHT
We maintain our preference for the Brewers to the Spirits companies, and prefer
                                                                                       Sector View                                2-NEUTRAL
ABI among the Brewers as it continues to generate strong top-line growth,
                                                                                       12-Month Price Target                          EUR 48.00
driven by industry-leading price/mix and has further cost savings to support
                                                                                       Price (09 Dec 2010)                            EUR 43.15
meaningful margin expansion. We expect ABI’s attractive geographic footprint
                                                                                       Potential Upside/Downside                              11%
(large shares in profitable and growing markets) and proven management
capability, particularly in driving its key revenue management strategy, to
                                                                                       Market Cap (EUR mn)                               69,247
support its continued outperformance to peers, while cash generation is strong.        Revenue TTM (EUR mn)                                  33692
                                                                                       Current BVPS (USD)                                    20.69
The Business Drivers
                                                                                       Return on Equity TTM (%)                              14.59
Our 1-OW rating is based on ABI’s superior growth profile over the near,               Dividend Yield (%)                                      0.7
medium and long term. In the near term the company should receive support              Source: FactSet Fundamentals
from cost savings, while its commitment to restoring its top-line through price
                                                                                       EPS (USD)
(recently in the US), innovation and marketing investment, is important.                FY DEC                    EPS                  P/E
Medium-term growth should be supported by its significant top-line opportunity
                                                                                       2009                   2.46A                   23.2
in Latin America, and improved unit profitability from the development of the
                                                                                       2010                   3.19E                   17.9
domestic premium segment, and restructuring benefits. In the long-term, we
                                                                                       2011                   3.81E                   15.0
believe there are untapped opportunities in the US through improving the
                                                                                       Source: Barclays Capital
efficiency of the route to market, natural market growth in Lat-Am and upside
from some large currently unprofitable markets becoming more profitable.               Upside/Downside Scenario
                                                                                        70                                                €51
Upside/Downside Scenarios                                                                                           €45        €48
                                                                                        60                                              (18.1%)
                                                                                                                   (4.2%)    (11.2%)
We expect a strong Q4 result with easier comparatives for a number of costs             40
and strong momentum in Brazil. For F11e we expect 1) both volumes and                   30                        Downside    Price      Upside
                                                                                        20                          Case     Target       Case
price/mix to improve in the US; 2) Continued cost savings, especially in Europe;        10
3) Continued strength in Brazil, with both market share growth and increased             0
premium penetration. We forecast F11e organic EBITDA growth of +9.5%                    16-Dec-09          9-Dec-10          Price Performance

against our +8.7% expectation in F10e. Upside may arrive from a faster recovery        Source: FactSet
in US volumes (improved employment picture) but more importantly stronger              Percentages indicate potential upside/downside from
                                                                                       current price.
price/mix. We currently assume price/mix of +2.5% (reported +3.4% in Q3),
with anything above, an upside to US margins. Additionally, stronger margin
                                                                                       Alex Oldroyd
expansion in Latin America could provide further upside, as we expect input and
                                                                                       +44 (0)20 3134 7301
distribution costs to reverse. In the medium term, we see a significant further
upside opportunity if ABI were able to gain control of Modelo (unconfirmed             Barclays Capital, London
Reuters report, 9 March 2010), as we think there are considerable synergies
                                                                                       Samar Chand
available. The key downside risk is a prolonged volume decline in the US beer
                                                                                       +44 (0)20 3134 3470
market, but we believe it has cyclical rather than structural problems. Our base
case target price is €48. In an upside scenario we see value to €51 and in a
                                                                                       Barclays Capital, London
downside scenario we think the shares could trade to around €45.

Valuation Analysis
On our forecasts, ABI is on 14.9x C11 earnings, only a slight premium to peers,
despite its footprint, earnings certainty, and focus on driving its top-line through
increased pricing, marketing and innovation. Cash flow generation is also very
strong (8-9% FCF yield) with the target net debt:EBITDA of 2.0x to be met by
2012. We believe the recent weakness in its shares following the Q3 results
provides a good entry point into the stock.

CONSUMER | European Food Manufacturing & HPC

Reckitt Benckiser (RB.L)
SSL deal to drive re-rating
                                                                                     Stock Rating                          1-OVERWEIGHT
The acquisition of SSL is likely to support a re-acceleration of organic sales and
                                                                                     Sector View                                2-NEUTRAL
earnings growth for the group, we think, despite the expected decline in the
                                                                                     12-Month Price Target                          GBP 41.00
pharma business. The full potential offered through the SSL deal should start to
                                                                                     Price (09 Dec 2010)                            GBP 34.81
become apparent following the closure of the deal and facilitate a re-rating of
                                                                                     Potential Upside/Downside                             18%
the stock, closer to its historical average valuation, over the next 12 months.
                                                                                     Market Cap (GBP mn)                               25,256
The Business Drivers
                                                                                     Revenue TTM (GBP mn)                                  8034
Reckitt Benckiser’s business model combines strong market share positions in         Current BVPS (GBP)                                     6.19
clearly defined, often niche categories with the implementation of a strong          Return on Equity TTM (%)                              39.81
product pipeline, enabling the company to generate consistent revenue growth         Dividend Yield (%)                                      3.1
and achieve margin uplift through scale, cost efficiencies and product mix.          Source: FactSet Fundamentals

                                                                                     EPS (GBP)
Upside/Downside Scenarios
                                                                                     FY DEC                     EPS                  P/E
As a base case scenario, we estimate the contribution of the pharma business at      2009                   1.95A                   17.9
£768mn sales (9% of group total) at the end of 2010, EBIT at £518mn (22.8%).         2010                   2.30E                   15.1
For 2011, assuming a 50% decline in the US Suboxone franchise for 2011, and
                                                                                     2011                   2.34E                   14.9
including the revenues from the recently acquired European franchise (est            Source: Barclays Capital
£88mn) and Suboxone sublingual (est £77mn), we expect £536mn in revenues
and £241mn EBIT, estimating a margin decline from 2010E 63.9% to 45%.                Upside/Downside Scenario
                                                                                      70                                                £51
As a blue sky scenario, in the event generic competition remains absent for           60                                     £41      (46.5%)
longer, the underlying Suboxone franchise could continue to grow by 15% and           50                          £31.7    (17.7%)
                                                                                      40                        (-8.93%)
margins stay at 65%. This could result in an additional £430mn of operating           30                                               Upside
profit, which in a blue-sky scenario could translate into +18% EPS upgrade            20                        Downside
                                                                                      10                          Case
potential and the shares trading up to as high as £51, following the
methodology outlined below. We still believe there will be competition at some        16-Dec-09          9-Dec-10          Price Performance
stage, though. Considering historical valuation multiples in conjunction with
                                                                                     Source: FactSet
growth momentum, we see room for further share price upside going forward.           Percentages indicate potential upside/downside from
Assuming a return to full historical average multiples within the next 12-month      current price.
period, the stock could trade to £44.
                                                                                     Susanne Seibel
On the downside, should the core household, health & personal care business          +44 (0)20 3134 3328
stagnate in developed markets (flat sales and operating margins), 2011 EPS 
would be 13.3% lower, translating into a target price of £31.7.                      Barclays Capital, London

Valuation Analysis
On a historical view, the stock has traded on an average 12-month forward P/E
of c.18.5x, but started to de-rate when growth momentum started to slow as of
late 2007/early 2008. We think the acquisition of SSL could support a re-
acceleration of growth momentum. Our share price target of £41 values the
stock on 2011E multiples of 17.5x PE and 12.4x EV/EBITDA, and for 2012E –
when cost savings should start to kick in more meaningfully – 16.0x PE and
11.1x EV/EBITDA.

CONSUMER | European Luxury Goods

Richemont (CFR.VX)
Strength in China and late cyclicality to drive earnings momentum
                                                                                       Stock Rating                          1-OVERWEIGHT
We sit c. 7% ahead of FY11 consensus EPS estimates and c. 8.5% for FY12. This
                                                                                       Sector View                               2-NEUTRAL
reflects our expectation of continued strong trading trends driven by structural top
                                                                                       12-Month Price Target                        CHF 61.00
line growth from the Chinese consumer as well as continued strong operating
                                                                                       Price (09 Dec 2010)                          CHF 55.45
profit leverage. We believe that Richemont has one of the strongest geographical
                                                                                       Potential Upside/Downside                           10%
exposures in the sector with Asia ex Japan now 36% of sales, well above historical
group levels. With over 50% of Western European sales derived from tourism
                                                                                       Market Cap (CHF mn)                             28,945
business, the group is also well positioned for the continued uptick in Chinese        Revenue TTM (CHF mn)                                6429
tourism trends as well as a stronger Russian and Middle Eastern consumer.              Current BVPS (EUR)                                  11.12
                                                                                       Return on Equity TTM (%)                            16.11
The Business Drivers
                                                                                       Dividend Yield (%)                                    0.6
Richemont is a predominantly hard luxury business with c. 75% of sales                 Source: FactSet Fundamentals
attributable to watches and jewellery. The products are positioned in the highest
                                                                                       EPS (EUR)
priced luxury segment and the key brand Cartier makes up c. 45% of sales, we
                                                                                       FY MAR                     EPS               P/E
estimate. The company is currently benefitting from a sharp rebound in luxury
                                                                                       2010                   1.08A                 39.5
demand and we expect 16.6% organic top-line growth this year (FY11) and just
                                                                                       2011                   2.10E                 20.3
under 10% in FY12 with EBIT margins returning to peak level this year.
                                                                                       2012                   2.43E                 17.6
The group has one of the highest exposures of peers to Asia ex Japan with              Source: Barclays Capital

Cartier one of the strongest brands in China, according to the Hurun report. We
                                                                                       Upside/Downside Scenario
currently forecast 15% medium-term organic growth from Asia ex Japan and
this appears very achievable given historical growth trends in mainland China                                                        CHF70
                                                                                                                              CHF61 (26.2%)
(34% p.a. on average) and the pace of store openings.                                                                        (10.0%)
                                                                                         60                        CHF36
Upside/Downside Scenarios                                                                40                                 Price     Upside
                                                                                         20                       Downside Target
Our base case assumes just under 10% organic top-line growth in FY12. In an                                         Case
upside scenario we would assume 16% organic top-line growth with Asia ex                 16-Dec-09         9-Dec-10          Price Performance
Japan growing at rates of almost 30%. This is in line with FY06-H109A group
                                                                                       Source: FactSet
organic growth and given the higher exposure to Asia ex Japan today (c.34% of          Percentages indicate potential upside/downside from
sales in FY10 vs c.22% in FY07) this does not appear unachievable. Our upside          current price.
case assumptions would imply a share price valuation of CHF 70 (+27% upside).
                                                                                       Helen Brand, CFA
The main concern for the group would be a deteriorating macro outlook, as hard         +44 (0)20 7773 0671
luxury has proven to be the most cyclical segment within luxury goods. A     
material double-dip recession with an organic sales decline of 10% would imply         Barclays Capital, London
a share price valuation of CHF 36 (35% downside).
                                                                                       Julian Easthope
                                                                                       +44 (0)20 3134 6640
Valuation Analysis
Our current target price of CHF 61 reflects 18.0x 1 year forward P/E in line with      Barclays Capital, London
the European Luxury Goods sector average and is supported by our DCF
                                                                                       Vicki Lee
valuation. The group currently trades at a c.12.5% discount to the space, which        +44 (0)20 3134 6733
we believe does not reflect the higher exposure to growth markets, especially
China, as well as current balance sheet strength.                                      Barclays Capital, London

CONSUMER | European Leisure

Whitbread PLC (WTB.L)
Hotels and Costa drive our above-consensus forecasts
                                                                                    Stock Rating                          1-OVERWEIGHT
We believe that the three-year EPS CAGR at Whitbread is in the range of 17%-
                                                                                    Sector View                               3-NEGATIVE
20% coming from new room growth at 8% pa, RevPAR outperformance of 2%
                                                                                    12-Month Price Target                          GBP 20.00
per annum, market RevPAR growth of c3% pa and Costa, which adds c2-3% to
                                                                                    Price (09 Dec 2010)                            GBP 17.69
the group’s growth. Given the operational and financial gearing, this adds up to
                                                                                    Potential Upside/Downside                             13%
EPS growth of 17-20% pa. We do not believe that the market is giving credit for
this growth potential, with the stock trading at 13.6x calendar 2011E PE.
                                                                                    Market Cap (GBP mn)                                   3,125
                                                                                    Revenue TTM (GBP mn)                                  1537
The Business Drivers
                                                                                    Current BVPS (GBP)                                     6.36
Whitbread operates primarily within the budget hotel market in the UK (c70% of      Return on Equity TTM (%)                              18.82
group EBIT). The budget hotel sector represents just 16% of the total UK hotels     Dividend Yield (%)                                      2.2
market (vs 23% in France and 25% in the US). Premier Inn has a 37% market           Source: FactSet Fundamentals
share of the branded budget UK market with the next biggest competitor
                                                                                    EPS (GBP)
Travelodge at 25%. According to OC&C strategy consultants, the demand for UK
                                                                                    FY FEB                     EPS                  P/E
hotel nights is set to increase by a CAGR of 5% over the next eight years. The
                                                                                    2010                   0.97A                   18.2
budget sector is expected to grow by 10% CAGR over the next ten years, leaving
                                                                                    2011                   1.15E                   15.4
Whitbread well positioned in the fastest-growing segment of the market.
                                                                                    2012                   1.34E                   13.2
Furthermore, over the last four years Premier Inn has grown at a faster rate than
                                                                                    Source: Barclays Capital
the overall budget sector in the UK, at 8.5% CAGR vs 6.8% for the market.
Management intends to grow the business to 55,000 rooms over four years,            Upside/Downside Scenario
implying c13,300 new room additions (>30% of the current system).                    30                                                £23
                                                                                                                            £20      (30.0%)
Management have also identified the potential for Costa to double in size over       25
the next few years, both through growth in the UK and in international markets.      20
                                                                                     15                                               Upside
Upside/Downside Scenarios                                                            10                        Downside                Case
                                                                                      5                          Case

Our FY EPS forecasts for 2010/11 are 2.5% ahead of consensus. For 2011/12             0
and 2012/13 we are 6% and 10% ahead, respectively.                                   16-Dec-09          9-Dec-10          Price Performance

                                                                                    Source: FactSet
Our blue-sky scenario works off an assumption of 20% EPS CAGR, giving 200p          Percentages indicate potential upside/downside from
EPS by 2014. On this basis we arrive at a value of 2300p for the group. The key     current price.
items that we believe could get Whitbread here are a better-than-expected UK
macro outlook or a faster rollout of both Premier Inn and Costa units. Success      Vicki Lee
with dynamic pricing could also drive higher RevPAR growth than anticipated.        +44 (0)20 3134 6733
We believe the key downside case is a double-dip, which means that GDP growth       Barclays Capital, London
in the UK comes in below our forecasts. Assuming flat RevPAR growth (market
                                                                                    Julian Easthope
RevPAR -3%) should still result in 10% EPS growth for Whitbread pa and, on that     +44 (0)20 3134 6640
basis, the stock would be trading on 14.6x calendar 2011E PE at the current share
price. We would expect a fair value of closer to 1500p (12x cal 2011E PE) on this   Barclays Capital, London

Valuation Analysis
Current multiple is 13.6x cal 2011E PE. Given the 17-20% EPS growth we have
described we view this as an extremely cheap level.

ENERGY & POWER | European Oil & Gas: E&P

Afren Plc (AFRE.L)
Well-positioned to capitalise on Nigerian opportunities
                                                                                       Stock Rating                          1-OVERWEIGHT
We believe that the trend of asset disposals by the Oil Majors in Nigeria is likely
                                                                                       Sector View                                2-NEUTRAL
to gather pace next year. As a result, we see Afren well positioned to capitalise
                                                                                       12-Month Price Target                           GBP 1.55
on potential new opportunities that may become available, as the recent
                                                                                       Price (09 Dec 2010)                             GBP 1.36
acquisition of Shell’s onshore assets has demonstrated. In addition, we believe
                                                                                       Potential Upside/Downside                             14%
the company could benefit organically from a potential upward revision in
reserves on the Ebok field offshore Nigeria and from increased activities in
                                                                                       Market Cap (GBP mn)                                   1,317
exploration and appraisal in East and West Africa. With a potential upside that        Revenue TTM (GBP mn)                                   383
now stands at 22% compared to a sector average of 12%, Afren is our 2011 top           Current BVPS (GBP)                                     0.82
pick.                                                                                  Return on Equity TTM (%)                               12.4
                                                                                       Dividend Yield (%)                                      NA
The Business Drivers
                                                                                       Source: FactSet Fundamentals
Afren’s competitive advantage is its presence in Nigeria where more than 90% of
                                                                                       EPS (USD)
its production (FY10) is currently located. The company has entered the country
                                                                                       FY DEC                     EPS                 P/E
through agreements with local indigenous companies which owned oilfields but
                                                                                       2009                   0.03A                   71.3
did not have either the technical skills or the balance sheet to develop them. The
                                                                                       2010                   0.13E                   16.5
development of two oilfields in Nigeria (Okoro and Ebok) has established Afren
                                                                                       2011                   0.35E                   6.1
as a credible technical operator. We believe the company could leverage on this
                                                                                       Source: Barclays Capital
to benefit from future asset disposals, as the Oil Majors are likely to reduce their
exposure to onshore Nigeria especially on those projects less material to them         Upside/Downside Scenario
and that require additional capex to meet the economic hurdles.                         6
                                                                                        5                                              (213.%)
Upside/Downside Scenarios                                                               4
                                                                                        3                                   £1.55
As for all the E&P companies the upside/downside scenario is mainly                     2                            £0.8  (13.9%)
determined by the outcome of their exploration and appraisal activities. For                                      (-41.1%)   Price
                                                                                                                  Downside   Target
Afren, we see Afren’s upside case at 426p in the event that all its exploration and     0
appraisal activities in East and West Africa are successful over the next 12           16-Dec-09          9-Dec-10           Price Performance

months. On the other hand, a downside-case with no success would see the               Source: FactSet
stock trading at Core NAV or 80p.                                                      Percentages indicate potential upside/downside from
                                                                                       current price.
Valuation Analysis
                                                                                       Alessandro Pozzi
Our target price for Afren is 155p, which is based on a 12.5% discount rate for        +44 (0)20 7773 4745
its Nigerian assets, higher than the typical 10% we apply to its peer group. This
implies a 14% potential upside, higher than sector average at 7%. From                 Barclays Capital, London
December 2010, Ebok is scheduled to be on-stream increasing group production
to 45k boe/d (FY11) from 16k boe/d (FY10). This would also put the company
on a 4.0x 2011 EV:EBIDA multiple compared to a sector average of 6.3x.

ENERGY & POWER | European Integrated Oil

BG Group (BG.L)
Greater transparency on Brazil to act as catalyst
                                                                                           Stock Rating                          1-OVERWEIGHT
When we upgraded BG to 1-Overweight – Under starter’s orders, 30 November –
                                                                                           Sector View                                1-POSITIVE
we indicated that one catalyst for performance would be greater transparency on
                                                                                           12-Month Price Target                          GBP 16.00
the value of the group’s assets in Brazil. The release of cost data on Tupi and Guara
                                                                                           Price (09 Dec 2010)                            GBP 13.34
allows us to more accurately model these barrels. When BG lifted its estimate of
                                                                                           Potential Upside/Downside                             20%
resources in Brazil at 3Q CEO Frank Chapman talked about the value he hoped to
deliver for shareholders through continued ownership of the assets in Brazil. We
                                                                                           Market Cap (GBP mn)                               45,147
continue to believe that ahead of retirement scheduled for 2013 he will be making          Revenue TTM (GBP mn)                              10930
every effort to realise value for shareholders – not just from Brazil but throughout       Current BVPS (GBP)                                    4.68
the portfolio. The 8 February strategy update will be the next opportunity to share        Return on Equity TTM (%)                              13.6
incremental information on the growth that is set to take a dramatic step-up in the        Dividend Yield (%)                                     1.0
next few years. We recently lifted our estimate of sum-of-the-parts by 100p/share          Source: FactSet Fundamentals
to reflect our first cut of the incremental value we see on these assets. With a new
                                                                                           EPS (GBP)
price target of 1,600p we continue to rate BG 1-OW.
                                                                                           FY DEC                     EPS                 P/E
The Business Drivers                                                                       2009                   0.66A                   20.2
                                                                                           2010                   0.79E                   16.9
Over the past four years the pace of top-line growth has slowed to 2% pa.
                                                                                           2011                   0.85E                   15.7
However, in the past 12 months we believe BG has demonstrated the quality of
                                                                                           Source: Barclays Capital
its execution capabilities, bringing on stream the first FPSO at Tupi and
sanctioning the QCLNG project in Australia. In 2011 we expect more of a step-              Upside/Downside Scenario
out performance – up 7% and 11% in 2012 – which should reassure investors                                               £14.5              £17
                                                                                            19                         (8.7%)            (27.4%)
that the group can deliver top-line metrics so beloved of markets.                                                               (19.9%)

With its strategy presentation we expect management to provide an outlook on                                                                Upside
the LNG market and confirm its $1.8-2bn pa EBIT guidance for the 2010-2012                   9                          Case     Target      Case

period. With the company delivering $1.9bn in just the first nine months of 2010
alone, there may be some potential upside to this guidance.
                                                                                            16-Dec-09          9-Dec-10          Price Performance

Upside/Downside Scenarios                                                                  Source: FactSet
                                                                                           Percentages indicate potential upside/downside from
BG is currently drilling a second well in East Africa with a third planned for year end.   current price.
This acreage, which borders the recent discoveries made by Anadarko in
Mozambique, is still at a very early stage. In terms of the potential upside that could    Lucy Haskins
be offered from this new basin, at this very preliminary risked exploration stage we       +44 (0)20 3134 6694
are probably talking only 20p/share, but a multi TCF play with the potential for a
                                                                                           Barclays Capital, London
two-train LNG development could be worth close to £1/share, on our estimates
(putting our upside price scenario at GBP17).                                              Rahim Karim
                                                                                           +44 (0)20 3134 1853
With 38% of our estimate value resting within Brazil, the largest risk facing the
company is of execution of the giant pre-salt projects in the Santos basin.                Barclays Capital, London
Assuming a 15% increase in capex costs above and beyond the contingency                    Lydia Rainforth, CFA
included within the company's guidance and the delay of the project by a year would        +44 (0)20 3134 6669
reduce our valuation by £1.5/share (to a downside price scenario of GBP14.5).    
                                                                                           Barclays Capital, London
Valuation Analysis
                                                                                           Tim Whittaker
BG stands on a 2011E EV/EBIDA of 9.6x a 68% premium to the sector, and by 2015             +44 (0)20 3134 6696
we expect this premium to be close to 38% – justified we believe by BG’s premium 
top-line growth to the end of the decade, which we expect to be 6-8% pa.                   Barclays Capital, London

ENERGY & POWER | European Refining & Marketing

Motor Oil (MORr.AT)
Strong cash flow to bolster shares in 2011
                                                                                       Stock Rating                          1-OVERWEIGHT
Motor Oil is one of the best placed refiners of the European group, benefiting
                                                                                       Sector View                                2-NEUTRAL
from a great location and a flexible configuration. During the downturn it has
                                                                                       12-Month Price Target                          EUR 11.00
also proved conclusively that complex refineries are better placed than simpler
                                                                                       Price (09 Dec 2010)                             EUR 7.89
ones to survive. Motor Oil has been one of the top three refining companies in
                                                                                       Potential Upside/Downside                             39%
unit profitability in 2010 and we expect it to earn over twice the sector average
cash flow in 2011, reflecting the investments made throughout the downturn.
                                                                                       Market Cap (EUR mn)                                    874
We rate the shares 1-Overweight with a €11/share price target.                         Revenue TTM (EUR mn)                                  5226
                                                                                       Current BVPS (EUR)                                     3.27
The Business Drivers
                                                                                       Return on Equity TTM (%)                              13.14
Motor Oil’s single 165kbpd refinery at Corinth has a complexity of 11.9x. This is      Dividend Yield (%)                                      8.9
a 60% uplift from a year ago with the company’s new 60kb/d crude distillation          Source: FactSet Fundamentals
unit now fully operational. Together with its acquisition of Shell’s marketing
                                                                                       EPS (EUR)
assets we are beginning to see the impact of the investment in the quarterly            FY DEC                    EPS                  P/E
numbers. We estimate that the expansion will add c $40m per year to operating
                                                                                       2009                   0.50A                   15.8
profit or 33% of the 2009 total. The high level of upgrading units give rise, in our
                                                                                       2010                   0.97E                    8.1
view, to additional flexibility to process a wider variety of feedstock slates that
                                                                                       2011                   1.12E                    7.0
are available around the Mediterranean. In addition, Motor Oil supplies a number
                                                                                       Source: Barclays Capital
of defence contracts with very high-quality jet fuel, in part a result of its
historical position. This should allow the group to generate premium pricing.          Upside/Downside Scenario
Despite its location in Greece and wider market concerns over sovereign debt,                                                            €20.1
                                                                                        25                                              (154.%)
we see the drivers of profitability as primarily international in nature, as shown      20
by the very strong 9M results. We believe that the perception of Motor Oil as a         15                                   (39.4%)
                                                                                                                    €5.2                 Upside
strong company in the Greek market is not a concern. In our view, the Motor Oil         10
                                                                                                                  (-34.0%)    Price       Case
refinery is a first-quartile asset and this gives us the confidence to assign a 1-       5                                   Target
Overweight recommendation relative to the sector.
                                                                                        16-Dec-09          9-Dec-10          Price Performance

Upside/Downside Scenarios                                                              Source: FactSet
                                                                                       Percentages indicate potential upside/downside from
Ultimately the profitability of the refining business is determined by the spread      current price.
between the crude oil price and the price of oil products such as gasoline and
diesel. These crack spreads show significant volatility both on a seasonal basis       Lydia Rainforth, CFA
and on a cyclical basis. If we were to return to the 2008 level of margin forever      +44 (0)20 3134 6669
and assume no benefit for the upgrade put in place during 2010, we would see
                                                                                       Barclays Capital, London
an upside valuation of €20.1/share based on a perpetuity approach. If instead
the 2009 refining margin were to prevail, we estimate a downside value of              Stephanie Maillet
€5.2/share on the same methodology.                                                    +44 (0)20 3134 2824
Valuation Analysis                                                                     Barclays Capital, London

We also note that Motor Oil is trading at effectively $925 per complex barrel, in
line with the sector average despite significantly better profitability. Our DCF-
based price target is €11 per share, which is calculated using a 12% discount
rate. Our analysis shows that the current share price is implying a discount rate
of 17%. The stock offers 39% potential upside and now trades on 7.6x 2011
EV:EBIDA, a 10% discount to the sector.

ENERGY & POWER | Russian Oil & Gas

Rosneft (ROSNq.L)
New tax framework a significant catalyst
                                                                                       Stock Rating                          1-OVERWEIGHT
Though Rosneft offers meaningful upside (29%) to our $9/GDR price target
                                                                                       Sector View                                1-POSITIVE
even under existing fiscal terms, tax overhaul discussion should be the most
significant catalyst shaping the performance of the company’s shares in 2011.          12-Month Price Target                          USD 9.00
The new framework, which we expect to come into effect on 1 January 2012,              Price (09 Dec 2010)                            USD 6.95
while likely largely preserving profitability of brownfields at existing low levels,   Potential Upside/Downside                            29%
should dramatically improve terms for greenfield developments, guaranteeing
                                                                                       Market Cap (USD mn)                              73,657
operators a certain return (most probably in the high-teens) throughout the life
                                                                                       Revenue TTM (USD mn)                                  NA
of the projects. Rosneft is well positioned to capitalise on these new
                                                                                       Current BVPS (USD)                                    NA
opportunities in our view, with a diverse start-up portfolio incorporating both
                                                                                       Return on Equity TTM (%)                              NA
near-term onshore opportunities like Yurubcheno-Tokhomskoe, as well as
longer-term continental shelf prospects. Rosneft’s ability to shape legislature is     Dividend Yield (%)                                    NA
                                                                                       Source: FactSet Fundamentals
ensured by its close relationship with the Ministry of Energy as well as its status
as the country’s NOC. The government’s stated desire to sell 15-25% in the             EPS (USD)
company as part of a secondary offering in 2013-15, should also contribute to          FY DEC                     EPS                 P/E
ensuring a positive outcome of the tax negotiations.                                   2009                   0.73A                   9.5
                                                                                       2010                   1.05E                   6.6
The Business Drivers
                                                                                       2011                   1.07E                   6.5
In upstream, Rosneft’s upstream offers what we consider to be the best                 Source: Barclays Capital
combination of assets among the Russian O&G names. The company has the
highest 2010-15 boe production CAGR, at 2.7%. Immediate-term growth comes              Upside/Downside Scenario

from the 500kbl/d Vankor field, which offers $2/bl F&D and $3/bl lifting costs,         15                                               $12
                                                                                                                             $9        (72.6%)
making it highly economical even under $30/bl netback. The growth is founded                                        $8.4
                                                                                        10                        (20.8%) (29.4%)
on a relatively young low-cost production base; we estimate a portfolio-wide
managed base decline of just 1%, courtesy of plateaued production at Yugansk.                                     Downside    Price
                                                                                         5                                               Case
                                                                                                                    Case     Target
In downstream, we estimate the light product yield of Rosneft’s refining system
will climb to 78% by 2015 as a result of the company’s ambitious $7bn capital            0
                                                                                        16-Dec-09          9-Dec-10          Price Performance
programme, positioning the company well to take advantage of equalisation of
light and heavy product export duty at 60% of the level of the one on crude.           Source: FactSet
                                                                                       Percentages indicate potential upside/downside from
Upside/Downside Scenarios                                                              current price.

We see $12/GDR as the blue-sky price level for the stock. This is the same level it    Ilya Balabanovsky
traded at in May-June 2008, when the oil price was trending towards $140/bl            +44 (0)20 3134 1762
and markets believed the company would continue to receive preferential tax  
treatment. With Barclays Capital’s commodity team looking for Brent to hit             Barclays Capital, London
$135/bl by 2015 (we factor $100/bl into our DCF) and the tax regime set to be
overhauled, a rebound to all-time-highs is not outside the realm of possibility.
Our downside scenario assumes further expansion into European downstream.
If Rosneft replicated its Ruhr Oel acquisition four more times, the resulting value
destruction (relative to putting same money to work into upstream at 17.5% vs
10% ROIC) would be about $5.5bn, suggesting a valuation of $8.40/GDR.

Valuation Analysis
Rosneft trades at 5.1 2011 F EV/EBITDA or about 25% less than its historical
premium to Lukoil. We expect it to regain this premium on a combination of
higher secular growth prospects as well as the greater leverage to benefits of the
oil tax overhaul and equalisation of refined product export duty.

ENERGY & POWER | European Oil Services & Drilling

Tecnicas Reunidas (TRE.MC)
Focus set to turn to record backlog
                                                                                      Stock Rating                          1-OVERWEIGHT
The main concern of investors surrounding Tecnicas in 2010 has been over the
                                                                                      Sector View                                1-POSITIVE
possible erosion of its favourable taxation status. This has recently been settled,
                                                                                      12-Month Price Target                        EUR 58.00
with a new rate of around 15%, to stay in place for at least the next five years.
                                                                                      Price (09 Dec 2010)                          EUR 45.54
Focus should now be on a record backlog at €6.3bn, representing over two years
                                                                                      Potential Upside/Downside                           27%
of forward revenues, and the outlook for future awards, especially on refining
projects in the Middle East. In addition, the company has shown the most stable
                                                                                      Market Cap (EUR mn)                                 2,546
margins in the Onshore Construction industry in recent years, mainly due to its       Revenue TTM (EUR mn)                                2782
preference for lower-risk convertible projects. We expect this to continue,           Current BVPS (EUR)                                   6.17
providing a consistency which we believe investors should value.                      Return on Equity TTM (%)                            41.75
                                                                                      Dividend Yield (%)                                    2.4
The Business Drivers
                                                                                      Source: FactSet Fundamentals
In a stable margin environment, we expect the key driver of growth to be the
                                                                                      EPS (EUR)
continued award of new backlog, particularly out of the Middle East and Latin
                                                                                      FY DEC                     EPS               P/E
America. Going forward, we believe that the group should be able to secure
                                                                                      2009                   2.63A                 17.3
more than enough work to keep its backlog at least stable. The spending outlook
                                                                                      2010                   2.43E                 18.7
in Saudi Arabia continues to be strong with several prospects near-term for gas
                                                                                      2011                   3.03E                 15.0
and the potential of more refinery workload in 2011. Furthermore, we expect to
                                                                                      Source: Barclays Capital
see two refining projects in Kuwait coming to market. For the short term, the
group has several opportunities to secure work in the power segment, largely in       Upside/Downside Scenario
central Europe. Based on this and the current backlog, we forecast revenues to         100                                              €72
grow from €2.8bn in 2010 to €3.7bn in 2012.                                             80                                   €58      (58.1%)
                                                                                        60                         €34
Upside/Downside Scenarios                                                                                        (-25.3%)             Upside
                                                                                        40                                 Price
The upside case for Tecnicas is likely to be driven by moves within the sector, as      20                       Downside Target
multiples expand within an up-cycle. At present the Oil Services & Drilling sector       0
is trading on 12.5x 2012F PE, a multiple that we expect to see expand to 15x in         16-Dec-09         9-Dec-10          Price Performance

the first part of 2012, with upside if contract awards materialise over Q1. We see    Source: FactSet
upside limited to 20x 2012F PE, implying an upside case of €72/share.                 Percentages indicate potential upside/downside from
                                                                                      current price.
The main risks are the company missing out on future project awards and
complications in project execution. This is true for all its peers and investing in   Mick Pickup
construction requires a degree of trust in the company. For these companies,          +44 (0)20 3134 6695
track record is the only guide to future performance. In this scenario and  
                                                                                      Barclays Capital, London
assuming oil price and market expectations similar to what we are projecting
(the sector performance being highly correlated to both), then we would expect
the stock to trade on a 20% discount to the sector at 12x a 20% reduced EPS
number. Our downside scenario is thus €34/share.

Valuation Analysis
Tecnicas Reunidas is trading on 15.0x 2011F PE, versus a sector on 16.2x and its
onshore peers on 14-18x, has €6.3bn of backlog, representing 2.2 years of
forward cover and is €511mn cash positive. With the tax increase worry behind
it, we believe that Tecnicas’s strong backlog position will begin to be more fully
appreciated and thus we rate the stock 1-Overweight. Our DCF-based price
target of €58 implies 27% upside potential.


HSBC Holdings PLC (HSBA.L)
Surplus liquidity, strong capital ratios and Asian expansion
                                                                                          Stock Rating                          1-OVERWEIGHT
We believe that a combination of surplus liquidity, strong capital ratios and
                                                                                          Sector View                                2-NEUTRAL
access to faster-growing Asian markets should lead to lead to faster loan growth
                                                                                          12-Month Price Target                           GBP 8.50
and stronger revenue generation than many European focused peers.
                                                                                          Price (09 Dec 2010)                             GBP 6.67
Additionally, HSBC’s balance sheet structure sees it well placed to deal with
                                                                                          Potential Upside/Downside                             27%
regulatory uncertainty and we see the company as relatively insulated from
ongoing Eurozone concerns. Despite being relatively low risk, we estimate that
                                                                                          Market Cap (GBP mn)                              117,912
EPS can double 2009-2012E and, with a dividend yield of c4%, we believe HSBC              Revenue TTM (GBP mn)                               89872
shares remain attractively priced. We have a 1-Overweight rating with a 12-               Current BVPS (USD)                                    7.25
month price target of 850p.                                                               Return on Equity TTM (%)                              7.29
                                                                                          Dividend Yield (%)                                     3.3
The Business Drivers
                                                                                          Source: FactSet Fundamentals
We view the combination of funding strength and a superior capital position as a
                                                                                          EPS (USD)
competitive advantage over the medium term, which sees the group well placed to
                                                                                          FY DEC                     EPS                  P/E
take advantage of a recovery in credit demand, particularly in faster-growth Asian
                                                                                          2009                   0.60A                   17.5
markets. As the US consumer finance business continues to run off and HSBC
                                                                                          2010                   0.90E                   11.1
continues to prioritise its emerging market franchise, we expect the shares to benefit.
                                                                                          2011                   1.05E                   10.0
Upside/Downside Scenarios                                                                 Source: Barclays Capital

Although our earnings forecasts are broadly consensual, we see substantial                Upside/Downside Scenario
upside potential in HSBC’s valuation as the company continues to de-emphasise              12
                                                                                           10                                              (42.4%)
its US business and increases its Emerging Markets focus, particularly in Asia.                                         £6
Accelerating loan growth accompanied by an earlier-than expected increase in                                         (-10.0%)
                                                                                            6                                               Upside
interest rates would likely lead to significant consensus earnings upgrades. Were           4
                                                                                                                     Downside   Target
improving operating conditions and a more benign regulatory environment to                  2                          Case

lead to a 1% uplift in sustainable RoE we believe that a valuation of 950p,                 0
reflecting a 1.7x tNAV multiple, could be justified.                                       16-Dec-09          9-Dec-10          Price Performance

                                                                                          Source: FactSet
A faltering economic recovery in developed markets could lead to a slower run-            Percentages indicate potential upside/downside from
off of the US book, dampen emerging market credit demand and result in                    current price.
sustained low interest rates. In this scenario, we would expect HSBC’s share
price performance to be more resilient than European peers. In such a scenario            Rohith Chandra-Rajan
we would expect HSBC to trade back towards 2010 lows of c600p seen at the                 +44 (0)20 3134 3211
peak of the Eurozone sovereign crisis and regulatory uncertainty.               
                                                                                          Barclays Capital, London
Valuation Analysis
At 1.4x 2011E tNAV per share of $7.07 and 10.0x 2011E EPS of $1.05, the rating
does not immediately appear to offer value relative to the European Banks sector
on 1.1x and 8.4x respectively. However, with EPS expected to double over the
next three years on our estimates, and book value growth likely to be further
boosted by write-backs from the AFS reserve, we believe that a longer-term
valuation is warranted. We use a 2013E SOTP model to derive a target multiple
of 1.6x (2013E tNAV $9.51, 2013E RoE of 16%). Discounting at the group’s cost
of equity gives a 12-month target price of 850p.

FINANCIAL SERVICES | European Diversified Financials

Key beneficiary of OTC derivatives reform
                                                                                      Stock Rating                          1-OVERWEIGHT
We believe ICAP is well placed to be a key beneficiary of OTC derivatives reform.
                                                                                      Sector View                                 2-NEUTRAL
Regulators on both sides of the Atlantic are pushing for more intermediation of
                                                                                      12-Month Price Target                           GBP 5.50
derivatives trading, but offering alternative platforms as viable solutions versus
                                                                                      Price (09 Dec 2010)                             GBP 5.24
exchanges. In addition, regulators are encouraging greater electronification of
                                                                                      Potential Upside/Downside                               5%
trading and link ups with clearing houses. In our opinion, ICAP has a strong track
record of partnership with the user community and excellent technology. As a
                                                                                      Market Cap (GBP mn)                                   3,458
result, we project strong take-up for the group’s electronic trading platform and     Revenue TTM (GBP mn)                                  1663
associated post trade and risk management services. The recent Europe e-IRS           Current BVPS (GBP)                                     1.81
initiative is evidence of this strong partnership arrangement with users.             Return on Equity TTM (%)                              14.34
                                                                                      Dividend Yield (%)                                      3.4
The Business Drivers
                                                                                      Source: FactSet Fundamentals
ICAP is the leading IDB in terms of flow market share of traditional voice broking
                                                                                      EPS (GBP)
derivatives (estimated at ~30%). This fact along with its technology leadership
                                                                                      FY MAR                     EPS                 P/E
vs peers puts it in a strong position to capture OTC business as it migrates to
                                                                                      2010                   0.35A                   15.0
electronic forms.
                                                                                      2011                   0.40E                   13.1
This product shift should cause a favourable margin effect since operating            2012                   0.41E                   12.8
profits margins are 2x-3x higher on ICAP’s Electronic and Post Trade Services         Source: Barclays Capital

divisions compared to Voice broking. As a result, operational leverage to top line
                                                                                      Upside/Downside Scenario
revenue growth should improve compared to historical developments. Recent
                                                                                       8                                                £6.3
consensus EPS momentum has been positive thanks to an earnings beat at the             7                            £3.4     £5.5     (20.2%)
interim results and lowered tax rate guidance.                                         6                         (-35.1%)   (4.9%)
                                                                                       4                                               Upside
Upside/Downside Scenarios                                                                                                    Price
                                                                                       3                         Downside   Target
If ICAP successfully migrates over traditional Voice business to its Electronic and                                Case
Post Trade Services division at 2x-3x the profit margin, we can see group             16-Dec-09          9-Dec-10           Price Performance
operating margins rising from 22% to ~30% in 2-3 years. This is likely to present
                                                                                      Source: FactSet
significant upside EPS surprises.                                                     Percentages indicate potential upside/downside from
                                                                                      current price.
Risks to the downside are if increased capital demands at investment banks
constrain overall volume outlook. In addition, ICAP could lose out on the             Daniel Garrod
electronification of OTC derivatives trading to exchanges, which own clearing         +44 (0)20 7773 3812
operations. In this scenario, volume declines cause EPS downgrades and the  
stock could de-rate back towards a single digit PE multiple.                          Barclays Capital, London

Valuation Analysis
ICAP has performed well over the past 3-4 months and is trading at ~13x a
calendar 2011E PE. The historic trading range has been 7x-15x so it is mid-
range. Consensus EPS growth expectations are still low, given a profit warning
as recently as February. This related to a cash equities expansion project which
has now been completely shut-down. As a result, these growth expectations
can, in our opinion, be exceeded.

HEALTHCARE | European Pharmaceuticals

Shire (SHP.L)
Enzyme replacement offers long-term opportunities
                                                                                        Stock Rating                          1-OVERWEIGHT
Shire’s strong position in enzyme replacement therapies is a platform for further
                                                                                        Sector View                                2-NEUTRAL
growth beyond near-term constraints, in our view. Greatest long-term potential
                                                                                        12-Month Price Target                           GBp 1700
lies in new product launches in areas of little or no competition. Nearer-term,
                                                                                        Price (09 Dec 2010)                             GBp 1484
Shire could gain additional market share if new capacity is approved sooner than
                                                                                        Potential Upside/Downside                             15%
expected. We model below-consensus sales for Shire’s market-leading
attention-deficit disorder franchise, even though we see an important FDA
                                                                                        Market Cap (GBp mn)                                   8,343
safety investigation, expected to report in Q1 2011, as a low-risk event.               Revenue TTM (USD mn)                                  3380
                                                                                        Current BVPS (USD)                                     4.02
The Business Drivers
                                                                                        Return on Equity TTM (%)                              30.22
Manufacturing setbacks at competitor Genzyme have enabled Shire to seize                Dividend Yield (%)                                      0.5
more than 60% of the global market for treatment of Fabry disease (from                 Source: FactSet Fundamentals
c.30%) and 16% of global market for treatment of Gaucher disease (from zero)
                                                                                        EPS (USD)
in the last year. We assume Genzyme’s graduated resupply will stabilise market           FY DEC                    EPS                  P/E
share, although increased treatment penetration may drive further growth in
                                                                                        2009                   3.49A                   13.1
these products and in Elaprase for Hunter Syndrome, for which Shire faces no
                                                                                        2010                   4.22E                   16.7
competition. Shire could launch four additional enzyme replacement therapies
                                                                                        2011                   5.21E                   13.5
between 2014E-18E in areas with little or no competition.
                                                                                        Source: Barclays Capital

Shire is the global leader in treatments for attention-deficit hyperactivity disorder
                                                                                        Upside/Downside Scenario
(ADHD), a market that is experiencing nearly 10% pa volume growth in the US.
                                                                                         30                                               £22.8
Shire’s Vyvanse continues to grow revenues at double-digit rates and Shire has also      25                                              (53.6%)
launched Intuniv to cater for the non-stimulant segment. We conservatively assume        20                                   (14.5%)
that further generic launches over the next 12-18 months will affect Vyvanse             15                        (-26.2%)               Upside
negatively and we model Vyvanse sales some $200m below consensus by 2012E.               10
                                                                                                                               Price       Case
                                                                                          5                          Case
Upside/Downside Scenarios                                                                 0
                                                                                         16-Dec-09          9-Dec-10          Price Performance
Key opportunities and risks relate, in our view, to: (1) Delays to generics of          Source: FactSet
ADHD drugs. Every year of delay increases our valuation by 50p (+3%); (2)               Percentages indicate potential upside/downside from
success or failure of key pipeline drugs. Consensus does not model sales for            current price.
Lialda in diverticulitis, Intuniv CarrierWave, or a new enzyme treatment for
Sanfilippo A. We include risk-adjusted estimates and success of all three could         Mark Purcell
increase our valuation by 295p (+17%), whilst failure could take 230p (-14%) off        +44 (0)20 3134 7189
our valuation per share; (3) the competitive supply situation with Genzyme. Our
                                                                                        Barclays Capital, London
forecasts assume no further substantial market share shifts, but should
Genzyme experience any further unplanned setbacks and Shire capitalises it              Brian Bourdot
could add 235p (+14%) to our valuation. However, if many patients switch back           +44 (0)20 3134 3038
to Genzyme’s treatments it could cost our valuation 150p (-9%); (4) the FDA’s 
safety study of ADHD stimulants could risk up to 225p (-13%) of our valuation if        Barclays Capital, London

negative. However, we see this as relatively low risk. In our view, a likely upside     Edward J. Dulac III
case valuation is 2,280p whilst our downside case valuation is 1,095p.                  +44 (0)20 3134 3296
Valuation Analysis                                                                      Barclays Capital, London

Shire stock trades at a 2011E PE of 13.5x, a 23% premium to the sector. This is         Michael Leuchten
in line with the stock’s average premium over the last four years. Our valuation is     +44 (0)20 3134 3039
DCF-driven and implies a 2011E earnings multiple of 15.2x.                    
                                                                                        Barclays Capital, London

INDUSTRIALS | European Autos & Auto Parts

China luxury and compelling valuation to drive BMW
                                                                                         Stock Rating                          1-OVERWEIGHT
BMW remains our top pick in the European Autos sector, despite the stock
                                                                                         Sector View                               2-NEUTRAL
appreciating 89% YTD and investor concerns about USD weakness and mean
reversion. We still see significant scope for further upside, with China potential       12-Month Price Target                        EUR 70.00
underappreciated and valuation highly compelling. Currently, BMW is cheaper vs           Price (09 Dec 2010)                          EUR 60.20
both its 10-year historical average and DAI, which we no longer believe deserves a       Potential Upside/Downside                              16%
premium for its lower-margin auto and truck businesses. Our price target of €70
                                                                                         Market Cap (EUR mn)                               36,240
results from a base-case scenario with top-line growth in China of 10% per annum,
                                                                                         Revenue TTM (EUR mn)                                  58173
but under our upside-case assumptions we see potential for the shares to trade to
                                                                                         Current BVPS (EUR)                                    33.15
€74, and a blue-sky scenario results in €88.
                                                                                         Return on Equity TTM (%)                              10.51
BMW’s business model                                                                     Dividend Yield (%)                                      0.5
                                                                                         Source: FactSet Fundamentals
BMW is a pure-play luxury manufacturer, focused on constant innovation and an
ever-strengthening global position. With 57% sales in Europe, 22% in North America       EPS (EUR)
and 9% in China, the German manufacturer balances a strong “home” presence with          FY DEC                     EPS               P/E
global diversification. With impressive pricing in China, and BMW’s strong growth        2009                   0.31A                 194.2
there (+91% YTD in October), we see it as our top pick for exposure to the Asian         2010                   4.55E                 13.2
market, with earnings driven by volumes, price and consumer goodwill. In our view,
                                                                                         2011                   6.45E                    9.3
BMW’s Efficient Dynamics strategy, combined with its electric MegaCity car project,
                                                                                         Source: Barclays Capital
position it well to meet tightening US and European fuel economy standards and
timing its entry to the electric vehicle market so as to avoid sunk costs.               Upside/Downside Scenario

China policy and fiscal austerity in Europe remain key risk factors                                                                         €88
                                                                                           94                                   €70       (46.1%)
Our current estimates assume just 10% top-line growth and a flat EBIT contribution of                                          (16.2%)
                                                                                           74                         (2.9%)
€1.6bn from 2010 onwards. In our upside-case scenario, we assume 30% top-line              54                                              Upside
growth in China and 2011 EBIT contribution growing to €2.1bn, stretching our                                        Downside Price          Case
                                                                                           34                         Case   Target
valuation to €74. Our blue-sky scenario (€88 valuation) takes our upside case
assumptions, but credits BMW with higher valuation multiples, pricing in China and         16-Dec-09         9-Dec-10          Price Performance
the company’s new double-digit earnings capabilities. A downside case valuation
                                                                                         Source: FactSet
would be €62, based on lower assumptions for margin recovery (8.2% Auto margin
                                                                                         Percentages indicate potential upside/downside from
vs 9.2% under base case) and also lower multiples for our valuation – 40% EV/Sales       current price.
(vs base case of 45%) and EV/EBITDA at 3.5x rather than 4.5x under base case.
The main risks which may impede the achievement of our price target are related to:      Kristina Church
1) External factors – macroeconomic factors outside the control of the company – ie,     +44 (0)20 3134 2199
fiscal austerity – leading to weaker demand and pricing in Europe/North America; 2)
                                                                                         Barclays Capital, London
China – both governmental policy and demographic developments are likely to play a
role in the Chinese auto market in the next few years, with potential change in policy   Brian A. Johnson
or consumer preferences likely to influence demand directly through volumes and          1.212.526.5627
ownership regulation, or pricing through further tax hikes. We believe our cautious
view on earnings growth going forward already incorporates those risks.                  BCI, New York

Valuation Analysis
We value BMW using historical average valuation multiples, as we do for other
auto peers. We use a blended average of 45% EV/Sales, 4.5x EV/EBITDA, 6.5x
EV/EBIT and 9.0x PE (which are at a small discount to the company’s 10-year
historical average) to reach our €70 PT. However, we note that were we to use
valuation metrics more in line with BMW’s new structural margin potential, we
could stretch our valuation to €88.

INDUSTRIALS | European Transportation

British Airways PLC (BAY.L)
Greatest leverage to global longhaul recovery
                                                                                     Stock Rating                          1-OVERWEIGHT
We view British Airways (soon to be IAG) as an effective way to leverage a global
                                                                                     Sector View                                1-POSITIVE
recovery in longhaul markets. We believe these inter-continental markets will see
both a stronger near-term recovery versus intra-European markets, but we also        12-Month Price Target                            GBP 3.60
expect stronger revenue growth over the cycle in markets better equipped to          Price (09 Dec 2010)                              GBP 2.73
manage fuel price and economic volatility via greater capacity discipline.           Potential Upside/Downside                              32%

The Business Drivers                                                                 Market Cap (GBP mn)                                    3,151
                                                                                     Revenue TTM (GBP mn)                                   8339
Recent merger/JV catalysts aside, we think the standalone recovery case is           Current BVPS (GBP)                                      1.59
ultimately the reason to own British Airways (and IAG after the January 2011         Return on Equity TTM (%)                               -25.5
closing of the Iberia merger). Post merger, IAG will have the most longhaul          Dividend Yield (%)                                       NA
exposure of the major flag carriers, just edging out Air France with c75% of         Source: FactSet Fundamentals
capacity in inter-continental markets.
                                                                                     EPS (GBP)
Beyond the recovery trade, we see company-specific positives including cost          FY MAR                     EPS                  P/E
cutting efforts related to the merger (company expects €400m in eventual run-        2010                 -34.30A                    NA
rate synergies) as well as the benefits of antitrust immunity and a JV on the        2011                   14.0E                    19.5
Atlantic, where IAG and partner American Airlines have recently become the last      2012                   32.0E                    8.5
of the three main alliances to form a joint venture.                                 Source: Barclays Capital

Upside/Downside Scenarios                                                            Upside/Downside Scenario
Key inputs to airline earnings – specifically economic growth and oil prices –                                                          £4.4
                                                                                      5                                      £3.6     (61.1%)
remain volatile. Our 360p price target assumes $81/bbl oil in FY11 and $87/bbl                                             (31.8%)
oil in FY12. We expect c11% unit revenue growth in FY11 and 3.5% growth in                                         £2
                                                                                                                (-26.7%)               Upside
FY12 for the stand-alone British Airways.                                             2                                     Price
                                                                                                                Downside   Target
We are currently expecting IAG to achieve peak margins for the cycle in the                                       Case
FY13/FY14 time frame. Achieving these margins sooner would likely drive              16-Dec-09          9-Dec-10           Price Performance
significant share price upside; if IAG where to hit peak margins by FY12 (c17.5%
                                                                                     Source: FactSet
EBITDAR margins for the combined company), we believe the stock could trade
                                                                                     Percentages indicate potential upside/downside from
in the 440p range, or c75% upside from current BAY levels even absent any            current price.
synergy benefits (note IAG will trade in euros, but we have kept the comparison
in sterling at current exchange rates for simplicity).                               David E. Fintzen
                                                                                     +44 (0)20 3134 3170
Airlines have substantial operational gearing, which drives meaningful downside
risks to economic or oil shocks. Whilst oil is largely hedged in the near term, we   BCI, New York
believe a moderate double-dip recession (c10% hit to our FY12 revenue
assumption) could see the shares trade down to around the 200p level. A
moderate recession would likely drive IAG shares to the 200p level in our view,
assuming a c6% hit to our FY12 revenue assumptions.

Valuation Analysis
On our pro-forma estimates, IAG shares continue to look inexpensive on our
above-consensus outlook (although IAG is more expensive than the stand-alone
British Airways). On EV/EBITDAR, IAG currently trades at 4.9x FY11 and 4.3x
FY12, below the c5.2x median over the last nine years. On P/E, IAG trades at
14x our FY11 estimate and 8.6x our FY12 estimate, with a median of c10x on
forward P/E and 11x on trailing P/E over the last nine years.

INDUSTRIALS | European Renewables & Clean Technology: Energy Efficiency

Outotec Oyj (OTE1V.HE)
End-market momentum and EM exposure lead to margin expansion
                                                                                      Stock Rating                          1-OVERWEIGHT
Outotec is a metals & mining and an energy efficiency technology solution
                                                                                      Sector View                                2-NEUTRAL
provider, which benefits from positive end-market momentum, margin expansion
                                                                                      12-Month Price Target                          EUR 36.00
and attractive emerging market exposure. Despite strong performance in 2010
                                                                                      Price (09 Dec 2010)                            EUR 40.71
(+53%), we believe Outotec to be an attractive long-term investment.
                                                                                      Potential Upside/Downside                             -12%
The Business Drivers
                                                                                      Market Cap (EUR mn)                                   1,864
Outotec’s traditional end markets are geared to metals & mining capex, which          Revenue TTM (EUR mn)                                   859
remains firm over the next five years. Outotec benefits from high barriers to         Current BVPS (EUR)                                     7.19
entry and structural trends towards lower grade ore, greater focus on health,         Return on Equity TTM (%)                               6.16
safety and sustainability, which increase demand for tailored technology solutions.   Dividend Yield (%)                                      1.7
Through the last cycle, the company has strengthened its services platform, a         Source: FactSet Fundamentals
trend which continues to generate positive margin mix effects as Outotec targets
                                                                                      EPS (EUR)
an increase in services revenue from a €300mn run rate in 2010 to €500mn by
                                                                                      FY DEC                     EPS                 P/E
2015. The company’s business model remains characterised by low capital
                                                                                      2009                   1.01A                   40.3
intensity and working capital, high ROCE and a net cash position. We believe
                                                                                      2010                   0.50E                   81.4
management comments around continually reviewing potential acquisition
                                                                                      2011                   1.21E                   33.6
opportunities are likely to be directed towards potential new growth areas for the
                                                                                      Source: Barclays Capital
company – service, sustainability and water in order to grow the non-mining focus
of the company within the Energy, Light Metals and Environment Solutions.             Upside/Downside Scenario
Upside/Downside Scenarios                                                                                                                €55
The focus on new markets linked to sustainability such as water, oil shale                                          €30 (-11.5%)
                                                                                       40                        (-26.3%)
processing and recycling could prove to be significant opportunities for the                                                           Upside
                                                                                       20                        Downside    Price      Case
company. We believe the CEO comment that things are "looking good" reflects                                                 Target
potential further periods of order intake going into 2011. In this scenario, we         0
estimate the share price could reach €55.0 driven by new markets, rising               16-Dec-09          9-Dec-10          Price Performance

commodity prices, strong order backlog and scope for earnings upside.                 Source: FactSet
                                                                                      Percentages indicate potential upside/downside from
Given the strong year-to-date performance for the stock (+53.0%) and a positive       current price.
capital markets day held at the end of November, we believe some short-term
profit-taking is possible ahead of the year end, though we believe long-term upside   Rupesh Madlani
remains for the company. At the weakest point the in the cycle, we estimate the       +44 (0)20 3134 7503
stock could decrease to €30.0 with lumpy order backlog declining, one-off project
                                                                                      Barclays Capital, London
execution risks affecting profitability and scope for order deferrals.
                                                                                      Arindam Basu
Valuation Analysis                                                                    +44 (0)20 3134 7216
On valuation Outotec trades on a consensus 2011 EV/EBIT of 11.9x, against the
                                                                                      Barclays Capital, London
energy efficiency sector average of 11.5x. Current levels represent a 21%
discount to Outotec’s historical one-year forward EV/EBIT.                            Julien Roques
                                                                                      +44 (0)20 7773 0901
                                                                                      Barclays Capital, London

INDUSTRIALS | European Aerospace & Defense

Rolls-Royce PLC (RR.L)
Growth driven by rebounding aftermarket revenues
                                                                                         Stock Rating                          1-OVERWEIGHT
(1) We expect strong multiple year EPS growth driven by an aftermarket
                                                                                         Sector View                                1-POSITIVE
rebound, growing OE share, an FX tailwind, followed by falling R&D at Civil
                                                                                         12-Month Price Target                           GBp 680
Aerospace coupled with solid sustainable growth at Marine. In 2011, this leads
                                                                                         Price (09 Dec 2010)                             GBp 642
to our 2011 EPS of 49.0p being 13% above consensus of 43.3p. (2) We believe
                                                                                         Potential Upside/Downside                             6%
RR has potential for significant multiple expansion as it trades at what we see as
an unjustified EV/EBITA discount to global peers and a cheap valuation vs. its
                                                                                         Market Cap (GBp mn)                               12,017
own history (11.1x - 16.0x at same point, last cycle in 2004/2005). (3) RR has           Revenue TTM (GBp mn)                              10711
scope for improving returns on capital as profit rises, cash conversion improves         Current BVPS (GBp)                                    1.69
and the Balance Sheet remains very strong. We believe Rolls-Royce will be a              Return on Equity TTM (%)                               .82
stock not only for 2011, but for 2012, 2013, and beyond.                                 Dividend Yield (%)                                     NA
                                                                                         Source: FactSet Fundamentals
The Business Drivers
                                                                                         EPS (GBp)
Rolls’ business is centred around power systems, which are focused on highly-
                                                                                         FY DEC                     EPS                 P/E
engineered gas turbine products developed for aerospace applications and
                                                                                         2009                   0.40A                   16.1
modified for marine and energy sector applications. Profit is mainly driven by
                                                                                         2010                   0.40E                   16.1
installed base growth, both in unit value and unit number. These products enjoy
                                                                                         2011                   0.49E                   13.1
very high barriers to entry due to patents, embedded intellectual property and
                                                                                         Source: Barclays Capital
engineering capability built over decades.
                                                                                         Upside/Downside Scenario
At the core of Rolls’ power systems business is the aero-engine OEM business
                                                                                          12                                                £9
contained in the Civil Aerospace segment, which represents ~50% of underlying                                                            (40.1%)
                                                                                          10                                    £6.8
EBIT. Earnings here are predominantly driven by 20%-plus margin aftermarket                8
revenues (~60% of segment), both under Total Care Agreements (“TCAs”, per-                 6
flying-hour contracts, ~60% of aftermarket revenues) and more traditional Time             4                        Downside    Price      Case
                                                                                                                      Case     Target
& Materials spares and overhauls (~40% of aftermarket revenues).                           2
                                                                                          16-Dec-09          9-Dec-10          Price Performance
Upside/Downside Scenarios
                                                                                         Source: FactSet
Upside: Civil Aerospace segment aftermarket growth ramps up to 20%-plus
                                                                                         Percentages indicate potential upside/downside from
growth in 2011 and 2012, deliveries of RR-powered B787s, A330 and A380s rise             current price.
with the cycle, USD strengthens further against sterling, Marine resumes growth
in 2011 and Defence sees F-136 funded through to production plus an export               Joseph F. Campbell, Jr.
order pick-up for Eurofighter. Upside price scenario: 900p (16x 2012 EPS)                +1.212.526.3277
Downside: aftermarket growth becomes sluggish after initial rebound due to               BCI, New York
slowing traffic and yields growth for airlines, the dollar weakens and Defence
                                                                                         Harry Breach
Aero. profit growth stalls as military operations reduce and company-funded
                                                                                         +44 (0)20 3134 7533
R&D is required for the F-136. Downside price scenario: 610p (11x 2012 EPS)    
                                                                                         Barclays Capital, London
Valuation Analysis
                                                                                         Carter Copeland
At the close on Tuesday 30 November of 609p, RR shares were trading at 12.4x our         +1.212.526.1661
2011 EPS estimate (an 11% discount vs. global large-cap com. aerospace median of
14.0x) and 7.7x 2011 EV/EBITA (a 21% discount vs. global large-cap com.                  BCI, New York
aerospace median of 9.7x). Our 680p price target is driven by a target multiple of 14x
2012E EPS, discounted back 15%. As the market begins to trade on more certain
2012 estimates this discount would be applied to our 2013 forecasts.

INTERNET & MEDIA | European Media

Lagardere SCA (LAGA.PA)
Operating momentum and Canal+ IPO to unlock value
                                                                                       Stock Rating                          1-OVERWEIGHT
We see two key reasons to buy Lagardère. First, the company is achieving good
                                                                                       Sector View                                2-NEUTRAL
operating momentum, and based on management’s recent comments we
                                                                                       12-Month Price Target                          EUR 38.00
believe that the company will achieve consensus expectations for the first time
                                                                                       Price (09 Dec 2010)                            EUR 31.16
in three years. Second, we expect the Canal+ IPO to go ahead in April 2011, as
                                                                                       Potential Upside/Downside                             22%
per management guidance. Based on one-third of the proceeds being returned
to shareholders, the shares offer a 12% yield over twelve months, which we view
                                                                                       Market Cap (EUR mn)                                   4,086
as attractive. We see two further reasons to buy the stock in the medium term:         Revenue TTM (EUR mn)                                    NA
1) e-books should be a positive for Lagardère’s largest division and 2) investors’     Current BVPS (EUR)                                    31.19
negative perception of Sports could change after the investor day in January.          Return on Equity TTM (%)                                3.3
The Business Drivers                                                                   Dividend Yield (%)                                      4.2
                                                                                       Source: FactSet Fundamentals
Lagardère is a diversified group with four business units: 1) Publishing
(consumer and educational book publishing); 2) Active (magazine publishing,            EPS (EUR)
                                                                                       FY DEC                     EPS                 P/E
radio, television); 3) Services (retail in airports/railway stations, press
distribution) and 4) Sports. Lagardere also has a 7.5% stake in EADS and a 20%         2009                   2.54A                   12.3

stake in Canal+. The drivers for the stock vary greatly between divisions. For         2010                   2.58E                   12.1
Publishing, the key driver is demand for books – both consumer (driven by new          2011                   2.65E                   11.8
titles) and educational (driven by regulatory issues such as changes in                Source: Barclays Capital

curriculum, budget cuts). For Active, the key drivers are advertising and              Upside/Downside Scenario
circulation. For Services, passenger numbers are a key driver for the retail part,
                                                                                        70                                                €50
whilst circulation is important for the distribution side. Finally, for Sports the      60                                              (60.4%)
main driver is consumer demand for watching sports outside of the home                  50
                                                                                        40                           €26
region, which in turn is driven by a strong sporting schedule.                                                    (-16.5%)
                                                                                        30                                              Upside
                                                                                                                              Price      Case
Upside/Downside Scenarios                                                               10
                                                                                                                  Downside   Target
We believe that at the current share price there is upside based on our central
                                                                                        16-Dec-09          9-Dec-10          Price Performance
base case. We expect to see growth within publishing, with e-books supportive,
                                                                                       Source: FactSet
as well as continued recovery in advertising. We see the unloved Sports division
                                                                                       Percentages indicate potential upside/downside from
as a free option if management can persuade investors that they are wrong              current price.
about it at the upcoming investor day in January.
                                                                                       Julien Roch
Our upside scenario, where eBooks prove accretive to margins but do not lead to
                                                                                       +331 44 58 32 48
lower industry sales, advertising rebounds more than expected and Sports is indeed
a growth business (albeit a cyclical one), could see the shares trade up to €50. Our
                                                                                       Barclays Capital, London
downside scenario, where eBooks impact profit negatively and advertising and
Sports do not recover, could see the shares trade down to €26.                         Natasha Brilliant
                                                                                       +44 (0)20 3134 3230
Valuation Analysis                                                           
                                                                                       Barclays Capital, London
We value Lagardere on a sum-of-the-parts basis to capture the conglomerate
nature of the company, valuing each of the divisions on industry multiples.
These multiples, along with portfolio rationalisation and divisional operating
growth, are a key driver of the valuation. We also look at the stock on a DCF
basis to capture the long-term value, independent of trading multiples and take
the average of these two methodologies to get to our price target of €38.00.
The stock has historically been inexpensive and remains that way, trading on
5.8x 2011E EV/EBITDA and 8.5x 2011E adjusted P/E.

POWER & UTILITIES | European Utilities

Asset disposals and cost-cutting to reshape the business
                                                                                     Stock Rating                          1-OVERWEIGHT
E.On, in our view, has the most compelling risk/reward profile in the Utilities
                                                                                     Sector View                                2-NEUTRAL
sector. For us a perfect storm of bad news has left an unloved and undervalued
                                                                                     12-Month Price Target                          EUR 26.00
share. Yet asset disposals, cost cutting, and new capacity additions should
                                                                                     Price (09 Dec 2010)                            EUR 22.59
reshape the business and drive a strong free cash flow recovery. At the same
                                                                                     Potential Upside/Downside                              15%
time, E.On has committed to a minimum dividend until 2012 and investors have
exposure to potential from continued strength in commodities.
                                                                                     Market Cap (EUR mn)                               45,203
                                                                                     Revenue TTM (EUR mn)                                  84145
The Business Drivers
                                                                                     Current BVPS (EUR)                                    21.68
E.On’s new CEO has implemented a strategic plan that involves €15bn of non-          Return on Equity TTM (%)                              20.37
strategic asset disposals, €2.1bn of aggregate efficiency improvements and a         Dividend Yield (%)                                      6.7
more focused approach to investment. We expect underlying free cash flow             Source: FactSet Fundamentals
recovery to come through from a wind-down in capex, 14GW of new power
                                                                                     EPS (EUR)
generation capacity, a doubling of upstream gas production, cost savings and
                                                                                     FY DEC                     EPS                  P/E
Russian power market exposure. We believe E.On can get its long-term gas
                                                                                     2009                   2.80A                    8.1
contracts back to profitability. And while we see continued pressure on margins
                                                                                     2010                   2.71E                    8.3
in the German power market, we believe E.On is sufficiently well diversified to be
                                                                                     2011                   2.37E                    9.5
a net beneficiary of rising commodity prices.
                                                                                     Source: Barclays Capital

Upside/Downside Scenarios                                                            Upside/Downside Scenario
E.On is geared into commodity prices and we see potential upside over the                                                              €33.4
medium term from rising coal, gas and CO2 prices, which should feed into                                                              (47.8%)
                                                                                      34                                    €26
higher power prices. Our upside scenario for E.On implies a valuation of              29                                   (15.0%)
€33.4/share. On the flip side, we see the threat of growing competition in the                                  (-14.1%)               Upside
                                                                                      19                                    Price       Case
German power generation market, putting pressure on margins. Failure to               14
                                                                                                                Downside   Target
renegotiate gas contracts could result in ongoing heaving losses in E.On’s gas         9
business. Our downside scenario implies a valuation of €19.4/share.                   16-Dec-09          9-Dec-10          Price Performance

                                                                                     Source: FactSet
Valuation Analysis                                                                   Percentages indicate potential upside/downside from
                                                                                     current price.
E.On’s shares have underperformed the DJ Stoxx 600 by 27% year-to-date. It
now trades at a 2011E P/E of 10.6x (excluding free CO2 permits), with potential      Peter Bisztyga
EPS CAGR to 2014E of 9.9%, versus the Utilities sector on 10.6x. E.On has            +44 (0)20 3134 4763
committed to a minimum dividend of €1.50 for 2010E and €1.30 for 2011/12   
giving an average three-year annual yield of 6.2%. We forecast FCF yield to climb    Barclays Capital, London
to 14.2% in 2013E and 16.3% in 2014E, assuming forward power prices remain
at current levels. Our base case sum-of-the-parts DCF valuation is €26.0.

POWER & UTILITIES | European Infrastructure

Vinci SA (SGEF.PA)
Predictable French toll-roads complemented by International projects
                                                                                        Stock Rating                          1-OVERWEIGHT
We believe that Vinci’s current market price over-discounts concerns
                                                                                        Sector View                                1-POSITIVE
surrounding the group’s construction outlook and does not properly capture the
                                                                                        12-Month Price Target                          EUR 53.00
value of safe and predictable French toll road activities. Toll-road traffic and
                                                                                        Price (09 Dec 2010)                            EUR 40.08
operating margins trends for toll roads are on track. In addition, we believe there
                                                                                        Potential Upside/Downside                             32%
is limited regulatory risk for toll roads thanks to concession frameworks that
protect the group from government interference. Lastly, Vinci has limited
                                                                                        Market Cap (EUR mn)                               22,132
exposure to declining roadwork activities domestically, which we believe are            Revenue TTM (EUR mn)                               33562
vulnerable to local-authority spending cuts. Domestic and international                 Current BVPS (EUR)                                    19.62
exposure to large value-added projects and a strong order book should act as a          Return on Equity TTM (%)                              17.51
cushion against potential slippage in low value-added roadwork activities.              Dividend Yield (%)                                      4.1
                                                                                        Source: FactSet Fundamentals
The Business Drivers
                                                                                        EPS (EUR)
Vinci benefits from an integrated concessions/construction business model,
                                                                                        FY DEC                     EPS                  P/E
which represents a competitive advantage when bidding for new infrastructure
                                                                                        2009                   3.05A                   13.1
projects. In addition, concessions and construction activities are complementary
                                                                                        2010                   3.03E                   13.2
in terms of exposure to the economic cycle and capital intensity.
                                                                                        2011                   3.32E                   12.1
Upside/Downside Scenarios                                                               Source: Barclays Capital

In our view, Vinci’s share price currently over-discounts concerns surrounding          Upside/Downside Scenario
the group’s construction business and does not properly capture the value of                                                               €57
                                                                                         66                                     €53
French toll roads:                                                                                                            (32.2%)    (42.2%)
1) Assuming zero value for the group’s construction activities, our fair value for                                 (-11.4%)               Upside
                                                                                         36                                    Price
Vinci would be €35.5.                                                                                                         Target       Case
2) The current market price reflects an undemanding multiple of 2x operating             16
                                                                                         16-Dec-09          9-Dec-10          Price Performance
profit for construction activities.
                                                                                        Source: FactSet
3) Our upside scenario assumes a stronger-than-expected recovery in construction        Percentages indicate potential upside/downside from
activities, which we believe could see the shares trade to around €57.                  current price.

Valuation Analysis                                                                      Susanna Invernizzi
                                                                                        +39 02 6372 2681
Owing to the group’s integrated concession/construction business model, we    
believe that the most appropriate valuation approach is a SOTP. We therefore            Barclays Capital, London
value concessions activities based on a DCF and construction activities using
                                                                                        Monica Girardi
both market and acquisition multiples. We obtain a fair value of €53.
                                                                                        +39 02 6372 2683
On market multiples, the stock trades at a discount to the sector average     
(EV/EBITDA YE 11 of 6.1x versus an average for the sector of 7.8x), which we            Barclays Capital, London

consider only partially justified by the group’s exposure to construction activities.

REAL ESTATE | European Real Estate

Vacancies falling, discount to NAV unjustified
                                                                                        Stock Rating                          1-OVERWEIGHT
Our 1-Overweight investment case for SEGRO and estimated 21% potential upside
                                                                                        Sector View                               2-NEUTRAL
to our price target are predicated on two key factors: 1) we believe SEGRO’s discount
to NAV that implies its portfolio value falls 13% is not justified in a stabilising     12-Month Price Target                           GBP 3.50
economy with resolute and unprecedented determination for growth; 2) SEGRO has          Price (09 Dec 2010)                             GBP 2.90
organic growth opportunities through reducing the high vacancy in some of its           Potential Upside/Downside                             21%
assets, predominantly those acquired during the Brixton takeover. Recent site visits
                                                                                        Market Cap (GBP mn)                                   2,150
confirm positive momentum and we estimate a further £3.1m or c1% of gross rental
                                                                                        Revenue TTM (GBP mn)                                   419
income is under offer. Our analysis indicates reducing vacancy from 14% to 10% is
                                                                                        Current BVPS (GBP)                                     3.58
achievable and could add a further 7.1% to NAV and 10% to EPS.
                                                                                        Return on Equity TTM (%)                              17.46
The Business Drivers                                                                    Dividend Yield (%)                                      4.9
                                                                                        Source: FactSet Fundamentals
SEGRO states that it aims to execute a business model of “buy smart, add value,
sell well”. Execution of this in practice will require calling commercial property      EPS (GBP)

market tops and bottoms with major, and almost always contrarian, capital               FY DEC                     EPS                 P/E

allocation decisions. This is not necessarily fully achievable where a company          2009                   0.18A                   16.1

seeks to trade long-term through cycles in a publicly listed environment.               2010                   0.17E                   17.1
                                                                                        2011                   0.18E                   16.1
SEGRO is a property investment and development company focused on the                   Source: Barclays Capital
provision of industrial and logistics property in the UK (c80% of asset value) and
in continental Europe (c20% of asset value in nine countries). Most recent              Upside/Downside Scenario
capital transactions were focused on the takeover of former rival Brixton, a               5                                              £4.27
                                                                                         4.5                         £2.43    £3.5       (47.2%)
successful deal well that was timed, and the acquisition of 50% of the APP                 4                       (-16.2%) (20.6%)
portfolio that has given SEGRO better access to under-rented airside property            3.5
adjacent to existing holdings around Heathrow airport.                                   2.5                                   Price
                                                                                           2                       Downside   Target
Upside/Downside Scenarios                                                                1.5                         Case
The upside case (a potential upside price of GBP4.27) is that: 1) property yields        16-Dec-09          9-Dec-10          Price Performance

compress further due to a continuation of global liquidity chasing yield, with low      Source: FactSet
relative yields on government and corporate bonds making current property               Percentages indicate potential upside/downside from
yields, that are significantly higher, attractive; 2) the emergence of evidence that    current price.

management is successfully reducing vacancy across the portfolio leading to
improved rental income and EPS and higher capital valuations. Management has            Aaron Guy
                                                                                        +44 (0)20 3134 4649
already reduced vacancy to 13.6% (from 14%) with the letting of the Verdus
building. The downside case (a potential downside price of GBP2.43) would
                                                                                        Barclays Capital, London
include the occurrence of: 1) a double-dip recession or deterioration in the
economic climate leading to tenant default; 2) sharply increasing bond yields,
corporate yields and interest rates leading to the expansion of property yields.

Valuation Analysis
Our price target of 350p (derived from the average of our nearest two annual
NAV and dividend estimates) incorporates an uneven recovery for commercial
real estate values but still estimates 21% upside. Catalysts for the crystallisation
of this upside are likely, in our view, if transactions in direct property markets
confirm our expectation of yield compression, if evidence of vacancy rate and
rent stabilisation in future results is announced, and if there are announcements
regarding the reduction of vacancy. SEGRO currently trades at a share price
implied portfolio yield of 6.8% and a dividend yield of 4.9%.

RETAIL | European General Retail

Carphone Warehouse Group PLC (CPW.L)
Best-Buy Mobile and smartphone penetration driving growth
                                                                                        Stock Rating                          1-OVERWEIGHT
We continue to be particularly bullish on the Best Buy Mobile business (Best Buy
                                                                                        Sector View                               3-NEGATIVE
Europe, a constituent of CPW, shares 50% of BBM’s profit), which we expect will
                                                                                        12-Month Price Target                           GBP 4.30
drive above-guidance earnings growth for the next several years. Recent upbeat
                                                                                        Price (09 Dec 2010)                             GBP 4.21
commentary from Best Buy’s management team on both the top-line growth
                                                                                        Potential Upside/Downside                               2%
and margin expansion solidifies this view. Additionally, we expect increased
smartphone penetration in Europe to drive profitability in the legacy business.
                                                                                        Market Cap (GBP mn)                                   1,923
                                                                                        Revenue TTM (GBP mn)                                    NA
The Business Drivers
                                                                                        Current BVPS (GBP)                                     1.56
CPW consists of a) UK real estate, b) 47.1 % stake in the France MVNO (Mobile           Return on Equity TTM (%)                              24.38
Virtual Network Operator), and c) a 50% stake in Best Buy Europe (BBE). BBE             Dividend Yield (%)                                      NA
includes the CPW retail business (including the Phone House in Continental Europe       Source: FactSet Fundamentals
and the Geek Squad tech support team), the Big Box consumer electronic retail
                                                                                        EPS (GBP)
business, which is being developed in the UK and will be rolled out to Europe, and a
                                                                                        FY MAR                     EPS                 P/E
profit-sharing agreement with BBM, a US mobile phone retailer with 150 stand-alone
                                                                                        2010                   0.08A                   52.6
stores and 1,093 stores within a store in Best Buys. What is unique about CPW is that
                                                                                        2011                   0.14E                   30.1
it allows customers to choose a contract among all available MVNOs.
                                                                                        2012                   0.23E                   18.3
We believe that CPW is best positioned to benefit from the increased penetration of     Source: Barclays Capital

smartphones in Europe. Smartphones have materially higher revenue per connection
                                                                                        Upside/Downside Scenario
due to higher prices, higher accessories sales (36% vs. 14% for non-smartphones)
and higher attachment to Geek Squad paid services (44% vs. 35%). In addition,                                                              £5
                                                                                         6                                     £4.3     (18.8%)
smartphones are driving higher usage by customers, increasing the monthly                5                            £3.4    (2.1%)
                                                                                         4                         (-19.1%)
payment, from which CPW also benefits. We expect continued growth of this
                                                                                         3                                               Upside
category to fuel revenue per connection and LFL growth in the future.                    2                         Downside               Case
                                                                                         1                           Case

Upside/Downside Scenarios                                                                0
                                                                                        16-Dec-09          9-Dec-10           Price Performance
In our current estimates we assume that BBM will get to an achievable, in our
                                                                                        Source: FactSet
view, 12.5% market share within the next 4 years, up from 5% currently given            Percentages indicate potential upside/downside from
the strong space growth and the increasing brand recognition as BBY rolls out           current price.
more BBM standalone stores and increases its marketing spend. We forecast
26% connections growth in FY11 and c25% in the next 3 years. We also assume             Karen Howland, CFA
smartphones’ penetration will continue in the run up to Christmas forecasting           +44 (0)20 3134 3469
2.2% FY11 LFL sales growth for the legacy business.                           
                                                                                        Barclays Capital, London
We believe that at the current share price there is a lot of upside based on our
                                                                                        Chris Chaviaras
main assumptions. In an upside case scenario where BBM gets to a 15% market             +44 (0)20 3134 1948
share by FY14 and improves its margins as it gains operational leverage we    
could see shares trading up to 500p. In our downside case scenario growth of            Barclays Capital, London
CPW could be slowed by rivals increasing their retail footprint in the UK and a
                                                                                        Maurice Patrick
space growth slowdown of BBM. In that case, the shares could trade down to
                                                                                        +44 (0)20 3134 3622
                                                                                        Barclays Capital, London
Valuation Analysis
At the moment BBE CY11 PE trades at an implied 16.0x, a 40% premium to the
UK General retail space. In our view, the substantially growth prospects of CPW
vs. the Gen. Retail space, on which we have a 3-Negative view, fully justifies a
premium over the sector.

RETAIL | European Food Retail

Tesco (TSCO.L)
Double-digit record earnings growth not priced in
                                                                                      Stock Rating                          1-OVERWEIGHT
Tesco has an unmatched record of growth in the food retail sector and, while
                                                                                      Sector View                                1-POSITIVE
the UK core may not grow as fast in the coming decade as it did in the last, the
                                                                                      12-Month Price Target                            GBP 5.00
growth opportunities from Asia, Central Europe and Retailing Services –
                                                                                      Price (09 Dec 2010)                              GBP 4.26
especially banking – are so significant that double-digit earnings growth looks
                                                                                      Potential Upside/Downside                              17%
eminently achievable to us. After a period in which returns have dipped, greater
capital discipline and operating improvements should lead to a steady rise.
                                                                                      Market Cap (GBP mn)                                34,231
                                                                                      Revenue TTM (GBP mn)                               58883
The Business Drivers
                                                                                      Current BVPS (GBP)                                      1.83
Tesco attracts 20mn customers to its UK stores each week – it has been very           Return on Equity TTM (%)                               17.96
successful in meeting the non-grocery needs of these customers in the past and        Dividend Yield (%)                                       3.2
the widening of Tesco Bank’s offer to mortgages and current accounts may              Source: FactSet Fundamentals
allow Tesco to take an even greater share of their spending. Tesco’s Clubcard
                                                                                      EPS (GBP)
scheme gives the company great insight into customer behaviour – insight
                                                                                      FY FEB                     EPS                  P/E
beyond that available to most, if not all, of its competitors.
                                                                                      2010                   0.27A                    15.8
Tesco’s global scale and operational abilities should not be underestimated, in       2011                   0.30E                    14.2
our view. These give it a large advantage compared with most of its domestic          2012                   0.34E                    12.5
competitors and in many of its international markets – not just in purchasing terms   Source: Barclays Capital

but also through factors such as its Service Centre in Hindustan, which provides
                                                                                      Upside/Downside Scenario
low-cost, high-quality operational support to the group. Few other retailers have
                                                                                       7                                                 £5.5
such sophisticated, deep foundations on which to build their growth plans.                                                     £5      (29.0%)
                                                                                       5                            £3.8
Upside/Downside Scenarios                                                              4
                                                                                       3                                                 Case
If Tesco can continue to generate solid sales and profit growth in the UK, can                                   Downside   Target
                                                                                       2                           Case
deliver on its Asian growth aspirations and succeed in turning around its loss-
making US operations then the company should be able to generate double-digit         16-Dec-09          9-Dec-10           Price Performance
operating profit growth over the next few years. This is even before considering
                                                                                      Source: FactSet
the growth opportunity from the expansion into banking. Our target price is 500p      Percentages indicate potential upside/downside from
but we believe the shares could easily hit 550p if the UK core shows improvement.     current price.

With c65% of sales still being generated in the UK, Tesco’s performance in its        James Anstead
home market is crucial. If UK sales and market share performance worsened             +44 (0)20 3134 6166
from their current mildly disappointing trajectory then this would likely cause the
stock to drift. However, we believe the company’s asset-backing and growth            Barclays Capital, London
prospects outside the UK would limit downside to perhaps 380p.
                                                                                      Amy Crofton
                                                                                      +44 (0)20 3134 6165
Valuation Analysis
Tesco is trading on 13.1x 2011 PE, versus a sector average of 12.9x. This hardly      Barclays Capital, London
looks remarkable at first glance, but one must bear several factors in mind. First,
Tesco’s excellent track record of delivery over the last 15 years means that a
premium is deserved. Second, earnings continue to be weighed down by losses
in several markets (US, Japan, India and China), which means that the PE
multiple overstates the price being paid for the core business. Third, Tesco’s
extensive real estate assets (>£35bn) should be taken as a valuation positive.

TECHNOLOGY | European Technology Hardware

Bullish on NAND capacity expansion and foundry investment
                                                                                      Stock Rating                          1-OVERWEIGHT
We expect ASML’s fundamentals to be sustained at a high level through 2011,
                                                                                      Sector View                                2-NEUTRAL
driving estimates and valuation higher. Our bullish view on ASML’s orders in
                                                                                      12-Month Price Target                          EUR 29.00
2011 are supported by capacity expansion in NAND, structural investment in
                                                                                      Price (09 Dec 2010)                            EUR 28.40
foundry, continued technology migrations in DRAM and share gains at Intel. We
                                                                                      Potential Upside/Downside                               2%
expect a sustained high level of technology orders, positive EPS momentum and
strong cash flow to lead to share price appreciation.
                                                                                      Market Cap (EUR mn)                               12,248
                                                                                      Revenue TTM (EUR mn)                                  3567
The Business Drivers
                                                                                      Current BVPS (EUR)                                     5.33
ASML has a sustainably dominant position in lithography, with its technology          Return on Equity TTM (%)                              33.43
leadership only set to grow with the migration to EUV for leading edge                Dividend Yield (%)                                      0.8
processes.                                                                            Source: FactSet Fundamentals

While DRAM orders may slow from 1Q11, we expect increased orders from                 EPS (EUR)
NAND (capacity expansion), foundries (Samsung and Global Foundries chasing             FY DEC                    EPS                 P/E

TSMC) and IDM (share gain at Intel) to support 2011 order flow. Later in 2011,        2009                  -0.35A                   NA
we expect ASML to begin recognising EUV orders (>EUR65m per tool). These              2010                   2.15E                   13.2
trends should support orders of around EUR1.1-1.3bn per quarter through 2011,         2011                   2.70E                   10.5
above consensus expectations.                                                         Source: Barclays Capital

                                                                                      Upside/Downside Scenario
Upside/Downside Scenarios
                                                                                       44                                                €36
The key question for investors remains, when do orders peak? At the time of 3Q         39                                    €29       (26.7%)
results in mid-October, ASML guided 4Q orders to rise sequentially to EUR1.4bn,        34                                   (2.1%)
                                                                                       29                          €20
but on Dec 9 announced they would be at least EUR2.0bn, a 40%+ revision.               24                        (-29.5%)              Upside
                                                                                                                             Price      Case
While this may prove to be the peak, the aforementioned industry fundamentals          19
                                                                                                                 Downside   Target
indicate we won’t see as material a decline in orders in 2011 as in prior cycles.                                  Case
                                                                                       16-Dec-09          9-Dec-10          Price Performance
Our 2011 order estimate of EUR4.8bn or EUR1.2bn per quarter is ahead of
                                                                                      Source: FactSet
consensus, yet we can envision more bullish scenarios. Greater demand for
                                                                                      Percentages indicate potential upside/downside from
leading edge and non-critical tools, plus the inclusion of initial EUV bookings by
                                                                                      current price.
year end, could drive 2011 orders to the low- to mid-EUR5bn range. In such a
scenario, 2011 revenue expectations would rise towards EUR5.5bn and EPS to            Andrew M. Gardiner, CFA
around EUR3.2. Even presuming a conservative 11x P/E multiple would drive             +44 (0)20 3134 7217
shares to EUR36.                                                            
                                                                                      Barclays Capital, London
On the downside, if economic trends deteriorate significantly, then we could see
further pressure on DRAM capex and to a lesser extent foundry, whereas we see         Youssef Essaegh
                                                                                      +44 (0)20 3134 7250
NAND and Intel’s budgets as relatively safe. In such a scenario, then 2011
revenue estimates would decline towards EUR4.0bn and EPS to EUR2.0, limiting
                                                                                      Barclays Capital, London
stock downside to EUR20 presuming a compressed 9x-10x P/E multiple.
                                                                                      C.J. Muse
Valuation Analysis                                                                    1.212.526.8945
Shares trade on just 10x 2011E EPS, a low level even if we consider this a cyclical
                                                                                      BCI, New York
peak and, despite its industry leadership, at the low end of its semi capital
equipment peers at 9-11x. We see further support from improved likelihood of
shareholder returns given our forecast dividend increase and potential for share

TECHNOLOGY | European Software & IT Services

Temenos (TEMN.S)
Positioned to dominate core banking software market
                                                                                        Stock Rating                          1-OVERWEIGHT
Temenos remains our top pick for the same reason as before. The long-term
                                                                                        Sector View                                1-POSITIVE
structural growth story has attracted a lot of bullish investor sentiment and we
                                                                                        12-Month Price Target                          CHF 40.00
believe it should continue to do so for some time to come. The Temenos story is
                                                                                        Price (09 Dec 2010)                            CHF 35.62
around the potential core banking software market, estimated at $12bn
                                                                                        Potential Upside/Downside                             12%
(company presentation), but dominated by in-house solutions. These in-house
solutions have led to high IT cost margins while providing little differentiation. As
                                                                                        Market Cap (CHF mn)                                   2,258
retail banking accepts the advantages of a standardised software solution, we           Revenue TTM (CHF mn)                                    NA
expect this to drive robust double-digit organic revenue growth for Temenos             Current BVPS (USD)                                      4.8
over the next few years.                                                                Return on Equity TTM (%)                              28.08
                                                                                        Dividend Yield (%)                                      NA
The Business Drivers
                                                                                        Source: FactSet Fundamentals
Most core banking solutions are currently developed in house, with many legacy
                                                                                        EPS (USD)
applications developed over the years that have now become costly to maintain.
                                                                                        FY DEC                     EPS                 P/E
We believe banks will struggle to maintain this high-cost approach. Moreover,
                                                                                        2009                   1.23A                   24.3
many in-house products are for common tasks that do not provide a
                                                                                        2010                   1.48E                   20.4
competitive edge. We believe that banks are finally recognising this and that they
                                                                                        2011                   1.77E                   17.7
see standardisation as an easy way to cut costs without losing competitiveness.
                                                                                        Source: Barclays Capital
Temenos sells into tier 2 banks, where it is easy to replace a legacy system, or to
tier 1 with their new ‘componentised’ product, which allows large global banks          Upside/Downside Scenario
to standardise their software piece by piece slowly over time.                           60
                                                                                                                            CHF40         CHF42
                                                                                         50                                              (17.9%)
However, replacement is not the only growth opportunity. Temenos receives                                          CHF30.7 (12.2%)
                                                                                         40                        (-13.8%)
nearly 50% of revenue from emerging markets, where new start-up banks                    30
                                                                                                                               Price     Upside
simply do not have the resources to develop a system from scratch.                       20                        Downside   Target      Case
                                                                                         10                          Case

In addition, Temenos can cross/up-sell new products such as CRM, BI, payment              0
processing and anti-money-laundering functionality obtained from acquisitions.           16-Dec-09          9-Dec-10          Price Performance

Current penetration into these markets is low, but the opportunity is significant.      Source: FactSet
Furthermore, Temenos has signed up with several large system integrators. This          Percentages indicate potential upside/downside from
                                                                                        current price.
allows Temenos to widen its sales coverage, boost project completion rates and
unburden itself from time-consuming implementation projects, focusing on
                                                                                        Raimo Lenschow, CFA
product development instead. This is exactly how SAP grew in the early 1990s.
                                                                                        +44 (0)20 3134 4757
Upside/Downside Scenarios
                                                                                        Barclays Capital, London
On the downside, if the macro situation worsens then the deal closure problems
                                                                                        David Wang
could continue into 2011 and reduce sales growth. Were 2011 EPS to be cut by 6%         +44 (0)20 7773 2432
then to maintain an 18.5x P/E, this implies a share price of CHF30.7. Conversely, a
strong environment could lead to 20% organic licence growth, leading to 5.6% EPS        Barclays Capital, London
upside. Based on the current target price we have an estimated 22.5x P/E and to
maintain this would imply an upside scenario of CHF42.

Valuation Analysis
2011 P/E is estimated at around 18x, on our forecasts. This compares to a
forward P/E over the last 12 months of 17x and a last three years forward P/E of
15x. This is at a justifiable premium to Misys in our view, given the stronger
organic growth potential.

TELECOMMUNICATIONS | European Telecom Services

Telenor ASA (TEL.OL)
Mobile data growth to drive sector-leading top line growth
                                                                                     Stock Rating                          1-OVERWEIGHT
Telenor is best exposed to our sector themes, specifically mobile data. We
                                                                                     Sector View                                1-POSITIVE
believe positive exposure will drive sector-leading revenue growth of 5% in
                                                                                     12-Month Price Target                     NOK 130.00
2011E versus broadly flat for peers. In addition, we believe cash flow generation
                                                                                     Price (09 Dec 2010)                        NOK 93.15
is becoming increasingly apparent and we expect the company to pay a sector-
                                                                                     Potential Upside/Downside                           40%
equivalent cash yield in 2011.
                                                                                     Market Cap (NOK mn)                            152,591
The Business Drivers
                                                                                     Revenue TTM (NOK mn)                             97656
Our mobile data report Winners and Losers from Mobile Data, 4 March 2010,            Current BVPS (NOK)                                  53.43
highlighted a major opportunity for mobile operators to drive traffic and revenue    Return on Equity TTM (%)                            20.58
growth from mobile data, while at the same time controlling opex and capex,          Dividend Yield (%)                                    2.7
therefore making the growth profitable. Telenor is clearly benefiting from this      Source: FactSet Fundamentals
across most of its key assets – from the Nordics (where growth is running well
                                                                                     EPS (NOK)
ahead of European peers) to emerging markets.
                                                                                     FY DEC                     EPS               P/E

Overall we expect organic revenue growth to remain strong and well ahead of          2009                   6.44A                 14.5
peers due to Telenor’s Nordic and Emerging market exposure, and we consider          2010                   6.24E                 14.9
the risk from “back book” and austerity to be limited relative to peers. This        2011                   8.84E                 10.5
revenue outperformance should drive margin expansion and cash-flow                   Source: Barclays Capital

upgrades due to the high operating leverage of Telcos. Our EBITDA forecasts are
                                                                                     Upside/Downside Scenario
9% above consensus in 2012.
                                                                                      200                                          kr150
                                                                                                                            kr130 (61.0%)
Upside/Downside Scenarios                                                             150                                  (39.5%)
We believe the key risk facing the stock is its Indian investment. We value the       100                       (-8.74%)
Indian business at NOK0.8/share, however, in an upside case scenario we could          50                       Downside Target
see it posing downside risk of NOK8-10/share (ie, Telenor spend $2bn more
than envisaged) to the current share price. Additionally, potential EM spectrum        16-Dec-09         9-Dec-10          Price Performance
auctions may present a medium-term risk.
                                                                                     Source: FactSet
                                                                                     Percentages indicate potential upside/downside from
In a blue-sky scenario, we see Telenor with upside to NOK150/share. This blue-
                                                                                     current price.
sky scenario is based on a: 1) rerating of EM assets (ex India) to 8.0x 2011
EV/opFCF, we assume the market currently implies a multiple of 6.2x                  Maurice Patrick
EV/EBITDA; 2) India valued at our SOTP valuation of NOK1.7bn; and 3)                 +44 (0)20 3134 3622
Vimpelcom’s M&A risk diminishes.                                           
                                                                                     Barclays Capital, London
Valuation Analysis
                                                                                     Jonathan Dann
We estimate Telenor trades on 5.5x 2011E EV/EBITDA, and 9.7x EV/OpFCF. This          +44 (0)20 3134 3525
compares to the sector on 5.1x and 8.0x, respectively. However, this is distorted
by India – if we exclude India at zero value, we estimate Telenor's EV/EBITDA        Barclays Capital, London
multiple falls to 4.9x, with EV/OpFCF just 7.1x. Given Telenor’s positive exposure
                                                                                     JP Davids, CFA
to sector themes and growth profile, we believe the stock is attractively valued.    +44 (0)20 3134 3437
                                                                                     Barclays Capital, London

Barclays Capital | Global Top Picks 2011


                                         We asked our fundamental analysts in the Asia-Pacific region to provide their single best
                                         stock ideas for 2011. We have not attempted to impose a top-down macro view on their
                                         selections; the only constraints were that the stocks should be rated 1-Overweight within
                                         the analyst’s sector coverage universe and that there should be sufficient liquidity for the
                                         average investor.

                                         To this point, the average market cap of the 29 stocks presented from the region – 19
                                         stocks in Japan and 10 stocks in our recently launched sectors in Asia Ex-Japan – is nearly
                                         $19 billion and offers an average 22% potential upside from current price levels to our
                                         currently published price targets.

                                         As can be seen in the figure below, our analysts’ recommendations offer a number of
                                         defensive opportunities with a higher concentration of the potential total return from
                                         dividends, as well as more aggressive growth ideas with a clear majority of the total return
                                         projected to come from share price appreciation.

                                         In addition, 11 of our Asia-Pacific top picks belong to sectors rated as 1-Positive by the
                                         respective analysts: ABC-Mart, Frontier Real Estate Investment, HTC Corp, Mizuho Financial
                                         Group, NTT, Ping An Insurance, Rakuten, Sumitomo Realty & Development, Sun Hung Kai
                                         Properties, SYSMEX CORP, Yangzijiang Shipbuilding.

Potential Total Return of Top Picks

 Dividend Yield

         4.0%                                                                                    Staples
                                        Power & Utilities                                         Telecommunications
         3.0%                                                     Financials
         2.5%              Technology
                                                                                                                       Basic Industries
         1.5%                                                     Retail

         0.5%                                                          Internet & Media
                0%               10%                        20%                    30%                     40%                 50%
                                                                  Potential Price Appreciation

Source: Barclays Capital

BASIC INDUSTRIES | Japan Chemicals

AIR WATER Inc. (4088.T)
The Investment Case
                                                                                      Stock Rating                           1-OVERWEIGHT
Air Water (AW) is an industrial gas firm that posted 8.4% p.a. CAGR BPS growth
                                                                                      Sector View                                 2-NEUTRAL
from FY3/02-10 with 120% DPS growth. The stock is trading at heavily
                                                                                      12-Month Price Target                          JPY 1500
discounted P/E and P/B levels versus global peers. We believe AW’s BPS and EPS
                                                                                      Price (09 Dec 2010)                              JPY 991
will grow steadily from FY3/10-13 at CAGRs of 7.4% and 11%, respectively,
                                                                                      Potential Upside/Downside                           51%
while maintaining RoE above 10%. Our 12-month TP is JPY1,500, suggesting
around 50% upside; we see limited downside risk due to the take-or-pay scheme.
                                                                                      Market Cap (JPY mn)                             192,457
                                                                                      Revenue TTM (JPY mn)                             453733
The Business Drivers
                                                                                      Current BVPS (JPY)                                800.73
AW, one of the three major industrial gas makers in Japan, has established            Return on Equity TTM (%)                            10.89
production sites and distribution channels, and we believe it can achieve             Dividend Yield (%)                                    2.2
continuous growth and margin improvement, as industry consolidation was               Source: FactSet Fundamentals
completed in 2004 and the company possesses a unique medium-sized on-site
                                                                                      EPS (JPY)
gas generation technology called “V-1”.
                                                                                      FY MAR                     EPS                P/E

AW is also keen to develop peripheral fields such as magnesia (vital to improve       2010                  71.60A                 13.8
electricity grid efficiency, 90% global share) and coke-oven-gas based chemicals,     2011                  85.80E                 11.6
and we believe these businesses will also grow steadily over the next three years.    2012                  88.90E                 11.1
                                                                                      Source: Barclays Capital
Upside/Downside Scenarios
                                                                                      Upside/Downside Scenario
Our FY3/11 RP estimate is JPY33bn, the highest among the major sell-side firms.        2,500                                          ¥2,010
We think the shares have yet to fully factor in the limited downside we see for        2,000                                  ¥1,500 (102.%)
earnings over the next three years. We see AW’s earnings as relatively predictable                                           (51.3%)
                                                                                       1,500                        ¥870
within the chemical universe and therefore think the stock merits a premium,                                      (-12.2%)             Upside
                                                                                       1,000                                Price       Case
thanks to the “unregulated utility” nature of the industrial gas business, the fact                               Downside Target
that industry consolidation is over, and AW’s steady record of earnings growth.                                     Case
                                                                                          16-Dec-09         9-Dec-10         Price Performance
We believe share-price downside is limited; our negative scenario envisages a
value of JPY870, which is equivalent to a 0.96x P/B and 2.8% p.a. dividend yield      Source: FactSet

based on our FY3/12 estimates. 0.96x represents the lowest P/B over the past          Percentages indicate potential upside/downside from
                                                                                      current price.
five years, reached in February 2009. Our upside scenario is a value of JPY2,010,
equivalent to a 2.22x P/B and 22.6x P/E based on our FY3/12 estimates.                Mikiya Yamada
JPY2,010 is the average of the values suggested by the peak P/B (2.31x,               81 3 4530 2911
JPY2,090) and P/E (21.8x, JPY1,930) levels of the past five years, both based on
our FY3/12 estimates.                                                                 BCJL, Tokyo

Growth in electronics-related businesses such as H2Se (used for CIGS solar cells,
for which we expect 10x sales growth in the next 24 months) and medical
business expansion may provide an additional boost.

Valuation Analysis
As of the 9 December close the stock trades on a P/E of 11.6x and P/B of 1.19x
based on our FY3/11 estimates. These multiples are far lower than its global
peer industrial gas companies, such as Airgas, based on Reuters consensus
estimates. They are also close to the five-year lows of 10.0x for P/E and 0.96x for
P/B, both recorded in February 2009; as such we see AW as highly attractive.

FINANCIAL SERVICES | Asia ex-Japan Banks

Bank of China Limited (3988.HK)
The Investment Case
                                                                                         Stock Rating                          1-OVERWEIGHT
We believe Bank of China (BOC) is undervalued. With FY11E/12E ROE of
                                                                                         Sector View                                2-NEUTRAL
17%/19%, the shares are trading at 1.35x FY11E P/B, which is 21% lower than the
                                                                                         12-Month Price Target                          HKD 5.60
H-share China banks’ average of 1.7x and implies only a 1.11x P/B for the bank’s
                                                                                         Price (09 Dec 2010)                            HKD 4.11
domestic franchise. Fundamentally, we believe both BOC’s domestic foreign
                                                                                         Potential Upside/Downside                             36%
currency operations and overseas operations have bottomed in terms of net
interest margin (NIM). BOC also has the highest sensitivity to US interest rate
                                                                                         Market Cap (HKD mn)                              343,688
increases. With relatively strong capital and reserves, as well as less of a potential   Revenue TTM (HKD mn)                             494126
impact from local government financing platform (LGFP) loans (according to our           Current BVPS (HKD)                                     2.48
stress-test analysis), we believe the bank will be among the least affected by           Return on Equity TTM (%)                              18.53
stricter regulatory requirements.                                                        Dividend Yield (%)                                      4.0
                                                                                         Source: FactSet Fundamentals
The Business Drivers
                                                                                         EPS (HKD)
Fundamentally, we believe both BOC’s domestic foreign currency operations and
                                                                                         FY DEC                     EPS                 P/E
overseas operations have bottomed, with their NIM touching historical lows of
                                                                                         2009                   0.32A                   12.8
1.14% and 1.70%, respectively, in 1H10. In addition, BOC will continue to
                                                                                         2010                   0.39E                   10.5
downsize its foreign currency investments and increase overseas banks’ self-
                                                                                         2011                   0.42E                   9.8
funding through large CDs and bond issuance locally, which we expect will help
                                                                                         Source: Barclays Capital
recycle funds to more productive RMB operations.
                                                                                         Upside/Downside Scenario
In terms of capital and reserve levels, with a FY10E Tier-1 CAR/total CAR of
                                                                                          7                         HK$5.38 HK$5.6        HK$5.8
10.3%/12.7% post-rights issue, and a reserve ratio of 2.26% as of end-1H10, we
                                                                                          6                         (30.9%) (36.2%)      (41.1%)
believe BOC is as strong as the other Big 4 banks and should be among the least           5
affected amid the increasingly strict regulatory environment. We expect the bank          4                                     Price     Upside
to deliver steady PPOP growth of 21% on average in FY10-12E, with ROE                     3                           Case     Target      Case

improving to 19% in FY12E from 17% in FY10E.                                              2
                                                                                         16-Dec-09          9-Dec-10           Price Performance
Upside/Downside Scenarios
                                                                                         Source: FactSet
Potential upside lies in interest rate hikes that could push up China banks’ NIMs.       Percentages indicate potential upside/downside from
In our scenario analysis, three interest rate hikes in 2011 could push up NIM by         current price.
10bp, which could improve 2011E net profit by 4% and the stock could trade up
to HK$5.80.                                                                              May Yan
                                                                                         +852 290 34756
Downside to the shares could come from the risk posed by LGFP asset quality. In
our stress-test analysis, where we assume a high NPL ratio of 50% for county-            Barclays Bank, Hong Kong
level LGFPs, and 15% for provincial and prefectural governments, as well as a
loss ratio of 50% for NPLs, BOC’s 2011E net profit would be cut by 24%. This
scenario could see the shares trade down to HK$5.38, as such an impact on
earnings would be one-off.

Valuation Analysis
With BOC’s domestic franchise trading at 1.11x FY11E P/B, 35% lower than the
China H-share banks’ average of 1.7x, on our estimates, we believe BOC
deserves a re-rating. Furthermore, we note that the valuation gap between BOC
and BOC HK (which we rate 2-EW) is widening, as BOC’s share price has
increased only 2% YTD vs BOC HK’s 47%, suggesting that BOC domestic is more
undervalued than before.

FINANCIAL SERVICES | Japan Regional Banks

Bank of Kyoto Ltd. (8369.T)
The Investment Case
                                                                                  Stock Rating                           1-OVERWEIGHT
Bank of Kyoto (BoK) is one of the few Japanese banks we see as having the
                                                                                  Sector View                                 2-NEUTRAL
prospect of longer-term profit growth, backed by a 5% annual increase in
                                                                                  12-Month Price Target                            JPY 920
lending. We view the stock as being heavily undervalued at an end-Sep 2010 P/B
                                                                                  Price (09 Dec 2010)                              JPY 747
of 0.7x (based on the 10 December closing share price). Any improvement in
                                                                                  Potential Upside/Downside                           23%
market sentiment towards Nintendo's stock now that the yen's rise has halted
could be positive for BoK's share price since the bank holds a 4.5% of the
                                                                                  Market Cap (JPY mn)                              283,265
company’s shares.                                                                 Revenue TTM (JPY mn)                             128229
                                                                                  Current BVPS (JPY)                               1117.67
The Business Drivers
                                                                                  Return on Equity TTM (%)                              4.6
BoK’s greatest point of competitive advantage is its growth in deposits and       Dividend Yield (%)                                    1.3
loans, backed by the opening of new branches since 2001. It plans to open a       Source: FactSet Fundamentals
further seven branches in FY3/11, and it maintained roughly 5% YoY growth in
                                                                                  EPS (JPY)
lending during 1H, at a time when the major banks posted declines and even the
                                                                                  FY MAR                     EPS                P/E
regional banks managed annualized growth of less than 1%. BoK trains staff
                                                                                  2010                  38.77A                 19.3
quickly and effectively, in a way that its peers have been unable to emulate.
                                                                                  2011                  53.70E                 13.9
Management has tended to avoid lending to the real estate industry or other       2012                  54.00E                 13.8
high-risk sectors. This has contributed to stable NP and limited earnings         Source: Barclays Capital

                                                                                  Upside/Downside Scenario
                                                                                   1,800                                            ¥1,400
Upside/Downside Scenarios
                                                                                   1,500                                           (87.4%)
BoK holds shares in many Kyoto-based tech companies, including Nintendo.           1,200                                 (23.1%)
Changes in dividends from Nintendo in particular impact interest income. Share       900
                                                                                                              (-19.6%)             Upside
                                                                                     600                                Price       Case
price changes affect unrealized gains on securities and therefore BPS. Exchange                               Downside Target
rates also impact the share price, since the bulk of stocks held are exporters.                                 Case
                                                                                     16-Dec-09         9-Dec-10          Price Performance
Our 12-month target price of JPY920 is based on our FY3/12 EPS estimate of
JPY54 and a target P/E of 17x. We would see upside to JPY1,400 if the yen         Source: FactSet
                                                                                  Percentages indicate potential upside/downside from
softens to JPY100/USD, and we would see downside to JPY600 if the yen
                                                                                  current price.
appreciates beyond JPY80/USD, and in turn were to lead to further profit falls
and dividend reduction at Nintendo.                                               Shin Tamura
                                                                                  81 3 4530 2977
Valuation Analysis                                                      
We see TSE-average P/E as an appropriate metric at forecast ROE above 5%,         BCJL, Tokyo
while we view P/B as being more relevant below 5%. The stock looks                Miwako Tani
undervalued on both ROE/COE and theoretical P/E at a FY3/11 forecast ROE          81 3 4530 2976
of 4.7%.                                                                
                                                                                  BCJL, Tokyo

FINANCIAL SERVICES | Asia ex-Japan Banks

Hang Seng Bank Ltd. (0011.HK)
The Investment Case
                                                                                      Stock Rating                         1-OVERWEIGHT
Hang Seng Bank is the most profitable bank in our coverage universe with a high
                                                                                      Sector View                               2-NEUTRAL
ROE of 25% and attractive dividend yield of 5.7% for FY11E. HSB benefits from
                                                                                      12-Month Price Target                     HKD 146.10
favourable capital requirements and, in our view, is most positively geared to a
                                                                                      Price (09 Dec 2010)                       HKD 129.10
rising HIBOR.
                                                                                      Potential Upside/Downside                           13%
The Business Drivers
                                                                                      Market Cap (HKD mn)                            246,819
We believe strong revenue growth (margin and loan growth) and a benign asset          Revenue TTM (HKD mn)                            31509
quality environment will continue to drive ROE expansion from 22% in FY10E to         Current BVPS (HKD)                                  33.59
25% in FY11E and 28% in FY12E. HSB is a dominant player in the Hong Kong              Return on Equity TTM (%)                            22.69
market and is best geared to a rising HIBOR, owing to its strong savings deposit      Dividend Yield (%)                                    4.0
franchise. For every 25bp rise in HIBOR (relative to Prime), HSB’s NIM increases by   Source: FactSet Fundamentals
14.6bp. As a result, we expect faster-than-industry NIM expansion at 6bp in FY11E
                                                                                      EPS (HKD)
and 14bp in FY12E. The bank’s mortgage business (29% of FY10E total loans)
                                                                                      FY DEC                     EPS               P/E
should benefit from a reasonably healthy domestic residential property market.
                                                                                      2009                   6.87A                 18.8
HSB benefits from lower capital requirements (vs smaller peers), due to its Basel     2010                   7.41E                 17.4
II Advanced IRC accreditation to calculate risk-weighted assets. We estimate its      2011                   8.58E                 15.0
risk weight for residential mortgages is less than 10%, compared to 35% for           Source: Barclays Capital

banks using the Standardised approach (all but HSB, HSBC and Standard
                                                                                      Upside/Downside Scenario
Chartered). This means their mortgages generate ROEs that are significantly
higher than non-accredited peers. We also like HSB’s strong risk-management            170                        HK$142.4 HK$146.1
                                                                                                                  (10.3%) (13.1%) (14.7%)
track record in light of the currently below-normal credit cost experience.            150
                                                                                       110                                           Upside
Upside/Downside Scenarios                                                               90
                                                                                                                 Downside Price
                                                                                                                   .      Target      Case
The key downside risks to share price performance include a sustained low-
interest environment (beyond 2012) and a potential capital issuance by                  16-Dec-09         9-Dec-10         Price Performance
Industrial Bank (20% associate of HSB), which could be a drag on HSB’s core
                                                                                      Source: FactSet
capital adequacy ratio.                                                               Percentages indicate potential upside/downside from
                                                                                      closing price.
Based on our blended valuation methodology, if interest rates remain unchanged
until FY13E (vs our current 1% interest rate hike assumption in FY12E), we could      Sharnie Wong
see downside to HK$142.40. Conversely, assuming interest rates rise more              +852 290 33457
rapidly, up by 2% in FY12E instead of just 1%, FY12E net profit could overshoot
our current estimates by 5% with upside to the share price of HK$148.10. Our          Barclays Bank, Hong Kong

blended valuation methodology incorporates long-term, one-year forward and            Tom Quarmby
normalised principles. Thus, the impact of interest-rate changes on our               +852 290 33053
upside/downside scenario will be smaller than using a single methodology.   
                                                                                      Barclays Bank, Hong Kong
Valuation Analysis
HSB is the most expensive stock in our coverage universe, trading on FY11E P/B
of 3.7x, but also has the highest ROE of 25% and an attractive dividend yield of
5.7%. We have factored in an 85% payout ratio from FY10E, a recovery from the
sub-normal payout of 74.3% in FY09, which resulted from management’s
cautious stance during the global financial crisis. We derive our HK$146.10 PT
based on a blended valuation approach, implying 13% potential upside.


Mizuho Financial Group Inc. (8411.T)
The Investment Case
                                                                                     Stock Rating                          1-OVERWEIGHT
Management has raised its guidance and now expects FY3/11 NP to more than
                                                                                     Sector View                                1-POSITIVE
double YoY. The stock has fallen on concerns that Basel III-related issues would
                                                                                     12-Month Price Target                             JPY 170
drive up recapitalization and