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					                                                                                                                                         09 April 2013
                                                                                                                                                Global
                                                                                                                                     Equity Research
                                                                                                                                   Investment Strategy




                                                   Global Equity Strategy
                           Research Analysts
                                                    STRATEGY
                          Andrew Garthwaite
                            44 20 7883 6477
          andrew.garthwaite@credit-suisse.com      GEM: stay overweight, despite the headwinds
                             Marina Pronina        ■ We remain overweight GEM, given that: a) emerging markets are trading
                            44 20 7883 6476
             marina.pronina@credit-suisse.com
                                                       at a 15% P/B discount to global markets, with the relative P/B at a seven-
                                                       year low (the implied growth premium is now just 30% versus a delivered
                              Mark Richards
                            44 20 7883 6484
                                                       growth premium of 52%); b) GEM growth momentum relative to developed
              mark.richards@credit-suisse.com          markets is now close to a three-year high, which is consistent with GEM
                            Sebastian Raedler          outperformance going forward; c) margins are already at historical lows –
                              44 20 7888 7554          and many of the pressures on margins (e.g. from the labour market) are
           sebastian.raedler@credit-suisse.com         abating, with most GEM countries now having spare capacity, on our
                                Robert Griffiths       estimates; d) emerging markets are already priced for a sharper
                               44 20 7883 8885         deterioration in the global cycle than we think is likely; e) capital flows into
              robert.griffiths@credit-suisse.com
                                                       GEM have turned positive, helping money supply growth, which in turn
                           Nicolas Wylenzek
                                                       pushes up asset prices; f) GEM equities have lagged GEM fixed income
                             44 20 7883 6480
           nicolas.wylenzek@credit-suisse.com          performance; and g) positioning on emerging markets is now cautious.
                                                   ■ However, we reduce our weightings in emerging markets (from 18% to
                                                       10% overweight), as some drivers of GEM underperformance are likely
                                                       to remain in place: a) we are bears of commodities (29% of GEM earnings
                                                       are from resource-related sectors, while 40% of market cap is from
                                                       commodity exporting countries); and b) our FX strategists expect the yen to
                                                       weaken to $/¥120 over the next 12 months, hitting NJA competitors.
                                                   What to buy? Our models – based on valuation (conventional and Credit
                                                   Suisse HOLT®), economic fundamentals (in particular, inflationary pressures)
                                                   and earnings revisions – highlight Korea, China and Hungary. Credit Suisse
                                                   emerging market strategist Sakthi Siva likes China, Korea and India. We view
                                                   developed market GEM plays as cheaper and more liquid with generally
                                                   stronger corporate governance than the direct plays.
                                                   Figure 1: GEM’s price-to-book relative has fallen to a 7-year low
                                                         120%

                                                         115%

                                                         110%
                                                         105%

                                                         100%

                                                          95%

                                                          90%

                                                          85%
                                                          80%
                                                                                              EM rel World: P/B          Av erage (+/- 1SD)
                                                          75%

                                                          70%
                                                            2004    2005    2006   2007    2008      2009         2010      2011        2012   2013


                                                   Source: Thomson Reuters, Credit Suisse research


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investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS                                                                BEYOND INFORMATION®
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                                                                                               09 April 2013




Table of contents
Key charts                                                                                 3
We remain overweight GEM                                                                   4
   1)    Relative growth momentum has improved                                             4
   2)    Valuations: the biggest positive                                                  5
   3)    Global growth likely to accelerate in 2013 (in spite of a growth pause near-term) 7
   4)    Lower inflationary pressures                                                      9
   5)    Relative margins are already at a 10-year low                                    11
   6)    Capital outflows have stopped                                                    13
   7)    Catch-up potential relative to GEM bonds                                         15
   8)    Positioning is cautious                                                          15
What are the problems?                                                                    16
   1)    We are bearish on commodity prices                                               16
   2)    US real bond yields have been rising… but should now fall again                  20
   3)    Dollar strength                                                                  21
   4)    The impact of a weaker yen                                                       23
Maintain preference for the indirect EM consumer stocks                                   25
Which GEM markets to focus on?                                                            29
   Lower correlations, more need for being selective                                      29
   Country selection                                                                      30
Individual GEM markets                                                                    34
   1)    China: overweight, in spite of our macro concerns                                34
   2)    India: top-down concerns abating                                                 39
   3)    Brazil: neutral                                                                  43
   4)    Korea: overweight                                                                46
Which countries risk overheating?                                                         49
Appendices                                                                                50
   Appendix 1: Country output gaps and inflation                                          50
   Appendix 2: GEM fund flows                                                             50




The team wishes to acknowledge the contributions made to this report by Anand
Hariharan, Srikant Agarwal and Prabu Mathivanan, employees of CRISIL Global Research
and Analytics, a business division of CRISIL Limited, a third-party provider of research
services to Credit Suisse.




Global Equity Strategy                                                                                    2
                                                                                                                                                                                       09 April 2013




Key charts
Figure 2: Emerging markets are now trading at a 15%                                              Figure 3: GEM already seems to have over-discounted the
discount to global markets, a seven-year low                                                     likely near-term pause in global growth momentum
      120%                                                                                                                                                                                     62
                                                                                                      230
      115%
                                                                                                      220                                                                                      57
      110%
                                                                                                      210                                                                                      52
      105%
                                                                                                      200                                                                                      47
      100%
       95%                                                                                            190
                                                                                                                                                                                               42
       90%                                                                                            180
                                                                                                                                                                                               37
       85%                                                                                            170
                                                                                                                                                 GEM total returns, relative to global, lhs    32
       80%                                EM rel World: P/B                Av erage (+/- 1SD)         160
                                                                                                                                                 Global manufacturing PMI new orders
       75%                                                                                            150                                                                                      27

       70%                                                                                            140                                                                                      22
             2004   2005   2006     2007    2008     2009     2010       2011    2012   2013            Jan-08          Jan-09         Jan-10          Jan-11         Jan-12          Jan-13


Source: Thomson Reuters, Credit Suisse research                                                  Source: Thomson Reuters, Credit Suisse research

Figure 4: GEM margins relative to those for global                                               Figure 5: Having turned negative in Q2 2012, GEM net
markets are at a 10-year low                                                                     capital flows turned positive again in Q4
                                                                                                     1,200
                                                                                                                  GEM: 4-quarter rolling money inflows (change in FX
     3%                            GEM non-financial net income margins, relativ e to                1,000        reserves, adjusted for current account balance), USD bn
                                   global (w ith 2013 consensus projection)
                                                                                                      800
     2%
                                                                                                      600

     1%                                                                                               400

                                                                                                      200
     0%
                                                                                                        0

     -1%                                                                                              -200

                                                                                                      -400
     -2%
                                                                                                      -600
        2003           2005               2007            2009                2011        2013           Q2 2004            Q2 2006             Q2 2008          Q2 2010            Q2 2012

Source: Thomson Reuters, Credit Suisse research                                                  Source: Thomson Reuters, Credit Suisse research

Figure 6: Resource-related sectors account for 29% of                                            Figure 7: Earnings upgrades for Japan relative to GEM
GEM earnings, compared to 17% for developed markets                                              has led to a strong spurt of outperformance
                                                                                                         125
      25%                                        % of net profit
                      21.5%                                                                                             Japan relative to GEM
                                                                                                         120
                                                   Oil and gas       Basic materials
      20%                                                                                                115                          EPS
                                                                                                                                      Price performance
                                                                                                         110
      15%                                                        12.8%                                   105

                                                                                                         100
      10%
                                   7.6%
                                                                                                             95

                                                                              4.5%                           90
       5%
                                                                                                             85

       0%                                                                                                    80
                                                                                                              Feb-11    Jun-11      Oct-11       Feb-12     Jun-12       Oct-12      Feb-13
                              EM                                         DM

Source: Thomson Reuters, Credit Suisse research                                                  Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                                              3
                                                                                                                                                                09 April 2013




We remain overweight GEM
We reduce our weighting on emerging markets – but remain overweight for the following
reasons:

1) Relative growth momentum has improved
The past three years have been marked by a slowdown in emerging market growth
relative to that in the developed world.

Figure 8: The GEM GDP growth premium has fallen to a                                  Figure 9: Lead indicators are still consistent with a pick-
nine-year low and have been declining for 3 years                                     up in relative IP momentum
  7.0%                                                                                                        Composite PMI new orders, EM relative to DM,lhs           40%
                           GDP growth gap: GEM versus world
                                                                                        13                    GEM IP momentum, relative to DM, 6m lag
                                                                                                                                                                        35%
  6.0%
                                                                                                                                                                        30%
                                                                                        10
  5.0%
                                                                                                                                                                        25%
                                                                                         7
  4.0%                                                                                                                                                                  20%

                                                                                         4                                                                              15%
  3.0%
                                                                                                                                                                        10%
  2.0%                                                                                   1
                                                                                                                                                                        5%
  1.0%                                                                                   -2
                                                                                                                                                                        0%

  0.0%                                                                                   -5                                                                             -5%
     Aug-98     Jun-01        May-04         Apr-07        Mar-10         Feb-13              2004   2005   2006     2007   2008   2009   2010   2011   2012     2013


Source: Thomson Reuters, Credit Suisse research                                       Source: Thomson Reuters, Credit Suisse research

However, relative lead indicators for the emerging market economies have rebounded
strongly over the past months (despite a temporary dip in February), with emerging market
composite PMI new orders relative to those in the developed markets close to a three-year
high. This is consistent with a rebound in relative IP (industrial production) momentum,
which in turn would point to strong relative performance for emerging market equities.

Figure 10: Emerging market equities should outperform as relative IP momentum
rebounds
                                                                                                                            35%
                           GEM total returns, relative to global, 3m ch, lhs
 35%
                                                                                                                            30%
                           GEM IP momentum, relative to DM
                           Relative IP momentum implied by relative PMI                                                     25%
 25%
                                                                                                                            20%
 15%                                                                                                                        15%

                                                                                                                            10%
  5%
                                                                                                                            5%

 -5%                                                                                                                        0%

                                                                                                                            -5%
-15%
                                                                                                                            -10%

-25%                                                                                                                        -15%
    2001            2003                2005                2007               2009           2011                 2013

Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                        4
                                                                                                                                                              09 April 2013



2) Valuations: the biggest positive
Emerging markets are now trading at a 15% discount to global markets on P/B, below the
trough point reached during the 2008 market panic and compared to a 10-year average
discount of 2%. On P/Es, they are trading on a 23% discount relative to global markets, an
eight-year low (though, admittedly, this is only slightly below the long-run average of an
18% discount).

Figure 11: GEM price to book relative is at a 15% discount                                Figure 12: GEM P/E relatives are trading on a 23%
to global markets, and below 2008 trough levels                                           discount
 120%                                                                                      120%                                           12m fw d P/E - Emerging
                                                                                                                                          Markets relativ e to World
 115%                                                                                      110%                                           Av erage (+/- 1SD)
 110%
                                                                                           100%
 105%
                                                                                            90%
 100%
  95%                                                                                       80%

  90%
                                                                                            70%
  85%
                                                                                            60%
  80%                              EM rel World: P/B                Av erage (+/- 1SD)
  75%                                                                                       50%

  70%                                                                                       40%
        2004   2005   2006     2007      2008     2009   2010     2011   2012      2013           1990   1993         1997       2001        2005        2009          2013

Source: Thomson Reuters, Credit Suisse research                                           Source: Thomson Reuters, Credit Suisse research

Part of the reason GEM looks so cheap on P/B relatives is that their return on equity (RoE)
relative to the developed world is now at a 10-year low (we discuss this point later when
we look at relative margins).

Figure 13: Return on equity in the developed world has                                    Figure 14: … leading to a sharp fall in emerging market
held up better than in emerging markets over the past                                     relative RoE levels
two years…
  18%                                                                                      4.0%
                                                                                                                12m forward return on equity: GEM minus developed
  17%                                                                                      3.5%

  16%                                                                                      3.0%

  15%                                                                                      2.5%

  14%                                                                                      2.0%

  13%                                                                                      1.5%
          12m forward return on equity
  12%                                                                                      1.0%
                             GEM
  11%                                                                                      0.5%
                             Developed

  10%                                                                                      0.0%
     Apr-04           Apr-06             Apr-08          Apr-10           Apr-12               Apr-04      Apr-06            Apr-08          Apr-10           Apr-12
Source: Thomson Reuters, Credit Suisse research                                           Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                        5
                                                                                                                                                 09 April 2013


On our calculations, emerging markets are discounting a 30% growth premium to the
developed world, compared to a historically realised growth premium of around 50%. (This
is assuming that GEM has a cost of equity nearly 3 percentage points (30% higher) above
that of the developed world. This might be overly harsh, given that relative EPS, GDP and
market volatility have only been 20% higher).

Figure 15: The implied growth premium of EM over World is 30% compared with a 52%
premium delivered over the past 10 years
                                                                                                  Premium of GEM
      Growth rate                                                    GEM             World
                                                                                                     over global
      Historical 10-year GDP                                            7.4           3.8                95%
      Historical 10-year EPS                                            23.1         15.2                52%
      Expected GDP (2012-17e IMF)                                       6.2           4.1                51%
      Expected EPS (IBES long-term)                                     12.3         10.9                13%
      Cost of equity                                                    11.9          9.2                28%
      12m fwd P/E                                                       10.4         12.9
      Implied EPS growth (COE- payout/PE)                               8.0           6.2                30%
Source: Thomson Reuters, Credit Suisse research



Furthermore, on Credit Suisse HOLT® emerging markets are trading on a lower economic
P/E than Continental Europe (which is generally thought to be a cheap region – though we
disagree; see our report, Is Continental Europe cheap? Not enough: increase
underweight, March 27), in spite of generating a slightly higher CFROI® and, in our
opinion, having a superior growth rate.

Figure 16: On HOLT, GEM trades on a lower economic P/E                                Figure 17: GEM’s value-to-cost ratio is lower than its
than Continental Europe, in spite of generating higher                                CFROI levels would suggest in an international
CFROI levels                                                                          comparison
                                                                                        1.8 Value to cost ratio
 26 Economic PE                                                                                                                            Sw itzerland
               Portugal                                                                                                                    United States
                Japan                                                                   1.6
 24
                    Spain                                                                                                             UK

 22                                                                                     1.4
                                                                    Belgium                                                            Core Europe

                                                                                                                                     GEM
 20                                                                                     1.2
                                Europe ex UK                       United States                                               Europe ex UK
                    Italy                      Netherlands
 18                                                                                     1.0           Peripheral
                                    France               UK Sw edenSw itzerland
                                                   GEM                                                  Europe     Japan
 16                                                  Germany                            0.8

                                                                        CFROI                                                                   CFROI (%)
 14                                                                                     0.6
                                                                        (%)
      3         4           5       6          7          8         9           10            1              3             5     7                9

Source: Credit Suisse HOLT                                                            Source: Credit Suisse HOLT




Global Equity Strategy                                                                                                                                      6
                                                                                                                                                           09 April 2013



3) Global growth likely to accelerate in 2013 (in spite
   of a growth pause near-term)
Global lead indicators have accelerated since their trough in July 2012, suggesting that the
three-year slowdown in year-on-year global GDP growth is coming to an end (global GDP
growth peaked at 5.15% in Q1 2010 – and has since slowed in every quarter up to Q4
2012, when it reached 2.5%). This should be a positive for emerging markets, given their
high operational leverage (i.e. the high relative sensitivity of their earnings to the global
cycle).

Figure 18: Global manufacturing PMIs are consistent with                               Figure 19: Emerging markets have high operational
an acceleration in global GDP growth                                                   leverage (i.e. their earnings are highly sensitive to the
                                                                                       global cycle)
 65                                                                                      6.0     5.5
                                                                              6.7%                                    Beta of EPS to Global IP
 60                                                                           5.7%
                                                                                         5.0
                                                                              4.7%
 55                                                                                                         3.9
                                                                              3.7%       4.0
                                                                                                                            3.3        3.2
 50
                                                                              2.7%                                                                2.9
                                                                                         3.0                                                                     2.5
 45                                                                           1.7%

 40                                                                           0.7%       2.0
                                                                              -0.3%
 35          Global manufacturing PMI new orders                                         1.0
                                                                              -1.3%
 30          Global GDP at PPP, 6m lag
                                                                              -2.3%      0.0
 25                                                                           -3.3%             Japan     Emerging         World    Continental   US             UK
   1998    2000    2001   2003   2005    2006   2008    2009   2011    2013
                                                                                                          markets                     Europe

Source: Thomson Reuters, Credit Suisse research                                        Source: Thomson Reuters, Credit Suisse research



In fact, emerging markets (and within these, both commodity importers and exporters)
tend to outperform when ISM new orders is above 50 and rising.

Figure 20: Emerging markets tend to outperform when the new orders component of the ISM survey is rising
             Stage of ISM New orders                                                      Price performance rel World
                                                                                                                 GEM                  GEM              GEM
          ISM New orders > 50 and Falling               US             UK        Cont. Europe     Japan      Exporters &           com m odity     com m odity
                                                                                                              Im porters            exporters       im porters
                  Average (7 periods)                  0.5%           -2.6%           2.9%        -1.7%             4.1%              5.9%              4.7%
          ISM New orders < 50 and Falling
                  Average (2 periods)                  -0.1%          18.8%           0.9%        -4.7%           -39.9%             -33.0%             -44.4%
          ISM New orders < 50 and Rising
                  Average (5 periods)                  2.8%           -6.5%           -8.4%       -9.7%           31.2%              18.5%              42.1%
          ISM New orders > 50 and Rising
                  Average (7 periods)                  4.1%           -4.7%           -1.5%       -4.2%           21.8%              20.8%              22.7%
               Average (All phases)                    2.2%           -2.2%           -1.4%       -4.8%           12.3%               10.1%             14.9%
      All prices in local currency, Data since 1995

Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                 7
                                                                                                             09 April 2013


Admittedly, there is some risk of a slowdown in global growth momentum in the near term,
given fiscal tightening in the US of 2.5% of GDP (which has already led to sharp drops in
consumer confidence and the March US manufacturing ISM), renewed uncertainty in the
Euro-area and the likely early signs of quantitative tightening in China (because of the
signs of rising inflationary pressures; for details, see our report Mining downgrade to
underweight, 8 March 2013). However, we would highlight that:

■   The signs of a slowdown so far are more ambiguous than might at first appear: while
    the global manufacturing PMI new orders series calculated by our economists fell by
    two points in March, the official Markit series actually rose by 0.6 points. The reason
    for this disparity is the fact that the manufacturing ISM new orders series, which our
    economists use to calculate their global figure, fell sharply in March (by more than six
    points), while the new Markit US manufacturing PMI new orders series was flat. That
    is, while the closely monitored ISM new orders index points to a sharp correction in
    economic momentum, the rival Markit series suggests the picture of slowing macro
    momentum is a little more ambiguous.

Figure 21: GEM already seems to have over-discounted the likely near-term pause in
global growth momentum

     230                                                                                                62
     220
                                                                                                        57
     210
                                                                                                        52
     200
                                                                                                        47
     190
                                                                                                        42
     180
                                                                                                        37
     170
                                                  GEM total returns, relative to global, lhs            32
     160
                                                  Global manufacturing PMI new orders
     150                                                                                                27

     140                                                                                                22
       Jan-08            Jan-09       Jan-10        Jan-11                 Jan-12              Jan-13


Source: Thomson Reuters, Credit Suisse research

■   Any slowdown in global economic momentum is likely to be milder now than it was in
    past years, given the greater stability of the financial system (due to the advanced
    healing process in the US private sector and the ECB’s OMT promise), which reduces
    the scope for the negative feedback loops between slower growth and systemic risk
    that have fuelled past corrections. Furthermore, global year-on-year GDP growth has
    already fallen to 2.5% in Q4 2012 (after slowing for a consecutive 11 quarters after
    peaking at 5.1% in Q1 2010). This suggests to us there is now limited further
    downside to global growth.

■   Emerging markets already appear to be over-discounting the near-term pause in
    growth (see Figure 21 above).




Global Equity Strategy                                                                                                  8
                                                                                                                                                                                                   09 April 2013



4) Lower inflationary pressures
The slowdown in relative GEM growth since 2010 was to a large degree due to policy
tightening, which occurred in response to overheating pressures (which in themselves
were caused by excessive credit growth).

Figure 22: Emerging market private sector debt to GDP                                                                      Figure 23: … leading to an overheating in emerging
increased by 15 percentage points in 2009…                                                                                 markets
      85                                                                                                                         12%                            Headline inflation
                                            GEM private sector debt to GDP
                                                                                                                                                       Developed markets
      80                                    Pre-crisis trend (2000 - 2008)
                                                                                                                                 10%                   Emerging markets
      75                                    2000 - 2012 trend                                                                                          DM 2013 CS forecasts
                                            10-year average                                                                      8%                    EM 2013 CS forecasts
      70

      65                                                                                                                         6%

      60                                                                                                                         4%

      55
                                                                                                                                 2%
      50
                                                                                                                                 0%
      45

      40                                                                                                                         -2%
       Jan-00                          Jan-02     Jan-04        Jan-06       Jan-08    Jan-10         Jan-12                           2001       2003         2005        2007      2009   2011   2013


Source: Credit Suisse EMEA strategy team                                                                                   Source: Thomson Reuters, Credit Suisse research



The good news is that the slowdown in emerging market growth over the past three years
has lowered overheating pressures. In fact, aggregate inflation has fallen from 7.3% to
4.9% – and among individual emerging markets, only in China is output above potential
and the CPI inflation rate has increased over the past six months (and even then the
negative output gap is modest).

Figure 24: Only China has rising inflation and a negative output gap (i.e. output above
potential)
                             3

                                                                                                                  Russia
                             2
                                                                                                     Brazil
                                                                                                                        Australia
  CPI inflation, 6m change




                                                                                                                                               China
                             1                                                    Argentina                              Indonesia
                                                                                         Netherlands
                                                      UK US                                         Korea
                                                                Spain                      Japan          South Africa
                             0                                                                 Hong Kong
                                                                                      Austria                Germany                          Singapore
                                                                          Portugal                                                                           Philippines
                             -1                                                      France               Chile                  Sweden
                                                 Italy                Czech Republic                                     India
                                                  Denmark
                             -2                                                                                          Belgium                           Turkey

                                                                                                                                         Poland
                             -3
                                                           Hungary
                                                                                           2012 output gap
                             -4
                                  -6             -5              -4              -3             -2                 -1                0                 1              2

Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                                                        9
                                                                                                                                            09 April 2013


As highlighted in Figure 31 below, aggregate emerging market wage growth has fallen
from a peak to 19% three years ago to 11% today. The fall in inflation has also been aided
by the recent correction in food prices, which are down by 20% from their April 2011 peak
to a two-year low (food prices are particularly important, given that food accounts for
around 30% of the CPI basket).

Figure 25: Food prices have fallen by 20% from their April                Figure 26: Food accounts for around a third of the GEM
2011 peak                                                                 CPI basket
 550                                                                       50                                    Weight of food in CPI basket
                                                                           45                                     GEM Av erage
 500                              CRB Food
                                                                           40
                                                                           35
 450
                                                                           30
                                                                           25
 400
                                                                           20
 350                                                                       15
                                                                           10
 300                                                                        5
                                                                            0
 250




                                                                                    South Africa




                                                                                           Qatar
                                                                                            India




                                                                                           Israel
                                                                                     Hong Kong
                                                                                      Indonesia




                                                                                            UAE
                                                                                            Peru




                                                                                           Korea
                                                                                           China


                                                                                            Chile




                                                                                           Brazil
                                                                                       Thailand




                                                                                          Poland
                                                                                         Russia




                                                                                      Singapore
                                                                                   Saudi Arabia
                                                                                           Egypt




                                                                                          Kuwait

                                                                                       Hungary
                                                                                     Philippines




                                                                                 Czech Republic
                                                                                        Taiwan



                                                                                        Mexico
                                                                                      Malaysia



                                                                                         Turkey
 200
       2003 2004 2005 2006 2007         2008 2009 2010 2011 2012 2013

Source: Thomson Reuters, Credit Suisse research                           Source: Thomson Reuters, Credit Suisse research



Our economists expect aggregate emerging market headline inflation to remain around
current levels throughout the year (ending 2013 at 4.9%, in line with the year-on-year
change of headline CPI in February; see Figure 23 above), while they expect aggregate
emerging market policy rates to be cut by a further 120bps by year-end (taking them from
the current 6.8% to 5.6%). On page 49 below, we discuss which economies face the
greatest overheating pressures.

Figure 27: Our economists expect a further 120bps cuts in                 Figure 28: Emerging markets are still running an
aggregate GEM policy rates                                                aggregate current account surplus
   15%             Policy rates
                                         Developed markets                      5

   13%                                   Emerging markets                       4
                                                                                           Emerging markets: currenct account
                                         EM 2013 CS forecasts                              balance, % of GDP
   11%
                                                                                3
       9%
                                                                                2
       7%
                                                                                1
       5%
                                                                                0
       3%
                                                                                -1
       1%
                                                                                -2
    -1%
            2000   2002       2004     2006    2008         2010   2013         -3
                                                                                  1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source: Company data, Credit Suisse estimates                             Source: Company data, Credit Suisse estimates




Global Equity Strategy                                                                                                                               10
                                                                                                                                                           09 April 2013


We also note that the emerging markets are in aggregate still running a current account
surplus, a sign that they are not subject to structural overheating pressures (a growing
current account deficit has been a tell-tale sign of unsustainable overheating periods in
emerging markets in the past).



5) Relative margins are already at a 10-year low
Relative margin weakness has been an important driver of the weak emerging market
performance over the past three years, in our view. While revenues in the emerging
market non-financial space have continued to enjoy premium rates of growth relative to
global non-financials, GEM non-financial net earnings growth has been negative. As a
consequence, margins have fallen to 10-year low – both in absolute terms and relative to
global markets.


Figure 29: Since 2010, GEM non-financials have                                        Figure 30: GEM margins relative to those for global
continued to enjoy premium top line growth, but relative                              markets are at a 10-year low
earnings growth has been weak
     GEM non-financials, relative to global (with 2013 consensus projections)
                                                                                160        3%                 GEM non-financial net income margins, relativ e to
   290                   Sales
                                                                                                              global (w ith 2013 consensus projection)
                         Net earnings, rhs
                                                                                150        2%

   240
                                                                                140        1%


   190                                                                          130        0%


                                                                                120        -1%
   140
                                                                                110
                                                                                           -2%
                                                                                              2003     2005        2007           2009          2011           2013
    90                                                                          100
      2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Thomson Reuters, Credit Suisse research                                       Source: Thomson Reuters, Credit Suisse research



The main driver of the margin compression, we believe, is rising unit labour costs (as
proxied by wages) in emerging markets versus developed markets, with wage growth
rising to almost 20% in emerging markets in 2010/11 during the most intense period of
overheating pressures in these markets.




Global Equity Strategy                                                                                                                                                11
                                                                                                                                                                                                                                                                                                        09 April 2013



Figure 31: Emerging market wage growth has fallen from                                                                                                            Figure 32: The growth rate in the GEM working age
19% three years ago to 11% currently, which helps abate                                                                                                           population has halved over the past decade
margin pressures

                                                                                                                                                                    2.0%            Working age population growth, yoy, %                                                                      GEM
       30%
                                     Hourly wages, yoy, %                                                                                                                                                                                                                                      Developed
                                                                                                                                                                    1.8%
       25%
                                                                                                                                                                    1.6%
       20%
                                                                                                                                                                    1.4%
       15%
                                                                                                                                                                    1.2%
       10%
                                                                                                                                                                    1.0%
        5%
                                                                                                                                                                    0.8%
        0%
                                                                                                                                                                    0.6%
       -5%
                                                                                       GEM                                                                          0.4%
      -10%                                                                             Developed                                                                    0.2%
      -15%                                                                                                                                                          0.0%
             1997                                   2001                                 2005                               2009                          2013             1997                                        2001                          2005                               2009                              2013

Source: Thomson Reuters, Credit Suisse research                                                                                                                   Source: Thomson Reuters, Credit Suisse research



We believe that we have seen most of the margin weakness in emerging markets
(relative to developed markets) because:
a)      While some of the increase in wage growth is clearly structural (due to the fall in
        working age population growth), a lot of it was cyclical, due to the overheating
        pressures emerging markets experienced over the past three years. As discussed
        above, we believe that the bulk of the overheating pressures in emerging markets has
        abated. Wage growth rates have eased to around 11%, down from 19% in 2011.
b)      While emerging market non-financial margins were above global non-financial
        margins in 2009 (6.4%, compared to 5.9%), they are now clearly below global margins
        (5.3%, compared with 6.9%). While on a two-year view we believe US margins will be
        flat, we think that once rates rise or labour regains pricing power, US margins will fall
        (i.e. when unemployment falls below 6% to 6 ½%).

Figure 33: US margins are above their 10-year average,                                                                                                            Figure 34: Margins in most emerging markets are no
while GEM have fallen to below average levels                                                                                                                     longer clearly elevated in absolute levels
     2.0                                                                                                                                                           14%

     1.5                                    2013E consensus non-financial margins, standard deviation                                                                                                                               2013E consensus non-financial margins
                                            from 10-year average                                                                                                   12%

     1.0
                                                                                                                                                                   10%
     0.5
                                                                                                                                                                    8%
     0.0
                                                                                                                                                                    6%
     -0.5
                                                                                                                                                                    4%
     -1.0

     -1.5                                                                                                                                                           2%

     -2.0                                                                                                                                                           0%
                                                                                                                                                                                        Russia
                                            Korea




                                                                                                                         Russia
                                                    Indonesia


                                                                           Turkey




                                                                                                        Mexico




                                                                                                                                        Brazil
                                                                                    Taiwan




                                                                                                                 India


                                                                                                                                  GEM




                                                                                                                                                         Poland




                                                                                                                                                                                                                                        Korea
                                                                                                                                                                                                                                                Brazil




                                                                                                                                                                                                                                                                             Mexico
                    Global




                                                                Malaysia




                                                                                                                                                                                                                                                                                            Turkey
                                                                                                                                                                                                                                                                                                     Taiwan
                                                                                                                                                                                                                                                                                                              Poland
                                                                                                                                                                            Indonesia




                                                                                                                                                                                                                                                         Global
             US




                                                                                                                                                                                                                                                                                      GEM
                                                                                             Thailand




                                                                                                                                                 China




                                                                                                                                                                                                 Malaysia




                                                                                                                                                                                                                                India
                             South Africa




                                                                                                                                                                                                                           US




                                                                                                                                                                                                                                                                  Thailand




                                                                                                                                                                                                                                                                                                                       China
                                                                                                                                                                                                            South Africa




Source: Thomson Reuters, Credit Suisse research                                                                                                                   Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                                                                                                                                                                         12
                                                                                                                                                                                09 April 2013


c)       Bottom-up consensus numbers project the first increase in GEM non-financial
         earnings relative to their global peers since 2010 (see Figure 29 above). As a
         consequence, consensus also projects a halt to the deterioration in relative margins
         (see Figure 30 above).
Despite margins being at 10-year relative lows, we would highlight that there are some
sectors in the emerging markets where margins are still abnormally high relative to their
US peers (for example Brazilian industrials and consumer goods).

Figure 35: GEM EBITDA margins relative to their US counterparts
                             Brazil        Russia         India         China   South Africa          Turkey          Poland         Mexico            Indonesia     Taiwan        Malaysia
Market                       133%           166%          108%          102%        117%               99%              89%           122%               160%         56%           140%
Oil & Gas                    96%            170%           56%          56%         148%               23%              26%            N/A               133%         17%            42%
Industrials                  203%           N/A           109%          59%         59%               153%              67%           110%               152%         43%           106%
Consumer goods               151%           271%          141%          106%        127%              143%             177%           144%               170%         119%          146%
Health Care                  37%            N/A           129%          36%         26%                88%              N/A            N/A               96%              N/A       107%
Consumer Services            70%            N/A           119%          137%        86%               110%             115%           96%                194%         83%           206%
Telecoms                     130%           114%          116%          122%        169%              159%             135%           136%               204%         133%          164%
Utilities                    75%            56%           117%          62%         N/A                32%              89%            N/A               180%             N/A        96%
Financials                   118%           133%          108%          110%        94%                79%              72%           138%               130%         60%           151%
Technology                    N/A           N/A           117%           N/A        N/A                76%              75%            N/A               N/A          41%            N/A
Basic Materials              134%           143%          122%          134%        177%              100%             187%           172%               197%         57%           205%

Source: Thomson Reuters, Credit Suisse research




6) Capital outflows have stopped
In the 12 months up to the end of Q2 2012, emerging markets saw $150bn of capital
outflows (or 0.6% of GDP), compared to capital inflows of around 5% of GDP in early 2011
(this is calculated as the change in FX reserves, adjusted for the current account balance).
This was mainly driven by outflows from China ahead of the leadership transition in late
2012. Since then, however, the flow picture has improved – and capital inflows turned
positive again in Q4 2012 (the latest point for which we have data).

Figure 36: Having turned negative in Q2 2012, GEM net                                          Figure 37: … as capital outflows from China abated
capital flows turned positive again in Q4…
1,200                                                                                           600
              GEM: 4-quarter rolling money inflows (change in FX                                               China: 4-quarter rolling money inflows (change in FX
1,000         reserves, adjusted for current account balance), USD bn                           500            reserves, adjusted for current account balance), USD bn

  800
                                                                                                400
  600
                                                                                                300
  400
                                                                                                200
  200
                                                                                                100
     0
                                                                                                  0
 -200

 -400                                                                                          -100

 -600                                                                                          -200
    Q2 2004             Q2 2006          Q2 2008          Q2 2010         Q2 2012                 Q2 2004               Q2 2006              Q2 2008            Q2 2010         Q2 2012
Source: Thomson Reuters, Credit Suisse research                                                Source: Thomson Reuters, Credit Suisse research



We believe capital inflows into the emerging markets are set to accelerate, as developed
market central banks will resume balance sheet expansion later this year. We would
expect balance sheets to increase again, by around 10% over the next six months (for



Global Equity Strategy                                                                                                                                                                     13
                                                                                                                                                                            09 April 2013


details on this view, see our report Still more upside for equities, March 15), having shrunk
in aggregate by 6% over the past three months. The Bank of Japan’s decision in early
April to significantly increase its monthly JGB purchases is consistent with this view. A
renewed expansion of DM central bank balance sheets should push down developed
world real bond yields, incentivising investors to focus on GEM currencies. Not only do
these currencies offer a higher real yield, as shown below, but also look undervalued on
our economists’ currency valuation measures (that use real effective exchange rates).

Figure 38: We expect developed market central banks to                              Figure 39: Many GEM currencies offer positive real yields
resume their expansion later this year                                              and are undervalued on our economists’ framework
                                                                                      5.0                                               Real 10y yield (%)
     9%                                                                                                                                                                    Brazil
                                                                                      4.0                                                                             Argentina

     4%
                                                                                      3.0
                                                                                                                          Romania
                                                                                                                                   Chile
     -1%                                                                              2.0         S. Africa            IndiaIsrael                                     Colombia
                                                                                                          Poland     Hungary Russia
                                                                                      1.0                                 Mexico
     -6%                     3 month % change                                                                                       Turkey
                                                                                                                 Malaysia
                          DM central bank balance sheet (rhs)                         0.0
                                                                                                                                 China            Czech Rep.
                                                                                      % undervalued                                                  Thailand                % overvalued
    -11%                  Assuming a 10% increase in CB balance sheets                                         Korea
                                                                                     -1.0                     Taiwan
                                                                                                                                                         Singapore
    -16%                                                                             -2.0          Hong Kong                                   Indonesia
           2009       2010              2011             2012            2013
                                                                                     -3.0
                                                                                            -20               -10                  0                10                20                   30

Source: Thomson Reuters, Credit Suisse research                                     Source: Thomson Reuters, Credit Suisse research

GEM policy makers are likely to try to counteract the upward pressure on their currencies
from capital inflows, resulting in an increase in money supply (as policy makers print
currency to sell in the FX market – and typically have trouble ‘sterilising’ their intervention,
as domestic interest rates are above US bond yields and thus central banks are on a
funding loss. These increases in money supply tend to be associated with strong equity
market performance. (In fact, the historical relationship suggests that GEM tends to
outperform developed markets when money supply is growing by more than 10% year-on-
year, compared to a current GEM M1 growth rate of 9%).

Figure 40: GEM money supply tends to fluctuate in line                              Figure 41: GEM equities tend to outperform when money
with capital inflows                                                                supply growth accelerates
   1,200          GEM: 4-quarter rolling money inflows, USD bn              1,400                               GEM, M1, year-on-year, %, lhs
                  GEM: 12-month change in M1, USD bn, rhs                                                       GEM total returns relative to DM, year-on-year, %                   40%
                                                                                        29%
   1,000
                                                                            1,200
    800                                                                                                                                                                             30%
                                                                                        24%
                                                                            1,000
    600                                                                                                                                                                             20%

    400                                                                     800         19%
                                                                                                                                                                                    10%
    200                                                                     600
                                                                                        14%
      0                                                                                                                                                                             0%
                                                                            400
    -200                                                                                    9%
                                                                                                                                                                                    -10%
                                                                            200
    -400
                                                                                            4%                                                                                    -20%
    -600                                                                    0
                                                                                             Jan-03           Jan-05           Jan-07         Jan-09         Jan-11         Jan-13
       Q2 2004     Q2 2006         Q2 2008          Q2 2010      Q2 2012
Source: Thomson Reuters, Credit Suisse research                                     Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                                     14
                                                                                                                                                                                   09 April 2013



7) Catch-up potential relative to GEM bonds
There has been significant decoupling between the performance of emerging market
equities (the relative price index of which has recently fallen close to a four-year low in US
dollar terms) and emerging market bonds (with GEM bond spreads over US Treasuries
having fallen to a three-year low in mid-February, though they have risen slightly since).
Figure 42: EMBI spreads suggest that emerging market                                         Figure 43: Emerging market government bond yields hit a
equities should have outperformed over the past year                                         10-year low of 5.6% in early 2013
     22.0                                Emerging markets rel to world                 0.8                                         EM: 10-y ear gov t bond y ield
                                                                                                  8.0                                                                                    6.0
                                         EMBI spreads (rhs, inverted)                                                              EM rel DM: 10-y ear gov t bond y ield, rhs
     21.5                                                                              1.3                                                                                               5.5
                                                                                                  7.5                                                                                    5.0
     21.0                                                                              1.8
                                                                                                                                                                                         4.5
                                                                                       2.3        7.0
     20.5                                                                                                                                                                                4.0

                                                                                       2.8                                                                                               3.5
     20.0                                                                                         6.5                                               z
                                                                                                                                                                                         3.0
                                                                                       3.3
     19.5
                                                                                                  6.0                                                                                    2.5
                                                                                       3.8
     19.0                                                                                                                                                                                2.0
                                                                                       4.3        5.5                                                                                    1.5
     18.5
                                                                                                        2006         2007       2008      2009      2010      2011      2012      2013
        Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

Source: Thomson Reuters, Credit Suisse research                                              Source: Thomson Reuters, Credit Suisse research

But at the very minimum, emerging market corporates should benefit from the lower cost
of capital that results from lower government bond yields. In fact, while the aggregate
developed market government bond yield troughed at around 1.2% in June 2012 and has
since risen by around 50bps, the aggregate emerging market bond yield hit a 10-year low
of 5.6% in early January 2013.
We acknowledge there may be a difference in the country and sector characteristics of the
two asset classes, but the decoupling still looks anomalous to us.

8) Positioning is cautious
According to data provided by EPFR Global, fund managers’ underweight on emerging
markets is close to the most extreme it has been over the past 10 years. Similarly, sell-
side analysts’ net recommendations on emerging markets relative to global equities are
close to the lowest since 2002. We show in Appendix 2 that inflows into GEM funds versus
emerging market funds is only middling.

Figure 44: Fund managers are underweight emerging                                            Figure 45: Relative net buy recommendations on
markets                                                                                      emerging markets are close to a 10-year low
        6.0%                 Fund managers weighting on GEM relative to benchmark                       6%
                             Average
                                                                                                        4%
        4.0%
                                                                                                        2%
        2.0%                                                                                            0%

                                                                                                        -2%
        0.0%
                                                                                                        -4%
       -2.0%
                                                                                                        -6%

                                                                                                        -8%
       -4.0%
                                                                                                    -10%
       -6.0%                                                                                                  1995          1998      2001         2004      2007       2010        2013
           Sep-03   Jan-05   May-06   Sep-07    Jan-09    May-10    Sep-11    Jan-13                                        GEM rel World: net recommendations; (+=BUY; -=SELL)


Source: EPFR, Credit Suisse research                                                         Source: EPFR, Credit Suisse research




Global Equity Strategy                                                                                                                                                                         15
                                                                                                                                              09 April 2013




What are the problems?
We see four reasons for the GEM underperformance since the beginning of the year: three
of these look set to persist for longer (weakening commodity prices, a weaker yen and
dollar trade-weighted strength), while two should reverse (the deterioration in relative
margins, discussed in the previous section, and the rise in the US real bond yields). As a
consequence, we slightly lower our overweight on emerging markets.

     1) We are bearish on commodity prices
We are bearish on commodity prices, given that over the last four years there has been a
significant supply-side response to higher commodity prices, with capital spending
increasing both in mining and in energy (as a consequence, both sectors now rank low on
our capital discipline monitor).

Figure 46: Australian mining capex-to-GDP is now 7% of                   Figure 47: Mining and energy scores worst on our capital
GDP                                                                      discipline monitor
    7.0%                                                                 2.0                            Sectors ranked on a combination of:
                         Australia:                                                                     1) capex / sales - stdev from avg
                                                                         1.5
    6.0%                                                                                                2) capex / depn - stdev from avg
                                 Mining capex , % of GDP                                                3) capex - deviation from trend
                                                                         1.0
    5.0%
                                                                         0.5
    4.0%
                                                                         0.0
    3.0%
                                                                         -0.5
    2.0%                                                                           average z-score, based on 20-yrs of data
                                                                         -1.0

    1.0%
                                                                         -1.5
                                                                                Mining
                                                                                Inds Eng
                                                                                Ind. Met & Mines
                                                                                Eltro/Elec Eq
                                                                                Fd Producers
                                                                                Oil & Gas Prod
                                                                                Leisure Gds
                                                                                Electricity
                                                                                Oil/Eq Svs/Dst
                                                                                Tobacco
                                                                                Support Svs
                                                                                Chemicals
                                                                                H/H Gds,Home Con
                                                                                Alt. Energy
                                                                                Aero/Defence
                                                                                Gs/Wt/Mul Util
                                                                                S/W & Comp Svs
                                                                                Beverages
                                                                                Personal Goods
                                                                                Auto & Parts
                                                                                Media
                                                                                Forestry & Pap
                                                                                Fxd Line T/Cm
                                                                                Con & Mat
                                                                                H/C Eq & Svs
                                                                                Inds Transpt
                                                                                Tch H/W & Eq
                                                                                Travel & Leis
                                                                                Mobile T/Cm
                                                                                General Inds
                                                                                Gen Retailers
                                                                                Pharm & Bio
                                                                                Fd & Drug Rtl
    0.0%
        1988     1992          1996       2000      2004   2008   2012



Source: Thomson Reuters, Credit Suisse research                          Source: Thomson Reuters, Credit Suisse research

As a consequence of these supply-side responses (as well as demand-side responses to
higher commodity prices over the past few years), commodity prices have clearly lagged in
this cycle.




Global Equity Strategy                                                                                                                                 16
                                                                                                                                                                09 April 2013



Figure 48: Commodity prices have not kept pace with                                  Figure 49: The spot oil price is moving in line with the
rising equity markets                                                                economic cycle
   120
                      Jefferies CRB all commodity index        S&P 500
                                                                                          60                                                                            70
   110                April 2008 = 100                                                    40                                                                            64

   100                                                                                    20                                                                            58

                                                                                                                                                                        52
       90                                                                                  0
                                                                                                                                                                        46
                                                                                          -20
       80                                                                                                                                                               40
                                                                                          -40
                                                                                                                                       Brent Crude, 3m%ch               34
       70
                                                                                          -60                                          ISM new orders, rhs
                                                                                                                                                                        28
       60
                                                                                          -80                                                                           22

       50                                                                                       2008          2009        2010        2011        2012          2013
        Apr-08     Apr-09        Apr-10          Apr-11      Apr-12         Apr-13
Source: Thomson Reuters, Credit Suisse research                                      Source: Thomson Reuters, Credit Suisse research

While the spot oil price appears to be heavily influenced by the economic cycle (as proxied
by the ISM new orders), the five-year forward oil price has, over the past 18 months,
remained significantly below the spot oil price. This decoupling between the spot and the
five-year forward oil price reflects supply-side and demand-side responses to high prices,
as discussed above.

Figure 50: The five-year forward oil price is considerably                           Figure 51: OPEC spare capacity is close to the top end of
below the spot oil price                                                             its historical range
 150                                                                                  8                                 OPEC 12 spare capacity, mmbbl/day
                                 Brent spot
 140                                                                                  7
                                 Brent 5-y ear future
 130
                                                                                      6
 120
                                                                                      5
 110
 100                                                                                  4

  90                                                                                  3
  80
                                                                                      2
  70
                                                                                      1
  60

  50                                                                                  0
                                                                                       1999            2001      2003       2005      2007      2009         2011      2013
   Jan-08        Jan-09       Jan-10          Jan-11      Jan-12         Jan-13

Source: Thomson Reuters, Credit Suisse research                                      Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
                                                                                     research

We expect commodity prices to remain depressed, as our commodity analysts expect
supply growth to outstrip demand growth for iron ore, copper and oil in the next few years
– and OPEC spare capacity remains high. (Our commodity analysts are now forecasting
an oil price of $110 a barrel on average in 2014, see Commodities Forecasts: The Setting
of the Sun…, 3 April 2013).




Global Equity Strategy                                                                                                                                                        17
                                                                                                                                                                                                                                09 April 2013


The problem with a fall in commodity prices for emerging markets is twofold:
     1)      Commodities account for a large share of GEM economic output
In many emerging markets, growth, exports and government revenues are heavily
commodity-dependent (with Brazil, Indonesia, Malaysia and Russia all significant
commodity exporters).

Figure 52: In many GEMs, growth, exports and government revenues are heavily
commodity-dependent
                                    Commodity                                                        % of total                                                            % of total
                                  exports % GDP                                             merchandise exports                                               government revenue
    Mexico                                     7%                                                             24%                                                                       35%
    Brazil                                   14%                                                              63%                                                                       10%
    Malaysia                                 26%                                                              36%                                                                       40%
    Indonesia                                14%                                                              62%                                                                       33%
    Russia                                   25%                                                              56%                                                                       50%
Source: UNCTAD, UN WEO, Credit Suisse Economics research

We show the net commodity exposure for emerging markets as a proportion of GDP (if a
country is above the line, then the lower the commodity price, the worse its terms of trade
and its outlook for GDP—so if, for example, net commodity exports are 10% of GDP, then
a 20% fall in commodity prices leads to 2% fall in GDP).

Figure 53: Many emerging markets are significant commodity exporters
  25%
                                                                               Net commodity exports,% of GDP
  20%

  15%

  10%

   5%

   0%

  -5%

 -10%

 -15%
                  Russia




                                             Colombia

                                                        Indonesia



                                                                                   Brazil

                                                                                            Mexico




                                                                                                                                                                                                                        Korea
                                                                                                     Poland




                                                                                                                                                              Turkey

                                                                                                                                                                       Czech Republic
                           Peru




                                                                                                                                                      India
          Chile




                                  Malaysia




                                                                                                                                                                                        Philippines



                                                                                                                                                                                                              Morocco
                                                                                                              Thailand



                                                                                                                                            Hungary




                                                                                                                                                                                                      China
                                                                    South Africa




                                                                                                                         Egypt, Arab Rep.




Source: Company data, Credit Suisse estimates

Net commodity exporters account for around 40% of GEM market cap, while in developed
markets the equivalent figure is just 9%.




Global Equity Strategy                                                                                                                                                                                                                   18
                                                                                                                                           09 April 2013


       2)   Nearly 30% of emerging market earnings are resource-related
Resource-related sectors account for 29% of GEM earnings, compared to around 17% of
developed market earnings.

Figure 54: Resource-related sectors account for 29% of                 Figure 55: GEM commodity importers have
GEM earnings, compared to 17% for the developed                        underperformed in line with commodity exporters
markets
 25%                               % of net profit                           360                   Commodity importers rel
                                                                                                   Commodity ex porters rel
               21.5%                                                                               Commodity importers ex resources rel
                                    Oil and gas      Basic materials         340

 20%                                                                         320

                                                                             300
 15%                                              12.8%                      280

                                                                             260
 10%
                            7.6%                                             240

                                                               4.5%          220
  5%
                                                                             200
                                                                               Jan-09     Jan-10          Jan-11          Jan-12          Jan-13
  0%
                       EM                                 DM
Source: Thomson Reuters, Credit Suisse research                        Source: Thomson Reuters, Credit Suisse research

However, the commodity story cannot by itself fully explain the weakness in emerging
market performance, given that it is not just the commodity exporters that have
underperformed this year. Rather, performance by the commodity importers has been
almost as weak (even after excluding the commodity stocks quoted in the commodity
importing countries).




Global Equity Strategy                                                                                                                              19
                                                                                                                                           09 April 2013



      2) US real bond yields have been rising… but
         should now fall again
Over the past three months, US real bond yields have risen slightly.

Figure 56: After falling for more than three years, US real                              Figure 57: GEM tends to underperform as US real yields
rates have recently started rising                                                       rise
    3.8

    3.3
                                        US 10-y r TIPS
    2.8

    2.3

    1.8
    1.3

    0.8

    0.3
    -0.2
    -0.7
    -1.2
       Apr-08        Apr-09   Apr-10        Apr-11       Apr-12        Apr-13


Source: Thomson Reuters, Credit Suisse research                                          Source: Thomson Reuters, Credit Suisse research

A rise in US real bond yields is negative for emerging markets for two reasons:

■    Quite a few NJA markets operate with a de facto dollar link, which means that higher
     US real rates push up the local discount rate (this is especially the case for Hong
     Kong, which has underperformed global markets by 6% since the December trough in
     US TIPS yields).

Figure 58: Hong Kong underperformed global markets by 6% after US TIPS yields
troughed in December
                                                                                                            -0.90
           106
                                                                                                            -0.85
           104
                                                                                                            -0.80

           102                                                                                              -0.75

           100                                                                                              -0.70

                                                                                                            -0.65
           98
                                                                                                            -0.60
           96
                                                                                                            -0.55
           94
                                                                                                            -0.50
                                                                  Hong Kong, relative to global
           92                                                                                               -0.45
                                                                  US 10-year TIPS yield, %, inv., rhs
           90                                                                                               -0.40
            Jun-12                     Sep-12                     Dec-12                           Mar-13

Source: Company data, Credit Suisse estimates

■    A higher real bond yield pushes up the dollar, which has historically been associated
     with GEM underperformance (see the next section).
We believe the rise in US bond yields will be reversed, as the US undergoes a modest
growth pause (for reasons described above) – and QE continues at c$85bn per month.




Global Equity Strategy                                                                                                                              20
                                                                                                       09 April 2013



         3) Dollar strength
The dollar trade-weighted index has risen by 5% since August 2012 – and, in line with the
historical correlation between the dollar and emerging markets, the latter have
underperformed.

Figure 59: Emerging markets have underperformed in line with the strengthening of the
dollar TWI
    60                                                                                          70
                                         GEM price rel. (local currency, lhs)
    55
                                         USD TWI (rhs, inverted)
                                                                                                80
    50

    45
                                                                                                90
    40

    35                                                                                          100

    30
                                                                                                110
    25

    20
                                                                                                120
    15

    10                                                                                          130
      1995           1997         2000                2003                 2006   2009   2012


Source: Thomson Reuters, Credit Suisse research

As our emerging market strategist Alexander Redman points out, the traditional
transmission mechanism from a stronger dollar to emerging market underperformance is
threefold:

■        Commodity prices: a stronger dollar is typically associated with weak commodity
         prices;

■        Flow of funds: typically a weaker dollar is associated with stronger inflows into
         emerging markets – and vice versa.

■        The impact on the sustainability of foreign-currency-denominated debt: although
         emerging markets have recently been able to issue debt in their own currencies, both
         public sector and private sector agents still have legacy debt denominated in foreign
         currencies (typically dollars), in that debt sustainability is negatively affected when the
         dollar strengthens.


We are positive on the outlook for the dollar…
There are good reasons to believe that the dollar trade-weighted could be in the process
of entering a structural bull market, as it becomes increasingly obvious that the US private
sector has liberated itself from most of the post-crisis overhang – and underlying growth
rates are set to strengthen on the back of a rebound in housing, the US energy boom, the
strong state of corporate balance sheets, the evidence that the household sector has
finished repairing its balance sheets and the return of manufacturing jobs to the US.




Global Equity Strategy                                                                                          21
                                                                                                                                         09 April 2013


… but dollar strength might not be as much of a problem as it first appears
We note three reasons for thinking that a rise in the US dollar trade-weighted index could
be less of a problem than at first appears.

■    While there is in general a negative correlation between the dollar TWI and the relative
     performance of emerging market equities, there have been periods in the past when
     emerging markets managed to outperform against the backdrop of a rise in the dollar
     TWI (in fact, this happened in 5 out of 15 periods of dollar strengthening over the past
     20 years, with one further period seeing flat GEM performance).

■    Our central expectation is the dollar TWI will strengthen driven by the dollar’s
     strengthening against other developed market currencies the yen in particular, while
     emerging market currencies could easily end up rising against the dollar (as investors
     are incentivised by developed market central bank balance sheet expansion to seek
     out currencies that offer a real yield pick-up). This would make some of the
     transmission channels (especially, the one concerned with FX debt sustainability) less
     problematic. In fact, over the past decade, emerging markets have typically
     outperformed when GEM currencies were rising against the dollar.

■    Moreover, we believe that GEM currency strength against the dollar is likely to be
     associated with accelerating capital inflows. In the past, these inflows have in general
     only been partially sterilised and thus excess liquidity has accelerated, helping
     multiples (this point is partly covered in the section discussing capital inflows on page
     13).

Figure 60: There have been periods in the past when GEM                      Figure 61: Over the past decade, emerging markets have
have outperformed against the backdrop of a rising US                        outperformed global equities as GEM currencies have
dollar TWI                                                                   strengthened against the dollar
      Start      Peak     Duration (in months) $ TWI % rise   GEM rel perf
                                                                                                                                                       65
    Apr-95      Apr-97           24.3             23%             -8%        190
    Jun-97      Aug-98           14.5             14%            -46%                                                                                  63
                                                                             170
    Jan-99      Jul-99            6.1              7%            26%                                                                                   61
    Oct-99      May -00           7.0              9%             -3%        150
                                                                                                                                                       59
    Jun-00      Nov -00           5.2              9%            -11%
    Jan-01      Apr-01            3.0              8%             6%         130
                                                                                                                                                       57
    Sep-01      Jan-02            4.3              8%            16%         110
                                                                                                                                                       55
    Jan-04      May -04           4.1              8%             -9%
    Mar-05      Nov -05           8.0             11%             6%          90                                                                       53
                                                                                                         GEM price rel, lc
     Jul-08     Sep-08            1.9              9%            -11%
                                                                              70                         GEM aggregate currencies vs USD, rhs          51
    Sep-08      Oct-08            1.1             11%            -11%
    Dec-08      Mar-09            2.7             12%            11%          50                                                                       49
                                                                                2001          2004          2007              2010              2013
    Dec-09      Jun-10            6.2             12%            0.3%
    Aug-11      Oct-11            1.1              6%             -3%
    Sep-12      Mar-13            5.9              9%             -4%
    Av erage                      6.4             10%             -3%
    Median                        5.2              9%             -3%
 % times rise                                                    40%
Source: Company data, Credit Suisse estimates                                Source: Company data, Credit Suisse estimates




Global Equity Strategy                                                                                                                                 22
                                                                                                                                                              09 April 2013



     4) The impact of a weaker yen
In Q4 2012, GEM performance followed the classic playbook of a pro-cyclical bout of
outperformance (with the relative price index rising by 6%). However, this outperformance
was suddenly reversed at the end of December. This raises the question: what happened
at the end of December to change the trajectory of emerging market relative performance
so profoundly?

Figure 62: GEM outperformed by 6% between early                                    Figure 63: In December, Japanese EPS started to be
September and late December                                                        revised up sharply

    137                                                                                        12-month forward EPS, local-currency terms
                                                                                    120                   Japan                   Euro-area

                                                                                    115                   US                      GEM
    132                                                                                                   UK
                                                                                    110

                                                                                    105
    127
                                                                                    100

                                                                                     95

    122                                                                              90
                         GEM relative to world, local currency terms
                                                                                     85

    117                                                                              80
      Apr-11    Aug-11      Dec-11      Apr-12      Aug-12      Dec-12    Apr-13      Apr-11     Jul-11    Oct-11 Jan-12 Apr-12            Jul-12   Oct-12 Jan-13 Apr-13


Source: Thomson Reuters, Credit Suisse research                                    Source: Thomson Reuters, Credit Suisse research

The answer is, in our view, the change in the outlook for Japanese corporate earnings on
the back of the weaker currency: the yen trade-weighted index peaked in mid-November
and from December, as the fall in the currency looked increasingly like a sustainable
development, analysts started upgrading their Japanese earnings numbers. That relative
shift in the earnings outlook has been associated with a strong outperformance of Japan
relative to the emerging markets.

Figure 64: The reversal in the earnings outlook for Japan                          Figure 65: Yet, so far this has only reversed a small part
relative to GEM has led to a strong spurt of                                       of the Japanese underperformance over the past decade
outperformance
   125
                                                                                     140                                                                               140
               Japan relative to GEM                                                                              Japan relative to GEM
   120
                                                                                                                                                                       120
                                                                                     120                                    EPS, lhs
   115                      EPS
                            Price performance                                                                               Price performance                          100
   110                                                                               100

   105                                                                                                                                                                 80
                                                                                      80
   100
                                                                                                                                                                       60
    95                                                                                60
                                                                                                                                                                       40
    90
                                                                                      40
                                                                                                                                                                       20
    85

    80                                                                                20                                                                               0
     Feb-11    Jun-11      Oct-11      Feb-12     Jun-12      Oct-12     Feb-13        Feb-00      Feb-02         Feb-04     Feb-06       Feb-08    Feb-10   Feb-12
Source: Thomson Reuters, Credit Suisse research                                    Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                 23
                                                                                                                                                                                                                                  09 April 2013


However, we note that the transmission mechanism has only been partly via earnings
downgrades in markets directly competing with Japan (Korea’s EPS forecasts, for instance,
have risen by 2% since the trough in Japanese EPS in early December). There appears to
have been a broader sentiment shift: we have come across many global and pan Asian
investors in our recent marketing trips who wish to have exposure to Japan relative to
Non-Japan Asia.

Figure 66: Japanese EPS upgrades have not led to                                                                                                                   Figure 67: … while leading to clear-cut underperformance
Korean EPS downgrades so far…                                                                                                                                      in the Korean market
  20%                                                                                                                                                                 99                                                                    82

                             Change in 12m fwd EPS since early December
  15%                                                                                                                                                                 97                                                                    87


  10%                                                                                                                                                                 95                                                                    92

   5%                                                                                                                                                                 93
                                                                                                                                                                                                                                            97

   0%                                                                                                                                                                 91
                                                                                                                                                                                                                                            102

                                                                                                                                                                      89
  -5%                                                                                                                                                                                                                                       107
                                                                                                                                                                                        Korea, relative to global, lhs
                                                                                                                                                                      87                Japan, relative to global, inv
 -10%                                                                                                                                                                                                                                       112
                                                                                                                                                          Brazil
        Japan




                                          Indonesia




                                                                            Russia
                                                                                     Korea



                                                                                                              Mexico
                Turkey
                         Taiwan



                                                      India


                                                                   Global



                                                                                             GEM




                                                                                                                                                 Poland
                                                                                                   Malaysia
                                  China



                                                              US




                                                                                                                                      Thailand
                                                                                                                       South Africa




                                                                                                                                                                      85
                                                                                                                                                                        Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13

Source: Thomson Reuters, Credit Suisse research                                                                                                                    Source: Thomson Reuters, Credit Suisse research



While rising real rates (which started in early November), a strong dollar (which started in
August) and relative margin deterioration (which has been ongoing for more than two
years now) have all had a negative impact on emerging markets, this has not prevented
GEM from outperforming strongly between September and December. What really seems
to have led to a negative turn for GEM is the rebound of Japan owing to the significant fall
in the currency.
We think that the yen is set to weaken further. BoJ governor Kuroda has said he is
confident the inflation target of 2% could be reached within two years (compared to a BoJ
inflation forecast of 0.9% for 2015, excluding tax effects). The announcements during
Kuroda’s first press conference testify to the strength of his commitment (the BoJ
announced JGB purchases equivalent to 17% of GDP this year, up from 9% of GDP, and
compared to Fed purchases equivalent to 8% of GDP; the elimination of maturity
restrictions for the purchased bonds and an increase in ETF purchases). Credit Suisse FX
strategists forecast $/¥105 over the next three months and $/¥120 over the next 12
months.
Once yen depreciation has stopped, reflation in Japan (via fiscal and monetary policy –
combined with some de-regulation and the TPP) should be a positive for emerging
markets, as it should mean that global growth is stronger than otherwise would have been
the case. However, in the short term a further fall in the yen should mean more relative
earnings pressure for the emerging markets, which should constitute a significant obstacle
for strong relative GEM performance over the coming months.




Global Equity Strategy                                                                                                                                                                                                                          24
                                                                                                                                                              09 April 2013




Maintain preference for the indirect
EM consumer stocks
For the past 6 years, our most important macro theme has been buying GEM-consumer
related plays. We continue to like stocks related to emerging market consumption for the
following reasons:
(1) The BRIC consumer share of GDP remains abnormally low – and the Chinese
    consumer share of GDP is still just half that of the US and Japan.

Figure 68: Emerging markets have a low consumption                                Figure 69: Chinese retail sales are growing considerably
share of GDP                                                                      faster than those in the US
 65%                                                                                24%                      Retail sales y oy , 3mma
                                                                                                                 US
                                                                                    19%
 60%                                                                                                             China
                                         G7 consumption share of GDP
                                         BRIC consumption share of GDP              14%
 55%
                                                                                        9%

 50%                                                                                    4%

                                                                                       -1%
 45%
                                                                                       -6%

 40%
                                                                                   -11%
        1997       2000          2003        2006         2009           2012
                                                                                             2002      2003         2005        2007         2009      2011         2013

Source: Thomson Reuters, Credit Suisse research                                   Source: Thomson Reuters, Credit Suisse research



(2) Even a modest increase in the consumer share of GDP would result in c10% real
    discretionary consumption growth in the BRICs

Figure 70: China grows by 7% per year in real terms between now and 2020, then consumption is likely to grow by 11%,
and discretionary spending by 13%

                         GDP                          Consumption                                            Discretionary consumption (% of total)
    Country
                    Real trend          Consumption share of GDP           Implied real                                                 Implied real   Implied nominal
                                                                                                    Latest            2020E
                     growth               2012           Target              growth                                                       growth            growth
       Brazil            3.5%              61%            63%                    3.8%                64%                 65%               4.0%                7.5%
       China             7.0%              36%            50%                   10.7%                52%                 65%              13.1%               15.6%
        India            6.5%              56%            62%                    7.7%                55%                 60%               8.6%               12.6%
       Russia            3.0%              51%            56%                    4.0%                59%                 65%               5.0%                8.5%
       BRIC              6.2%              44%               54%                8.3%                 56%                 64%               9.8%               13.3%
Source: Thomson Reuters, IMF, Credit Suisse estimates




Global Equity Strategy                                                                                                                                                 25
                                                                                                                                                      09 April 2013


(3) Chinese retail sales have been resilient to the global cycle (see Figure 70 above),
    while Asian exports have been a play on the global cycle.

Figure 71: Asian exports have continued to follow the US cycle
                                                                                                               45%
     70
                                                                                                               35%


     60                                                                                                        25%

                                                                                                               15%
     50
                                                                                                               5%

     40                                                                                                        -5%

                                                                                                               -15%
     30                           ISM new orders, 6m lead, lhs
                                                                                                               -25%
                                  Asian ex port grow th, y /y , rhs
     20                                                                                                        -35%
          1994                 1998                          2003                   2008               2013

Source: Thomson Reuters, Credit Suisse research



(4) GEM currencies have started to turn from a headwind to a tailwind: GEM
    currencies in aggregate depreciated by 11% against the dollar between 2011 and
    2012, hurting developed market exporters to the emerging markets. However, GEM
    currencies have recently started to appreciate against the dollar (see Figure 61 above)
    – and we think this trend has further to go (see page 22).


What about valuation?
Our only concern is valuation, with indirect GEM plays trading at a 30% premium to global
markets. However, developed market GEM consumer plays are not expensive relative to
the direct consumer plays, trading on a slightly lower 12-month forward P/E of 15.7x,
compared to 16.5x, despite offering better liquidity and better corporate governance.

Figure 72: Developed market GEM consumer plays look                                    Figure 73: … but trade on slightly lower multiples than
expensive relative to global markets...                                                direct GEM consumer plays
 150%                                                                                                  12m fwd P/E GEM consumer indirect rel GEM consumer direct
                    GEM indirect consumer 12m fw d P/E rel World
 140%                                                                                      200%        Average (+/- 1 SD)
                    Av erage
 130%
 120%                                                                                      170%

 110%
 100%                                                                                      140%

  90%
                                                                                           110%
  80%

  70%
                                                                                           80%
  60%
  50%
                                                                                           50%
        1991     1994      1998         2002          2005            2009   2013             1991   1994       1998        2002      2005       2009        2013

Source: Thomson Reuters, Credit Suisse research                                        Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                             26
                                                                                                                                                                                                                       09 April 2013


We also note that the developed market plays are cheaper than the direct plays on a sum-
of-the-parts basis.

Figure 74: Developed market consumer stocks with emerging market exposure are trading cheaply relative to their
foreign-listed subsidiaries
                                   Firm                           Country                  GEM Ex posure                 12m fw d PE           GEM PE / Main PE*                 Dev eloped Market P/E*
                           British American                          UK                                                         15.0
                                                                                                      60%                                                 143%                                5.2
                                Tobacco                          Malay sia                                                      21.5
                                                           UK/Netherlands                                                       19.2
                                Unilever                            India                             54%                       27.8                      156%                                6.6
                                                                 Indonesia                                                      32.0
                                                                 Belgium                                                        19.3
                      Anheuser-Busch-Inbev                                                            49%                                                 117%                                16.1
                                                           Brazil (AMBEV)                                                       22.6
                                                                     US                                                         20.1
                           Colgate Palmolive                                                          47%                                                 138%                                13.2
                                                                    India                                                       27.8
                                                             Sw itzerland                                                       18.7
                                 Nestle                          Malay sia                            42%                       25.6                      158%                                10.8
                                                                    India                                                       33.3
                         *GEM equal w eighted
Source: Thomson Reuters, Credit Suisse research



Stock picks
Below we show European stocks that have at least 20% of their revenues coming from
emerging markets. Of these, BAT, Swatch, BMW, Richemont and Imperial are rated
Outperform by Credit Suisse analysts and either look cheap on HOLT or have an FCF
yield above 5%.

Figure 75: European stocks that are plays on the emerging markets consumer with at least 20% of revenues from GEM
(stocks above the line are considered branded plays)
                                                                  -----P/E (12m fwd) ------                   ------ P/B -------       Yield (2013e), %     HOLT        Momentum
                                                                                                                                                                                                 Consensus
                                                                                       rel to mkt %                   rel to mkt %                          Price, %               3m Sales
                                                                                                                                                                        3m EPS



                             % Sales % Sales    % Sales                                                                                                                                       recommendation
Name                                                       Abs       rel to Industry   above/below          Abs       above/below      FCY         DY      change to                           (1=Buy; 5=Sell)   Credit Suisse rating
                            from GEM from NJA from China
                                                                                         average                        average                               best

Sabmiller Plc                73%          9%      7%       19.2         108%              56%               2.2            6%          3.3         2.1      -20.1      0.7         -0.8              2.5         Outperform
British American Tobacco     57%       15%        n.a      14.8         103%              67%               8.5           27%          6.1         4.3      -16.0      2.1         1.0               2.2         Outperform
P.L.C. Plc
Unilever                     53%       21%        n.a      19.2         107%              52%               26.6         273%          3.8         3.1      -30.7      2.0         2.4               2.5         Neutral
Swatch Group Ag              50%       47%       37%       16.1          96%              -49%              3.6           46%          3.4         1.5       23.2      9.2         6.2               2.2         Outperform
Diageo Plc                   49%       22%        2%       18.2         102%              46%               9.1           74%          4.1         2.5      -11.6      -0.3        0.3               2.2         Outperform
Anheuser-Busch Inbev Sa      47%          5%      n.a      18.6         104%              39%               3.8           63%          6.2         2.4      -39.5      -2.8        -5.9              2.2         Outperform
Pernod Ricard                45%       27%       10%       18.3         102%              56%               2.4           25%          3.7         1.8      -24.3      -2.8        -1.6              2.7         Outperform
Nestle S.A.                  42%       13%        3%       18.6         104%              30%               3.6            8%          4.2         3.2      -14.6      -0.8        -0.8              2.5         Outperform
Richemont (Compagnie         41%       34%       26%       16.1          96%             125%               4.1           78%          3.7         1.1       34.5      -0.8        -0.4              2.2         Outperform
Financi
Lvmh Moet Hennessy           35%       23%       14%       17.0         102%              -3%               3.0          -15%          5.0         2.4       8.2       -4.3        -0.1              2.1         Neutral
Louis Vuitton
Adidas Ag                    35%          9%      8%       16.7         100%              36%               3.1          -18%          4.0         2.0      -14.3      -0.9        -1.8              2.2         Outperform
Millennium & Copthorne       33%       33%        n.a      15.8          86%              12%               0.9            4%          na          2.6       24.3      -2.6        -0.8              2.6         Neutral
L'OrealPlc
Hotels                       33%       14%        5%       23.6         127%               1%               4.2          -16%          3.7         2.0      -34.6      -0.7        -0.6              2.7         Neutral
Reckitt Benckiser Group      32%       11%        1%       17.6          95%              22%               6.0           13%          5.5         2.9       18.4      5.8         3.2               3.0         Neutral
Plc
Bmw (Bay. Motoren Werk)      30%       14%       14%       8.9           89%              -25%              1.7          -14%          20.2        3.9       91.3      -0.1        0.4               2.6         Outperform
Imperial Tobacco Group       29%          3%      n.a      10.7          75%              12%               3.9          -89%          8.7         5.0       28.7      -0.7        -0.3              2.4         Outperform
Plc
Prudential Plc               60%       60%        n.a      13.8         125%              18%               3.1           -3%          5.2         2.6      -47.3      2.3         0.4               2.2         Outperform
Telefonica Sa                48%          na      0%       9.9           75%              -20%              2.4          -22%          13.2        6.2       42.9      -5.7        -2.9              2.6         Neutral
Telenor Group Asa            43%       35%        0%       12.4          94%              14%               2.4           28%          8.5         5.1       -7.1      -0.5        -0.8              2.3         Outperform
Vodafone Group Public        37%          9%      0%       11.3          86%              -28%              1.2          -80%          7.3         5.9       2.4       0.5         0.7               2.3         Outperform
Limited Guichard-
Casino, Company              29%          8%      n.a      13.5          94%               0%               1.3          -37%          3.5         4.1      -24.6      -3.4        -2.4              2.4         Outperform
PerrachonS.A.
Carrefour Et Cie             29%          7%      5%       15.0         104%               4%               2.2          -48%          5.0         2.8      -33.6      -0.8        -2.1              2.5         Outperform
Sanofi S.A.                  28%          1%      1%       12.2          88%              -25%              1.8          -63%          7.0         3.8       14.0      -3.9        -0.4              2.0         Neutral
Meda Ab                      28%          na      n.a      19.9         143%              46%               1.6          -30%          10.7        2.9      -69.8      -10.3       -1.9              2.4         Outperform
Tesco Plc                    26%       14%        2%       11.4          79%              -7%               1.7          -27%          3.0         4.0       10.0      -1.7        -0.5              2.8         Outperform
Wpp Plc                      25%       11%        6%       na             na               na               na             na          na          na         na        na         na                na          Outperform
Novartis Ag                  24%          1%      1%       13.8          99%              -4%               2.6          -21%          6.5         3.5       32.2      -6.1        -0.2              2.3         Outperform
Teliasonera Ab               24%       15%        0%       10.9          82%              -26%              1.7           -4%          8.9         7.2       21.3      -2.2        -0.6              3.0         Neutral
Glaxosmithkline Plc          23%          1%      1%       12.8          92%              -12%              12.8           5%          12.6        5.1      -22.0      -2.4        -1.0              2.6         Neutral

Source: MSCI, IBES, Thomson Reuters, Credit Suisse HOLT, Credit Suisse research




Global Equity Strategy                                                                                                                                                                                                                  27
                                                                                                                                                                                             09 April 2013


We show US stocks with the same characteristics.

Figure 76: US stocks that are plays on the emerging markets consumer with at least 20% of revenues from GEM
                                                               -----P/E (12m fwd) ------             ------ P/B -------      Yield (2013e)    HOLT        Momentum
                                                                                                                                                                                 Consensus
                                                                                    rel to mkt %             rel to mkt %                     Price, %




                                                                                                                                                                   3m Sales
                                                                                                                                                          3m EPS
                          % Sales % Sales % Sales                                                                                                                             recommendation Credit Suisse
Name                                                    Abs       rel to Industry   above/below    Abs       above/below    FCY         DY   change to                         (1=Buy; 5=Sell) rating
                         from GEM from NJA from China
                                                                                      average                  average                          best
Mead Johnson Nutrition    58%        na        na       21.9         122%              24%         nm             nm        2.1        1.8    -15.5      -1.6      -1.0            2.4        Neutral
Philip Morris             50%       17%        0%       15.4         108%              32%         nm             nm        5.7        3.9    -27.0      -0.8      -2.5            2.2        Neutral
International
Colgate-Palmolive Co      39%        na        na       19.5         105%               9%         24.5          15%        3.0        2.3    -29.2      -2.7      -1.5            2.7        Outperform
Yum Brands Inc            32%       32%       21%       21.0         114%              56%         14.5         -42%        4.2        2.0    -39.8      -14.7     -5.1            2.4        Outperform
Procter & Gamble Co       27%        4%        4%       18.0          97%               7%         3.4          -38%        4.2        3.1    -44.0      1.8       0.4             2.1        Neutral
Kraft Foods Inc           26%        1%        1%       na             na               na         na             na        na          na      na        na       na              na         Outperform
Nike Inc                  24%       14%        9%       18.6         112%              23%         4.8           29%        4.8        1.6     -5.6      0.5       0.1             2.3        Neutral

Source: MSCI, IBES, Thomson Reuters, Credit Suisse HOLT, Credit Suisse research



On the global strategy team, our preference continues to be for companies that offer
products with a high demand elasticity to income (i.e. as people get richer, they spend
more on the product in question). Among European names, this would highlight
companies such as Prudential, Swatch and Diageo.
The recent CS Emerging Market Consumer Survey (see Emerging Consumer Survey
2013, January 2013) focusses extensively on this theme, highlighting that:
■ The best prospects for consumption growth appear to be in Brazil, China and
   Indonesia;

■      Income growth is the main driver of consumption;

■      The young consumer tends to be the rich consumer;

■      It also highlights which brands benefit from the highest awareness.




Global Equity Strategy                                                                                                                                                                                       28
                                                                                                              09 April 2013




Which GEM markets to focus on?
Lower correlations, more need for being selective
Correlations among the different emerging markets have fallen to the lowest level since
2006. This is an expression of a wider trend for correlations among different assets and
between stocks to come down from their elevated crisis levels. This clearly indicates that
picking the right market is becoming more important.

Figure 77: Correlations among the different emerging markets have recently fallen to the
lowest level since 2006
     0.6



     1.1



     1.6



     2.1

                                         6-month correlation among country equity markets
                                         (prox ied by the standard dev iation of performance,
     2.6                                 adjusted for market v olatility )


           1998          2000     2003                 2005                2008                 2010   2013

Source: Thomson Reuters, Credit Suisse research




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                                                                                                                      09 April 2013



Country selection
We use the following measures to assess which are our most and least preferred
emerging markets:
     1)       Inflation risk
We rank countries on the basis of their output gap, current account and inflation to identify
those that face the highest risk of monetary tightening. On this basis, India, Russia and the
Philippines face the highest risk and Hungary, Malaysia and Thailand face the lowest risk
(see page 49).
     2)       Earnings revisions
We rank emerging markets on the change to consensus 12-month forward EPS estimates.

Figure 78: Emerging market EPS scorecard
                                                                        Earnings momentum

     Rank         Country / Region             Change in 12m fw d EPS            Earnings breadth        Ov erall z
                                                                                                           score
                                                  1m             3m             1m              3m
          1       Thailand                       -0.3%          0.9%            47%             6%          0.8
          2       Indonesia                      0.7%           4.0%            18%             0%          0.8
          3       Hong Kong                      0.6%           4.4%            -6%            17%          0.8
          4       India                          0.0%           3.4%            8%              -2%         0.6
          5       China                          0.7%           4.2%            -10%            -5%         0.5
          6       Taiw an                        0.3%           2.7%            -17%            -5%         0.3
          7       Singapore                      -0.3%          1.0%            -11%            -5%         0.2
          8       Turkey                         0.0%           3.8%            -29%            -9%         0.2
          9       South Korea                    1.5%           0.2%            -4%            -41%         0.1
       10         South Africa                   -2.1%          -1.9%           1%             -11%         -0.1
       11         Mex ico                        -2.4%          -1.9%           20%            -23%         -0.1
       12         Malay sia                      -0.6%          0.3%            -9%            -33%         -0.1
       13         Brazil                         -0.5%          -1.8%           -20%           -19%         -0.2
       14         Russia                         -0.2%          -0.9%           -33%           -20%         -0.2
       15         Poland                         -1.4%          -2.9%           -3%            -33%         -0.3
       16         Philippines                    -2.1%          -3.0%           -50%           14%          -0.4
       17         Hungary                        -4.9%          -1.7%           0%              -8%         -0.4
       18         Colombia                       0.4%           6.6%            n.a.          -100%         -0.5
       19         Czech Republic                 -2.4%          -6.4%           -9%            -20%         -0.6
       20         Chile                          -4.9%          -7.0%           0%             -25%         -0.9
                  A high z-score indicates the country has better earnings momentum and is a positiv e
Source: Thomson Reuters, Credit Suisse research



     3)       Openness with limited commodity exposure
Notwithstanding recent weakness in some lead indicators, we expect that the global
economy will grow at a faster rate in 2013 than the 3.1% growth rate it achieved in 2012.
Consequently, we like markets that have greater exposure to the global economy (we
proxy this by looking at countries’ trade as a proportion of GDP). However, we are
cautious on the outlook for commodity prices, as supply growth is set to outstrip demand
growth over coming years, keeping downward pressure on prices (see page 16).
Therefore, we prefer to have exposure to commodity importers rather than exporters.




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                                                                                                09 April 2013


We combine these criteria using the following weights:

■   No inflation pressures – and therefore lower risk of monetary tightening (50%
    weighting);

■   Open economies (benefit from an improving global economy; 12.5% weighting);

■   Commodity importers (we expect commodity prices to fall; 12.5% weighting);

■   Earnings revisions (12.5% weighting).


On this basis, Hungary, the Czech Republic, Thailand and Korea score well and Russia,
Indonesia and India score badly.

Figure 79: Macro scorecard – we prefer markets with an international economy that is a
net commodity importer with little overheating pressure and positive earnings revisions
                                          Net commodity
                                  Trade %                   Overheating   Earnings
                 Country                  importers, % of                             z score
                                    GDP                       score       revisions
                                               GDP
                 Weights            20%        20%             40%          20%       100%
                 Hungary           153%         4%             -0.6        -0.8%       0.7
                 Czech Republic    149%         5%             -0.4        -2.4%       0.4
                 Thailand          127%         2%             -0.2        0.2%        0.4
                 Korea              93%        13%              0.1        -1.1%       0.3
                 Taiwan            121%          na             0.2        0.8%        0.2
                 China              47%         7%              0.5        0.5%        0.0
                 Poland             85%         2%              0.4        -2.0%       -0.2
                 Malaysia          134%        -10%             0.0        -3.0%       -0.3
                 Argentina          32%        -10%             0.4        1.8%        -0.3
                 Mexico             64%         -1%             0.3        -1.9%       -0.3
                 Philippines        47%         6%              0.9        0.0%        -0.4
                 Turkey             50%         5%              0.8        -0.4%       -0.4
                 Chile              57%        -21%             0.1        -0.6%       -0.5
                 Brazil             19%         -4%             0.5        -1.2%       -0.6
                 South Africa       48%         -5%             0.6        -1.8%       -0.6
                 India              38%         4%              1.0        -1.0%       -0.6
                 Indonesia          43%         -7%             0.8        -0.2%       -0.7
                 Russia             44%        -17%             1.0        -0.3%       -1.0
Source: Thomson Reuters, Credit Suisse research




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                                                                                                                                                                                                                         09 April 2013


Incorporating valuation
We use two different approaches to valuation:

■   We calculate a fair value for each market, as a function of a cross-sectional regression
    using leverage, budget and current account balances, the savings ratio, growth and
    inflation as the independent variable. We then overlay Credit Suisse FX team’s
    assessment of currency valuation and rank markets according to their
    over/undervaluation. The cheapest markets on this basis are Russia, Korea, China
    and the C3 markets. The most expensive are Mexico, Brazil and Indonesia.

■   We rank emerging markets on the basis of P/E, P/B and dividend yield relatives– as
    well as the Economic P/E on HOLT (deviation from long-run average). The cheapest
    markets are Russia, Hungary and Poland.

Figure 80: Russia, Korea, the C3 countries and China rank well on our GEM fundamental valuation scorecard
                                                                                                                                                                                               FX
                                          Total debt      Budget & CA balance      Gross sav ings       Potential GDP          Inflation                       Warranted 12m                               Gap, adjusted
                       Country                                                                                                             12m fw d P/E                          Gap       ov er/under
                                      (2013e,% of GDP)      (2013e,% of GDP)            ratio              grow th             (2013e)                            fw d P/E                                    for FX
                                                                                                                                                                                           v aluation
              Russia                        64%                   1.5%                  29%                 3.9%                5.4%           6.0                 11.3          89%          5%               79%
              Korea                         158%                  2.5%                  31%                 4.0%                2.8%           8.5                 12.2          44%         -12%              64%
              China                         159%                   1%                   50%                 8.7%                4.0%           9.1                 12.6          39%         -5.4%             47%
              Egy pt                        111%                 -10.7%                 14%                 5.9%                7.1%           6.8                 12.4          81%          24%              46%
              Poland                        122%                  -7.5%                 16%                 3.8%                1.7%           11.6                14.2          22%         -7.9%             32%
              Hungary                       232%                  -1.8%                 20%                 2.2%                2.8%           7.7                 10.1          31%         2.7%              28%
              Czech Republic                92%                    -6%                  22%                 3.5%                2.0%           9.6                 13.0         35.5%        11.9%            21.0%
              Taiw an                       200%                  7.2%                  28%                 4.8%                2.3%           14.1                15.4          9.0%        -10%             21.0%
              Malay sia                     167%                   3%                   32%                 5.0%                2.9%           14.1                13.4          -4%         -7.4%             3.3%
              Turkey                        93%                   -8.1%                 12%                 4.3%                6.6%           10.8                11.8          9.6%        10.9%            -1.2%
              South Africa                  122%                 -11.0%                 15%                 3.9%                5.2%           12.4                10.5         -15.0%      -13.8%            -1.4%
              Hong Kong                     235%                  2.0%                  27%                 4.3%                4.0%           14.9                11.5         -22.8%      -19.8%            -3.7%
              Chile                         73%                    -4%                  22%                 4.5%                2.2%           16.9                14.9         -11.9%       -0.4%            -11.5%
              India                         123%                 -10.8%                 32%                 7.7%                6.2%           13.4                11.0          -18%        -6.3%            -12.8%
              Colombia                      79%                   -3.8%                 20%                 4.5%                2.9%           14.5                14.7          1.7%        17.7%             -14%
              US                            274%                  -8.8%                 13%                 3.2%                1.8%           13.9                11.9         -13.9%        0%               -14%
              Thailand                      145%                  -2.7%                 31%                 4.6%                3.9%           12.6                10.9          -13%        2.1%              -15%
              Singapore                     223%                   20%                  44%                 4.0%                3.0%           14.1                12.9          -9%         11.9%             -18%
              Indonesia                     53%                   -5.5%                 33%                 7.0%                6.3%           14.8                12.0          -18%         1%               -20%
              Brazil                        121%                   -5%                  18%                 4.1%                5.6%           13.7                11.6          -15%        12.8%             -25%
              Mex ico                       63%                   -3.1%                 24%                 3.5%                3.9%           16.7                11.9          -29%        -5.2%             -25%
              A high value for gap indicates the country is trading cheap on 12m fwd P/E compared to the warranted multiple
              Countries offering the most upside on warranted P/E and FX valuation are ranked at the top

Source: Thomson Reuters, Credit Suisse research

Figure 81: Russia, Hungary and Poland look cheap on our conventional valuation scorecard
                                                   12m fwd P/E                                        Price to book                                       DY                   HOLT Eco PE Conventional          Macro &
                   Country                                                                                                                                                                  valuation           traditional
                                           Relative                Z-Score                  Relative                  Z-Score              Relative               Z-Score        Z-Score      Score              valuation
         Russia                              50%                     0.74                       49%                     0.17                169%                    2.07           0.95             1.44              1.93
         Hungary                             62%                     0.23                       51%                     1.80                133%                    0.68           0.83             1.27              0.91
         Poland                              88%                     -0.42                      72%                     0.57                166%                    1.60           0.69             1.04              1.02
         Czech Republic                      75%                     0.46                       79%                     0.00                244%                    0.40           1.02             1.03              0.78
         Egypt                               54%                     0.68                       79%                     0.57                234%                    0.02           0.45             0.87              1.01
         China                               72%                     0.43                       86%                     -0.15               152%                    0.06           0.76             0.82              0.99
         US                                 108%                     -0.50                      135%                    -0.10                79%                    0.00           0.21             0.38           -0.15
         Colombia                           115%                     -0.40                      127%                    -1.33               167%                    0.54           0.37             0.36           -0.14
         Brazil                             106%                     -1.32                      81%                     1.84                153%                    1.04          -1.11             0.22           -0.37
         Korea                               66%                     -0.10                      64%                     -0.40                44%                    -1.10          0.03             0.12              0.97
         Hong Kong                          116%                     -0.50                      90%                     -0.63               109%                    -0.75          0.17             0.11           -0.12
         India                              102%                     -0.26                      126%                    -0.46                60%                    -0.50         -0.70          -0.09             -0.35
         South Africa                        96%                     -1.42                      145%                    -1.23               126%                    -0.72         -0.06          -0.29             -0.27
         Malaysia                           111%                     -0.73                      122%                    -1.48               111%                    -0.93         -0.28          -0.31             -0.22
         Taiwan                             110%                     -0.34                      109%                    -0.80               122%                    -0.12         -1.45          -0.39                0.05
         Chile                              137%                     -1.18                      122%                    -0.95               106%                    -0.98         -0.93          -0.59             -0.61
         Singapore                          111%                     -0.85                      83%                     -1.00                99%                    -1.16         -1.36          -0.72             -0.75
         Indonesia                          114%                     -1.14                      248%                    -1.94                74%                    -1.33         -0.94          -0.83             -0.81
         Turkey                              86%                     -1.26                      112%                    -1.38                76%                    -0.44         -1.59          -0.84             -0.56
         Thailand                            96%                     -0.15                      147%                    -1.15               110%                    -0.46         -2.35          -0.84             -0.74
         Mexico                             137%                     -1.81                      179%                    -1.84                67%                    -0.86         -1.77          -1.20             -1.14
         Philippines                        156%                     -2.64                      193%                    -2.75                58%                    -1.82         -1.27          -1.56             -1.44
         A high z-score indicates the country is trading cheap on 12m fwd & P/B relative to the world market, compared to its long term average
         Cheapest countries are ranked at the top

Source: Thomson Reuters, Credit Suisse research, Credit Suisse HOLT




Global Equity Strategy                                                                                                                                                                                                            32
                                                                                                                                                 09 April 2013


Combining the macro and valuation scorecards
We then plot a combination of the two different valuation z-scores against the macro and
earnings revisions score from Figure 79. On this basis, the best markets are in the top
right-hand corner of the scatter chart below. These are Czech Republic, Korea and
Hungary.

Figure 82: Czech Republic, Korea and Hungary have the best combination of attractive
valuation, an open economy, limited inflation pressure and positive earnings revisions
                      2.0                 Russia

                      1.5
                                                                            Poland            China
                      1.0                                                                                           Korea
  Valuation z score




                                                                                                                                       Hungary
                      0.5                                                                                            Czech Republic
                                                                                                           Taiwan
                      0.0
                                                             South Africa
                                                                                         Malaysia
                      -0.5                                         India        Turkey
                                                                                                                          Thailand
                                               Indonesia                         Chile
                      -1.0                                         Brazil
                                                                                   Mexico
                      -1.5
                                                            Philippines
                      -2.0
                          -1.20   -1.00        -0.80       -0.60        -0.40        -0.20          0.00    0.20     0.40       0.60   0.80
                                                                      Openness / overheating / earnings revisions score

Source: Thomson Reuters, Credit Suisse research

We highlight that China and Korea are among the top NJA country picks by Credit
Suisse’s Asia Equity Strategist, Sakthi Siva.




Global Equity Strategy                                                                                                                                    33
                                                                                              09 April 2013




Individual GEM markets
     1) China: overweight, in spite of our macro
        concerns
We have discussed our medium-term concerns about the Chinese economy in our report
Mining downgrade to underweight, 8 March 2013. However, attractive valuations and
positive earnings momentum lead us to be positive on the Chinese equity market in a
global context. We would also note that our Emerging Market Strategist, Sakthi Siva,
recommends the Chinese equity market as one of her top three country overweights in
Asia (Asian Investment Conference 2013 - Asia ex-Japan Strategy, 15 March 2013)


From a macro perspective, we find ourselves a bit more negative on Chinese GDP
growth than the consensus over the medium term for the following reasons:

■   GDP growth has become even more imbalanced, with the investment share of GDP
    now at 48%;

■   Total leverage is now around 230% of GDP, around 30 percentage points higher than
    suggested by an international comparison;

■   The five key drivers of Chinese GDP growth over the last decade (WTO accession,
    housing, rising leverage, a negative real cost of capital and a rise in the working age
    population) are all sharply diminished;

■   Housing appears to be in a bubble – both in terms of valuation and the degree of
    overbuilding;

■   China is beginning to tighten policy, with the announcement in March of new rules to
    regulate wealth management products, as well as a 20% capital gains tax on property.
    Our China economist, Dong Tao, still considers the shadow banking system to be the
    largest risk to the stability of China’s economy (see Out of the shadows: China
    banking regulator sets new rules to regulate WMP, 28 March 2013).




Global Equity Strategy                                                                                 34
                                                                                                                                                                    09 April 2013


However, we maintain our overweight of the Chinese equity market (MSCI China) for
the following reasons:

■    The market is attractively valued. China ranks third on our valuation scorecard (see
     Figure 80). China’s P/E and P/B relative to emerging markets are close to 14-year and
     ten-year lows, respectively, while the dividend yield relative is close to a ten-year high.

Figure 83: China’s 12m forward P/E relative to emerging                                      Figure 84: … while the P/B relative is also close to a
markets is close to a 14-year low…                                                           10-year low
                                China rel MSCI GEM: 12m fw d P/E                              170%                        China rel GEM: P/B
 270%                           Av erage (+/- 1SD)
                                                                                                                          Av erage (+/- 1SD)
                                                                                              150%

 220%                                                                                         130%

                                                                                              110%
 170%
                                                                                               90%

 120%                                                                                          70%

                                                                                               50%
    70%
                                                                                               30%

    20%                                                                                        10%
          1995   1997    1999     2001     2003   2005   2007   2009   2011    2013                  1995   1997   1999     2001     2003      2005   2007   2009   2011   2013

Source: Thomson Reuters, Credit Suisse research                                              Source: Thomson Reuters, Credit Suisse research



Figure 85: China’s dividend yield relative is close to a 10-year high

 500%

 450%                                                                    China rel GEM: DY
                                                                         Av erage (+/- 1SD)
 400%

 350%

 300%

 250%

 200%

 150%

 100%

    50%

     0%
          1995          1997        1999          2001      2003        2005          2007        2009         2011           2013

Source: Company data, Credit Suisse estimates



Comparing China’s 12-month forward P/B relative to its return on equity with those for
other emerging markets, suggests China should be trading on a multiple some 30% above
current levels.




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                                                                                                                                                                              09 April 2013



Figure 86: China’s P/B is low relative to its return on                                              Figure 87: Chinese earnings revisions are stronger than
equity compared to other emerging markets                                                            those for global equity markets
          3.5                                                                                         20%                             China rel MSCI AC World: 3m breadth of rev isions
                                    R² = 0.57                                   Indonesia
          3.0                                                                                         15%

                                                                                                      10%
          2.5
                                                      India                                            5%
                                                                     Thailand
12m P/B




          2.0               Mexico
                                         Malaysia               South Africa
                               Taiwan                  Turkey                                          0%
          1.5
                  Poland                          China                                                -5%

                           Brazil       Korea
          1.0
                                                                                                      -10%
                                         Russia
          0.5                                                                                         -15%
                10%        12%           14%          16%            18%          20%          22%
                                                                                                            1995     1997     1999    2001    2003      2005   2007    2009   2011   2013
                                          12m forward return on equity

Source: Thomson Reuters, Credit Suisse research                                                      Source: Thomson Reuters, Credit Suisse research

■           China is a commodity importer (and we are bearish on commodity prices), and an
            open economy, and as a result it scores well on our aggregate scorecard, coming
            fourth (i.e., based on the combination of our valuation and macro scorecards).

■           Relative earnings revisions have improved – and China ranks fifth out of twenty on our
            earnings momentum scorecard (see Figure 78 above).

■           Despite the recent rebound in narrow money supply we have not yet seen a
            corresponding pick-up in the Chinese stock market.

■           China experienced capital outflows ahead of the leadership transition last year. Since
            then, however, the flow picture has improved – and the latest money supply figures
            suggest capital flows have turned positive again in early 2013. This should again help
            market performance.

Figure 88: Chinese shares have not yet seen a pick-up                                                Figure 89: Chinese capital outflows have been slowing
corresponding to the recent rebound in narrow money
supply
                                                                                                      600

                            Chinese M1 growth / M2 growth                                                          China: 4-quarter rolling money inflows (change in FX
          1.8                                                                                  15     500          reserves, adjusted for current account balance), USD bn
                            China A shares rel to MSCI AC World (local)
          1.6
                                                                                               13     400
          1.4
                                                                                                      300
                                                                                               11
          1.2
                                                                                                      200
          1.0                                                                                  9
                                                                                                      100
          0.8
                                                                                               7
                                                                                                        0
          0.6
                                                                                               5
          0.4                                                                                        -100

          0.2                                                                                  3     -200
                2005   2006      2007     2008      2009      2010   2011      2012     2013            Q2 2004             Q2 2006           Q2 2008          Q2 2010         Q2 2012


Source: Thomson Reuters, Credit Suisse research                                                      Source: Thomson Reuters, Credit Suisse research




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                                                                                                                                                                                                                                      09 April 2013



■         While we are cautious of growth on a 12- to 18-month view, we do not believe there
          will be much of a slowdown near-term given recent PMI and M1 data, as shown below.

Figure 90: China’s manufacturing PMI new orders have                                           Figure 91: … on the back of a rebound in narrow money
rebounded strongly since August…                                                               supply growth
                       GDP, y/y%, 3m lag                                                        1.8                             Chinese M1 growth / M2 growth                                                                                          67
    13                 China PMI manufacturing new orders (HSBC), rhs                                                           Chinese manufacturing PMI new orders, rhs
                                                                                                1.6                                                                                                                                                    62
                                                                                          63
    12
                                                                                                1.4
    11                                                                                    58                                                                                                                                                           57
                                                                                                1.2
    10                                                                                    53                                                                                                                                                           52
                                                                                                1.0
     9                                                                                                                                                                                                                                                 47
                                                                                          48
                                                                                                0.8
     8
                                                                                                                                                                                                                                                       42
                                                                                          43    0.6
     7
                                                                                                0.4                                                                                                                                                    37
                                                                                          38
     6
                                                                                                0.2                                                                                                                                                    32
     5                                                                                    33          2005       2006                  2007           2008                 2009             2010           2011            2012              2013
         2005   2006     2007    2008      2009    2010    2011     2012     2013

Source: Thomson Reuters, Credit Suisse research                                                Source: Thomson Reuters, Credit Suisse research



■         There have been brief periods when the Shanghai A outperformed despite GDP
          slowing (e.g., 2003-2005).

■         Sentiment: Asian hedge fund managers have already strongly reduced their position
          on China since the middle of 2012.
Figure 92: The correlation between GDP growth and the                                          Figure 93: APAC hedge fund manager’s net exposure
Chinese equity market has improved                                                             changes over the last 12 months
    15                                                                                16
                   China A shares rel to MSCI AC World (local)                                                                          APAC hedge fund net exposure (12m change)
                   Chinese real GDP (% chg Y/Y)                                       15       4%
    13
                                                                                      14
                                                                                               2%
                                                                                      13
    11
                                                                                      12       -1%
     9                                                                                11
                                                                                               -3%
                                                                                      10
     7
                                                                                      9
                                                                                               -5%
                                                                                      8
     5
                                                                                      7        -7%
                                                                                                                                                                            Thailand




                                                                                                                                                                                                                                             Korea
                                                                                                                                        Indonesia




                                                                                                                                                                                                   Macau




                                                                                                                                                                                                                                                     Japan
                                                                                                                                                    Taiwan




                                                                                                                                                                                       Singapore




                                                                                                                                                                                                                       India
                                                                                                                            Malaysia




                                                                                                                                                             New Zealand
                                                                                                                Hong Kong




                                                                                                                                                                                                           Australia



                                                                                                                                                                                                                               Philippines
                                                                                                        China




     3                                                                                6
         1998   2000      2001     2003     2005    2007     2009     2011     2012

Source: Thomson Reuters, Credit Suisse research                                                Source: CS Prime services HK




Global Equity Strategy                                                                                                                                                                                                                                  37
                                                                                                                                                                      09 April 2013


Stock picks
Below we show the Outperform-rated stocks among our China strategist Vincent Chan’s
top picks.

Figure 94: Below we show a screen of Vincent Chan’s Outperform-rated top picks for China
                                     -----P/E (12m fwd) ------             ------ P/B -------           2013e, %      HOLT       2013e Momentum, %
                                                                                                                                                         Consensus
                                                          rel to mkt %             rel to mkt %                       Price, %                        recommendation Credit Suisse
Name                          Abs       rel to Industry   above/below    Abs       above/below    FCY          DY    change to   3m EPS    3m Sales    (1=Buy; 5=Sell) rating
                                                            average                  average                            best
Anta Sports Products          12.8          77%              -2%         2.1          -42%        na           5.3     -7.4       -5.8       -5.7          3.2        Outperform
Belle International Hdg.      16.8          91%              -9%         4.8            2%        3.5          1.8     4.1        -5.8       -1.2          2.5        Outperform
Brilliance China Autv. Hdg.   12.8         128%               8%         6.1          243%        1.2          0.2    -61.4       0.3        -0.9          2.1        Outperform
Intime Dept.Store (Gp.)       12.7          69%              -17%        2.1          -11%        na           3.2     0.7        1.5        2.3           1.6        Outperform
New Oriental Ed.& Tech.       16.8          92%              -37%        3.9          -60%        5.6          1.8     36.3      -11.9       -0.9          1.9        Outperform
Gp.Ads 1:1
Cnooc                         8.0           71%              -8%         2.0          -19%        6.8          3.0    114.9       -2.7       -1.1          2.3        Outperform
China Shenhua En.Co.'H'       9.4           82%              -20%        2.1          -33%        7.6          4.0     75.4       -2.3       1.1           1.9        Outperform
China Con.Bank 'H'            6.1           57%              -33%        1.6          -27%        na           5.3     51.1       2.6        0.9           1.7        Outperform
Indl.& Coml.Bk.Of China 'H'   6.1           56%              -36%        1.6          -26%        na           5.4     51.4       1.8        -0.4          1.7        Outperform
China Pac.In.(Group) 'A'      17.4         158%              -6%         2.1          -20%        na           2.0    -26.3       -9.9       -0.4          1.7        Outperform
China Med.Sy.Hdg.(Di)         20.8         149%              56%         6.2           77%        na           1.6    -29.6      -12.0       -1.4          1.7        Outperform
Air China 'H'                 10.5          68%              -8%         1.5          -19%        na           1.7    -39.2       3.9        -0.2          2.4        Outperform
Aisino 'A'                    11.1          74%              -45%        2.9          -28%        na           3.4    127.7       -1.9       -2.5          1.6        Outperform
Lenovo Group                  13.9         126%              -28%        4.3            4%        6.5          2.3     33.6       2.2        0.2           2.1        Outperform
Aac Technologies Hdg.         13.8         124%               na         6.7            na        na           2.7     16.5       3.6        2.4           1.8        Outperform
Tencent Holdings              22.4         150%              -4%         13.8          37%        4.2          0.5     65.0       -1.8       0.7           2.1        Outperform
Kunlun Energy                 14.7         130%               3%         3.8           54%        5.5          1.8    -12.1       -0.5       2.2           2.0        Outperform
China Res.Power Hdg.          11.7          79%               9%         2.3           21%        15.6         2.5     8.0        11.3       -3.2          1.8        Outperform

Source: MSCI, IBES, Thomson Reuters, Credit Suisse HOLT, Credit Suisse research




Global Equity Strategy                                                                                                                                                               38
                                                                                                                                       09 April 2013



     2) India: top-down concerns abating
We have highlighted India’s structural challenges in recent years. However, we believe
these concerns are abating, while the Indian equity market now clearly appears cheap. We
note that India is our GEM strategist, Sakthi Siva’s, top country pick in Asia (see Asian
Investment Conference 2013 - Asia ex-Japan Strategy, 15 March 2013)
We have the following macro concerns, but admit that they appear to be
diminishing:

■   Inflationary pressures appear to be abating a little and our economists forecast
    75bp off rates (compared to consensus of a 50bp cut).
Urban CPI inflation is close to 11% – and wholesale price inflation (WPI) has been much
higher than the weakness of its usual drivers, such as industrial production and commodity
prices, would suggest. But WPI inflation is starting to decline and our India economist,
Robert Prior-Wandesforde, forecasts wholesale price inflation (WPI) to fall to 5.5% from
the current 6.8%. Food inflation is likely to come off in due course (onion prices rose by
150% year-on-year, and our economists do not expect this rate of acceleration to be
maintained). Our economist expects the RBI to cut rates by additional 75bp, compared to
consensus expectations of 25-50bps, with the market pricing in cuts of 50-75bps.

Figure 95: Manufacturing wholesale price inflation has                        Figure 96: India 12-month rolling current account (% GDP)
decoupled from manufacturing output…
                              Manufacturing output                                          India current account
     % y-o-y                                                   % y-o-y            3
                                                                                            balance, % of GDP, 4 qtr
                              Manufacturing WPI (RHS)                                       average
      25                                                                 9        2
                                                                                            Recent quarter
                                                                         8
      20                                                                          1
                                                                         7
      15                                                                 6        0

                                                                         5        -1
      10
                                                                         4
       5                                                                          -2
                                                                         3
                                                                         2        -3
       0
                                                                         1        -4
       -5
                                                                         0
                                                                                  -5
      -10                                                                -1         1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
            98   00      02       04        06       08   10   12

Source: Credit Suisse India Economics team, Credit Suisse research            Source: Thomson Reuters, Credit Suisse research



■   A near-record current account deficit (which is beginning to improve)
Elevated inflation has not only constrained policy makers in their ability to stimulate
domestic demand, but has also led to a loss of competitiveness. This, in turn, has led to a
deterioration in the visible trade balance, which has dropped to a deficit equivalent to 10%
of GDP, and a near record current account deficit, which now stands at 4% of GDP.
Our India economists flag signs that the external deficit is beginning to improve. Although
there has only been one month of improvement in the trade deficit, it was fairly significant,
and consistent with our economists’ fundamental view that it takes around 18 months for a
weaker rupee to boost exports (it is now around 18 months since the INR started to
weaken). Meanwhile, weak domestic demand should continue to cap imports. Our
economists expect the current account deficit to fall to 3.5% of GDP in 2013/14, down from
4.6% in 2012/13.




Global Equity Strategy                                                                                                                            39
                                                                                                                                             09 April 2013



■   India is only one notch away from non-investment grade status, but recent
    policy measures should prevent a downgrade
India’s budget deficit has deteriorated significantly during the financial crisis, with a 12-
month rolling deficit of nearly 8% of GDP in 2009. This left India with a BBB- rating from
S&P, only one notch away from non-investment grade.
However, Finance Minister Chidambaram recently forecast a 5.2% of GDP budget deficit
in 2012/13, falling to 4.8% in 2013/14. According to our India economists, the former is
mainly achieved by a spending squeeze, whereas the latter should be fairly easily
achieved via a modest additional tightening. This should reassure rating agencies and the
RBI, which called for a reduction in India’s high fiscal deficit (see Non Japan Asia
Economic Releases & Events: The week that was and will be, 1 March 2013).


■   We are worried about the banking system
We are concerned that the proportion of non-performing loans could rise. Our India banks
team believes that 33% of companies have an interest cover of less than 1x. NPLs are
officially 3%, but around 6% of loans are classified as ‘restructured loans’, meaning that
the provisioning on these loans is abnormally low, at 3%.


In spite of these negatives, we think there is a good case to become more positive
on Indian equities because:

■   Indian equity market valuations look cheap on P/E and P/B relatives
The 12-month forward P/E relative to global markets is now clearly below the 5-year
average – and the P/B relative is lower than at any time during the past seven years.

Figure 97: India looks cheap on 12m forward P/E relative               Figure 98: The P/B relative is lower than at any point since
to global markets is below the five-year average                       2006
                                                                          280%                 MSCI India: Price to book rel to MSCI World
    170%           MSCI India: 12m fw d P/E rel to MSCI World
                                                                                               Average
                   Av erage                                               260%
    150%           5 y ear av erage
                                                                          240%
    130%
                                                                          220%
    110%
                                                                          200%
     90%                                                                  180%

     70%                                                                  160%

     50%                                                                  140%

     30%                                                                  120%
           1996          2000           2004             2008   2013             2006   2007    2008     2009     2010      2011     2012    2013

Source: Thomson Reuters, Credit Suisse research                        Source: Thomson Reuters, Credit Suisse research



Lastly, the dividend yield relative is at the highest level since 2007. Relative earnings
revisions are still positive.




Global Equity Strategy                                                                                                                                40
                                                                                                                                                                                                 09 April 2013



Figure 99: India is attractively valued on relative dividend                                       Figure 100: India’s relative earnings revisions are still
yields                                                                                             positive
         60%                                                                                                                                           Earnings momentum
                                    MSCI India: dividend yield rel to MSCI World
                                                                                                        60%
                                                                                                                                            India      India rel World
                                    Average
         55%
                                                                                                        40%

         50%                                                                                            20%

         45%                                                                                               0%

         40%                                                                                            -20%

         35%                                                                                            -40%


         30%                                                                                            -60%

                                                                                                        -80%
         25%
                                                                                                                  1998                       2001         2004            2007          2010           2013
            2006      2007      2008      2009      2010        2011      2012       2013

Source: Thomson Reuters, Credit Suisse research                                                    Source: Thomson Reuters, Credit Suisse research



■         Recent forecasts indicate India’s GDP growth might have troughed

■         India’s leverage at acceptable levels for its GDP per capita.

Figure 101: Indian real GDP growth troughed according to                                           Figure 102: India is not overleveraged especially
recent forecasts                                                                                   compared to China
    12                                                                                              420%                                                                            Ireland
                                                                                                           Total debt less FX reserves, %




                                                                                                    360%                                                                            Japan
    10                                                                                                                                              Portugal
                                                                                                                        GDP




                                                                                                    300%                                                     Spain        UK
                                                                                                                                                       Greece
     8                                                                                                                                                                                US      DenmarkAustralia
                                                                                                                                                                           France
                                                                                                    240%                                                          Italy
                                                                                                                                                                                      Canada
     6                                                                                                                                                                     Germany
                                                                                                                                            Hungary
                                                                                                    180%                 China
                                                                                                                                                                       Norway
     4                                                                                                                                                  Singapore
                                                                                                    120%             Malaysia               Hong Kong
                                                        India real GDP growth rate, %yoy                       EgyptSouthBrazil
                                                                                                                          Africa
                                                                                                                        Poland
                                                                                                         India
                                                                                                                      Turkey Czech Republic
     2                                                  Finance ministry forecast 2013-14            60%                  Chile
                                                                                                                     Mexico
                                                                                                                         Russia                      GDP per capita, USD
                                                        IMF forecast 2013-14                              Indonesia
     0                                                                                                0%
         1998      2000      2002      2004      2006      2008        2010      2012       2014         0      10,000 20,000 30,000 40,000 50,000 60,000 70,000


Source: Company data, Credit Suisse estimates                                                      Source: Company data, Credit Suisse estimates



■         A fall in the oil price would help India
We are bearish on the oil price, for the reasons highlighted on page 16. In 2011, India
imported oil with a value of 2.7% of its GDP, making it one of the larger GEM net oil
importers.




Global Equity Strategy                                                                                                                                                                                        41
                                                                                                                                                               09 April 2013



■      The government is attempting to pursue reform
India’s finance minister has taken several steps since September to reform the country’s
economy and reduce its budget and current account deficits. India has launched a series
of investor-friendly policy reforms, which allow foreigners to take majority stakes in
supermarkets, department stores and broadcasters and stakes of up to 49% in airlines
and power exchanges. The government has also announced partial privatisation of several
state-owned companies and has reduced the subsidies in diesel. The IMF estimates that
freezing diesel prices and reforming other subsidies would eliminate about two-thirds of
the baseline fiscal deficit (Bloomberg, 19 December 2012). In addition, the government
has imposed a duty on gold imports (which in some months make up nearly half of the
current account deficit).


■      Despite the need for reform near-term, longer-term growth prospects are
       attractive
On 2010 estimates, India has the lowest rate of urbanisation of any of the major GEM
countries. The process of urbanisation will be challenging, but is likely ultimately to drive
India’s growth in the coming decades, with India’s Ministry of Urban Development
estimating that $800bn of infrastructure investment will be required over the next 20 years.


■      The currency is now cheap on PPP (versus its norm)
The Indian rupee is over 6% undervalued relative to its PPP-derived fair value. According
to our Emerging Market economists, this leaves the currency nearly 3 standard deviations
below its fair value, and one of the cheapest EM currencies in their view.


What to buy?
Our emerging market strategist, Sakthi Siva, and our India strategist, Neelkanth Mishra,
see the following stocks as their top picks in India. Of these stocks, Tata Motors, HCL
Technologies and Sterlite look cheap on HOLT.

Figure 103: Credit Suisse strategists’ top picks for India
                                -----P/E (12m fwd) ------          ------ P/B -------           2013e, %      HOLT       2013e Momentum, %
                                                                                                                                                 Consensus
                                                  rel to mkt %             rel to mkt %                       Price, %                        recommendation Credit Suisse
                                       rel to
Name                     Abs                      above/below    Abs       above/below    FCY          DY    change to   3m EPS    3m Sales    (1=Buy; 5=Sell) rating
                                     Industry
                                                    average                  average                            best
Tata Motors              7.2           72%           -64%        2.8            2%        3.5          1.4     39.1       -9.1       -0.6          2.1        Outperform
Hcl Technologies         13.8          93%            -6%        5.5           23%        4.1          1.5     70.8       13.6       1.8           2.0        Outperform
Reliance Industries      11.8         104%            55%        1.5          -17%        2.4          1.2     -2.5       3.3        4.3           2.7        Outperform
Sterlite Inds.(India)    4.8           46%            -9%        0.7          -47%        na           2.1    233.9       1.0        0.1           2.7        Outperform
Ntpc                     10.4          70%           -22%        1.6          -32%        na           3.3     -0.7       0.7        -1.0          2.1        Outperform

Source: Thomson Reuters, Credit Suisse research, Credit Suisse HOLT




Global Equity Strategy                                                                                                                                                       42
                                                                                                                                                     09 April 2013



      3) Brazil: neutral
Our Brazil economists believe that 2013 will be a better year for the domestic economy
than 2012. They project that GDP growth will accelerate to 4% from just 0.9% in 2012.
This forecast underpins our Brazilian equity strategists’ view that the earnings downgrade
cycle will come to an end this year. They are overweight the market within a LatAm
context.
From a global equity strategy perspective, we would be a little more cautious on the
Brazilian market, given a lack of a compelling valuation story and few signs – yet – of a
pick-up in earnings momentum relative to global markets. Our negative view on the iron
ore price and the oil price are also reasons for caution on the equity market (with oil and
mining accounting for around 35% of market cap).
What are the positives on the Brazilian market?
■     GDP growth is set to accelerate, as highlighted above, driven primarily by
      investment and a pick-up in agricultural output.
■     Some moderation in real wage growth from 4% to 3% in 2013.
■     Brazil might be close to the end of earnings’ downgrade cycle. Our Brazilian
      equity strategy team, led by Andy Campbell, believes a domestic recovery can arrest
      the downgrade cycle which has weighed on the Brazilian equity market over the last 2
      years (see their report All too familiar, Brazil EPS still trending lower, 1 March 2013).
      As illustrated in Figure 104 below, Brazilian forward EPS estimates have fallen
      steadily over the past 12 months, in line with consensus GDP estimates. Our Brazil
      economists’ estimate of a return to stronger growth in 2013 would appear consistent
      with a material pick-up in earnings estimates.
Figure 104: GDP growth expectations, together with EPS                              Figure 105: The cost of debt service as a % of disposable
estimates, have fallen steadily, with CS now well above                             income has fallen slightly, but our economists believe it
consensus                                                                           will come down further as spreads are compressed
4.6                               Brazil 2013 consensus GDP growth forecast         25
                                                                              101
                                  CS 2013 GDP growth forecast                                            Debt service ratio - principal
4.4
                                  12m fwd EPS rel World (Apr 2012 = 100, rhs) 99                         Debt service ratio - interest
                                                                                    20
4.2                                                                           97

4.0                                                                           95
                                                                                    15
3.8                                                                           93

3.6                                                                           91    10

3.4                                                                           89
                                                                                     5
3.2                                                                           87

3.0                                                                          85
  Apr-12    Jun-12       Aug-12      Oct-12     Dec-12       Feb-13     Apr-13       0
                                                                                     Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13

Source: Thomson Reuters, Credit Suisse research                                     Source: Thomson Reuters, Credit Suisse research



■     Our economists believe that bank lending spreads can decline in 2013.
      According to data from the Brazilian Central Bank, the spread between the Bank
      lending rate to households and the Selic base rate declined by around 300bps in
      2012, but remains high in absolute terms, at 27%. Our economists believe this lending
      spread can decline further in 2013, driven by public sector banks lowering the interest
      component of the debt service ratio, although this would be partly offset by the
      expected rise in the base rate (see below), thereby supporting household
      consumption.


Global Equity Strategy                                                                                                                                         43
                                                                                                  09 April 2013



■   Fiscal and political stability. Our economists expect a primary surplus of 2.3% of
    GDP in 2013, underpinning a steady decline in the net debt to GDP ratio from 35% in
    2012, to 33.8% in 2013. They also highlight that President Dilma Rousseff continues
    to enjoy high approval ratings, with the next election not due until October 2014.


What are the negatives?

■   As growth accelerates, inflation is likely to pick up: In common with inflation in a
    number of emerging market economies, Brazilian inflation is also set to accelerate in
    2013. Our economists expect inflation to pick up to 6.0% this year (on average) from
    5.4% in 2012, with food prices providing much of the upward momentum.

■   …leading to rising interest rates. In response to the pick-up in both GDP and
    inflation, our economists expect the Central Bank of Brazil to shift toward monetary
    tightening. Our economists expect the Selic rate to rise by 125bps in 2013, with the
    monetary policy committee having removed their commitment that the base rate would
    remain at its 7.25% for a “prolonged period” in their March meeting. Any rise in the
    Selic rate would serve to offset, at least in part, the benefit to households from falling
    lending spreads.

■   We are bearish of both iron ore and oil. Our commodity research team expects iron
    ore prices to fall to $110/t by the end of this year and $95/t by the end of 2014 (see
    their research note, Commodities Forecasts: The Setting of the Sun…, 3 April 2013).
    Were iron ore prices to continue falling, Brazil’s terms of trade would suffer, as iron ore
    exports account for around 13% of total exports. We are also cautious on crude
    oil, which accounts for a further 7% of Brazilian exports by value (we think the price
    will trend toward the 5-year forward of $90/bbl). Mining and oil account for around 35%
    of market cap.

■   From a global equity strategy perspective, Brazilian valuations do not seem
    compelling. On a forward /PE basis, the Brazilian equity market is trading at around
    its post-2007 average relative to the global market. More negatively, earnings
    momentum has taken a further move down, both in absolute terms and relative to
    global markets. Earnings momentum has weighed heavily on Brazilian equities in
    recent years, with our Brazilian equity strategy team highlighting that EPS estimates
    for 2012 halved during the past year.

■   Brazil ranks poorly on our scorecards. Brazil ranks second bottom on our
    fundamental valuation scorecard. It also ranks poorly on our macro (due to its
    relatively low trade share of GDP) and earnings momentum scorecards.




Global Equity Strategy                                                                                     44
                                                                                                                                                                                          09 April 2013



Figure 106: The P/E rel is more than 1 s.d. above its long-                                          Figure 107: … while earnings momentum is negative in
term average…                                                                                        absolute and relative terms
 100%                      MSCI Brazil: 12m fwd P/E rel to MSCI World                                                                 Earnings momentum
                           Average                                                                         60%
                                                                                                                                            Brazil              Brazil rel World

                                                                                                           40%
  80%
                                                                                                           20%

                                                                                                             0%
  60%
                                                                                                        -20%

                                                                                                        -40%
  40%

                                                                                                        -60%


  20%                                                                                                   -80%
        2000        2002         2004         2006        2008         2010        2012                     1998           2001         2004                  2007                 2010          2013


Source: Thomson Reuters, Credit Suisse research                                                      Source: Thomson Reuters, Credit Suisse research



What to buy?
Our Brazilian equity strategy team maintain a model portfolio of their preferred stocks.
Below we present those which are Outperform-rated by Credit Suisse analysts (their full
model portfolio is available in their note, LatAm Equity Strategy – Returning to Brazilian
large caps: April monthly portfolio, 31 March 2013).

Figure 108: Brazilian stocks
                                      -----P/E (12m fwd) ------               ------ P/B -------            2013e, %      HOLT       2013e Momentum, %
                                                                                                                                                                      Consensus
                                                        rel to mkt %                  rel to mkt %                        Price, %                                 recommendation Credit Suisse
                                             rel to
Name                            Abs                     above/below       Abs         above/below     FCY          DY    change to   3m EPS          3m Sales       (1=Buy; 5=Sell) rating
                                           Industry
                                                          average                       average                             best
Itauunibanco Pn                10.1          94%            38%           2.2             -7%         na           3.1     22.5       -3.2             -4.2               2.0             Outperform
Ptro.Brao.Adr 1:2               7.8          69%            20%           0.7             -64%        na           4.1      na        -9.3             5.8                2.5             Outperform
Cielo On Nm                    14.5          97%            30%          16.5             -7%         na           4.8     4.6        -0.7             3.9                2.6             Outperform
Bmf Bovespa On                 14.5         127%            18%           1.3             15%         na           4.0    -38.2       -3.8             0.6                2.3             Outperform
Estacio Part On                17.9          98%            56%           6.0             81%         na           1.5    -18.6       2.2              -0.4               2.4             Outperform
Tegma On                       12.6          81%            31%           5.2             48%         14.1         4.4     -6.0       -0.3             1.4                2.0             Outperform
Marisa Lojas                   18.3          99%            56%           5.6             61%         na           2.2     18.5       4.7              1.5                2.3             Outperform
Tractebel On                   13.7          92%            41%           4.1             63%         na           5.4     14.7       3.3              0.7                2.6             Outperform
Qualicorp On Nm                21.6         156%            22%           2.8             20%         na           1.6     52.2       -0.1             -0.1               1.8             Outperform
Klabin Sa Pn                   17.3         126%            84%           2.2             44%         3.7          2.1     -6.1       4.2              1.7                2.2             Outperform
Cyrela Realt On                 8.1          49%           -17%           1.5             -40%        14.6         3.0     51.0       -4.1             -6.6               2.5             Outperform
Brf Foods On                   19.0         106%           117%           2.6             84%         na           1.4    -29.1       1.1              1.4                2.5             Outperform
Minerva On                     10.4          58%            32%           1.8             41%         10.5         0.7     -6.2       6.9              2.2                2.2             Outperform
Br Propert On                  16.6          73%            8%            0.9              4%         na           1.8     51.8       -1.6             -1.4               1.9             Outperform
Braskem Pna                    16.5         116%            1%            1.3             44%         na           0.6    -35.5       -4.8             0.6                3.0             Outperform
Cesp Pnb                        6.2          42%           -72%           0.7             -86%        na           8.0      na        16.1            11.5                2.9             Outperform

Source: MSCI, IBES, Factset, Thomson Reuters, Credit Suisse HOLT, Credit Suisse research




Global Equity Strategy                                                                                                                                                                                 45
                                                                                               09 April 2013



     4) Korea: overweight
On our scorecards, Korea offers an attractive combination of exposure to an improving
global economy, is a net commodity importer (which we consider a positive, given our view
that commodity prices will moderate further) and scores very highly on the basis of relative
composite valuations. Our emerging market strategist, Sakthi Siva, is also very positive on
the Korean equity market, highlighting three key positives: it is underowned by foreign
investors, valuations look compelling and our economists forecast global GDP to
accelerate in 2013 (albeit after a modest end-Q1 loss of momentum).


The macro picture

■   Our Korea economists forecast some acceleration in Korean GDP growth in
    2013. The Korean economy is among the most open of all the emerging markets, with
    trade worth 93% of GDP, making it particularly sensitive to the acceleration in global
    growth momentum forecast for 2013 by our economists. Our global economists
    forecast global GDP growth to accelerate to 3.4% this year from 3.1% in 2012, and our
    US economists have recently further upgraded their 2013 US GDP growth forecast to
    1.9% from 1.6%, suggesting upside to their current global forecast.
Our Korea economist, Christaan Tuntono, expects an acceleration in Korean GDP growth
in 2013 to 2.7% from 2.0% in 2012. However, he has reduced his forecast slightly in
recent months from 3.2%, in light of a sluggish start to the year. Export growth was
subdued through 2012; a recovery in US and European growth would, in our economist’s
view, be a necessary condition for any sustained period of export growth.

■   Yen weakness will not, in our economist’s view, undermine Korean growth. Our
    Korea economists point out that there is little correlation between export growth and
    the JPY/KRW exchange rate. Moreover, Korea’s global market share has risen over
    the past decade even at times when the JPY/KRW rate was below current levels.

■   Scope for a cut in interest rates given decelerating inflation. Our economists have
    in recent months cut their inflation forecast for 2013 from an average of 2.9% to 2.2%,
    the same rate as in 2012. Our economists believe that the Bank of Korea has scope to
    cut interest rates (they forecast a 25bp cut in 2013) which would also help moderate
    the appreciation of the won, as well as boosting domestic demand.
The equity market
(1) Valuations are attractive
The Korean market trades at an 18% discount to GEM on a 12-month forward P/E basis,
and a near 30% discount on a P/B basis.




Global Equity Strategy                                                                                  46
                                                                                                                                                                         09 April 2013



Figure 109: Korea trades at an 18% PE discount to GEM                                                   Figure 110: …and on a P/B basis, the discount is closer to
                                                                                                        30%
 200%                                                                                                    100%

 180%                                         Korea rel GEM: 12m fwd P/E
                                              Average                                                     90%
 160%
                                                                                                          80%
 140%

 120%                                                                                                     70%

 100%
                                                                                                          60%
  80%
                                                                                                          50%
  60%                                                                                                                                       Korea rel GEM: P/B          Average

  40%                                                                                                     40%
     1990                 1993      1997           2001          2005          2009       2013               1995    1997   1999   2001   2003   2005   2007     2009    2011     2013


Source: Thomson Reuters, Credit Suisse research                                                         Source: Thomson Reuters, Credit Suisse research

Looking at the 12-month forward price to book relative to the consensus estimate for the
12-month forward return on equity of Korea compared to other emerging market suggests
the Korean market should be trading some 30% above current levels.

Figure 111: Comparing Korea’s RoE / P/B trade-off to that of other emerging markets
suggests it should be trading on a higher multiple
              3.5

                                                        R² = 0.57                                                   Indonesia
              3.0


              2.5
                                                                            India
                                                                                                   Thailand
    12m P/B




              2.0                 Mexico
                                                        Malaysia                         South Africa
                                          Taiwan                               Turkey
              1.5
                      Poland                                           China
                                                   Korea
              1.0                Brazil

                                                        Russia
              0.5
                    10%            12%                    14%                   16%                18%              20%             22%
                                                                    12m forward return on equity

Source: Thomson Reuters, Credit Suisse research

As a result of this, Korea ranks second on our fundamental valuation scorecard.




Global Equity Strategy                                                                                                                                                               47
                                                                                                                                                                             09 April 2013


(2) Earnings momentum has picked up. Relative to the global market, Korean earnings
    momentum has turned slightly positive again.

Figure 112: Earnings momentum has picked up                                                  Figure 113: The weakness of the yen has weighed on
                                                                                             Korean relative performance

  60%                                                                                         0.50
                                     Korea rel w orld, earnings momentum,
                                                                                                                                                                                        1600
                                     4w ma
  40%
                                                                                              0.45
                                                                                                                                                                                        1400
  20%
                                                                                              0.40
                                                                                                                                                                                        1200
     0%

                                                                                              0.35                                                     Korea relative to world
 -20%                                                                                                                                                                                   1000
                                                                                                                                                       KRWJPY (rhs)

 -40%                                                                                         0.30                                                                                      800

 -60%
                                                                                              0.25                                                                                      600
       2000     2002       2004             2006         2008       2010        2013              2006         2007       2008      2009     2010        2011         2012       2013

Source: Thomson Reuters, Credit Suisse research                                              Source: Thomson Reuters, Credit Suisse research



On the downside, our FX strategists are seeing further downside for the yen, with a
three-month target of $/¥105 and a twelve-month target of $/¥120 (and their forecasts
imply a 22% depreciation in the yen against the Korean won over the next 12 months).
While a case can be made that the BoJ is unlikely to surprise expectations any further
from current levels, a further weakening in the yen would be a negative for Korea’s relative
performance. Indeed, over the past eight years, there has been a reasonably close
correlation between the won/yen cross rate and the relative performance of the Korean
market. However, our FX strategists point out that the Bank of Korea has already
intervened in currency markets to protect the currency against excessive strength.


Stock picks
The stocks that look cheapest on HOLT with positive earnings momentum are Hyundai
and Samsung Electronics.

Figure 114: Korean stocks which are cheap on HOLT with positive earnings momentum
                                -----P/E (12m fwd) ------             ------ P/B -------            2013e, %           HOLT       2013e Momentum, %
                                                                                                                                                            Consensus
                                                     rel to mkt %             rel to mkt %                             Price, %                          recommendation Credit Suisse
Name                     Abs       rel to Industry   above/below    Abs       above/below     FCY          DY         change to   3m EPS    3m Sales      (1=Buy; 5=Sell) rating
                                                       average                  average                                  best
Gs Home Shopping         9.8           53%              42%         2.0            0%         0.1          1.7          27.4       16.4       -2.1              1.8          Outperform
Sk Telecom               8.8           67%              -6%         1.1          -53%         11.8         5.1          49.6       3.3        1.8               2.0          Neutral
Hyundai Mobis            7.6           75%              -52%        1.7           12%         0.6          0.6         102.9       0.2        0.0               1.7          Outperform
Sk Hynix                 14.1          89%              -56%        2.0          -55%         1.8          0.1          4.9        1.8        -1.5              1.8          Outperform
Kt                       7.5           57%              -31%        0.7          -46%         2.8          5.5          72.5       0.6        0.1               2.2          Outperform
Samsung Electronics      7.2           46%              -14%        1.6          -10%         12.3         0.6          78.1       6.0        1.9               1.7          Outperform
Samsung Heavy Inds.      9.1           69%              -1%         1.6           12%         29.3         1.4          1.2        1.6        -0.6              1.7          Outperform

Source: MSCI, IBES, Factset, Thomson Reuters, Credit Suisse HOLT, Credit Suisse research




Global Equity Strategy                                                                                                                                                                    48
                                                                                                                                09 April 2013




Which countries risk overheating?
We score the inflation risk for individual emerging markets on the basis of the following
factors:

■   The 2012 output gap;

■   The current account deficit;

■   The change in the current account deficit over the past year;

■   The inflation rate;

■   The change in the inflation rate over the last 12 months.
On this basis, India, Russia and the Philippines face the highest risk of monetary
tightening.

Figure 115: Emerging market inflation risk scorecard: India, Russia and the Philippines face the highest risk of
monetary tightening
                    Country          Output       Current account balance                 Inflation
                                                                                                                      z score
                                      gap
                                               Now        Change over last year    Now    Chg over last year, % pts
                    Weights          50%      12.5%             12.5%             12.5%           12.5%               100%
                    India            -0.9      -3.5               1.1             12.1%             4.7%               1.0
                    Russia           -0.6       2.1              -1.9              7.3%             3.5%               1.0
                    Philippines       1.5       2.2              -1.1              3.4%             0.6%               0.9
                    Turkey            0.9      -6.5              -0.7              7.0%            -3.4%               0.8
                    Indonesia        -0.5      -3.5              -0.7              5.9%             1.9%               0.8
                    South Africa     -1.2      -6.2              -0.2              5.9%            -0.2%               0.6
                    Brazil           -1.4      -2.7              -0.3              6.3%             0.5%               0.5
                    China             0.3       2.9               0.3              3.2%             0.0%               0.5
                    Poland            0.1      -4.1              -0.5              1.6%            -2.8%               0.4
                    Argentina        -3.1       0.4              -0.1             10.8%             1.1%               0.4
                    Mexico           -1.3       -1               -0.2              3.6%            -0.3%               0.3
                    Taiwan           -2.0       9.7              -0.8              3.0%             2.7%               0.2
                    Korea            -1.3        3               -0.7              1.3%            -1.3%               0.1
                    Chile            -1.7      -4.3              -0.6              1.3%            -3.1%               0.1
                    Malaysia         -0.3       7.8               1.4              1.5%            -0.6%               0.0
                    Thailand         -3.7      -0.2              -0.9              2.7%            -0.8%               -0.2
                    Czech Republic   -4.0      -2.4               0.0              1.8%            -1.9%               -0.4
                    Hungary          -4.6       1.2               0.0              2.8%            -3.1%               -0.6
Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                   49
                                                                                                                                                09 April 2013




Appendices
Appendix 1: Country output gaps and inflation
Figure 116: Output gaps for individual emerging markets
                                                                             Output gap, % of GDP
    4
                                                                                 NJA                LatAm
                                                                                 EMEA               EM
    2


    0


   -2


   -4


   -6


   -8
        1995                                                   1998               2001              2004            2007          2010   2013

Source: Thomson Reuters, Credit Suisse research




Appendix 2: GEM fund flows
Figure 117: Relative GEM fund flows are middling

                                                               50%                               EM rel Dev . Markets
                                                               40%
                   3m annualised net flows, as a % of assets




                                                               30%
                                                               20%
                                                               10%
                                                                0%
                                                               -10%
                                                               -20%
                                                               -30%
                                                               -40%
                                                               -50%
                                                                      2001      2003      2005           2007   2009       2011   2013

Source: EPFR Global, Credit Suisse research




Global Equity Strategy                                                                                                                                   50
                                                               09 April 2013



Companies Mentioned (Price as of 05-Apr-2013)
AAC Technologies Holdings Inc (2018.HK, HK$36.75)
Adidas AG (ADSGn.F, €78.92)
Air China (0753.HK, HK$6.05)
Aisino Co., Ltd (600271.SS, Rmb13.87)
AmBev (AMBV4.SA, R$82.9)
Anheuser-Busch InBev (ABI.BR, €75.15)
Anta Sports Products Limited (2020.HK, HK$6.5)
BM&F Bovespa SA (BVMF3.SA, R$13.71)
BMW (BMWG.F, €66.3)
BR Properties (BRPR3.SA, R$21.9)
Belle International Holdings Ltd (1880.HK, HK$12.1)
Bradesco (BBDC4.SA, R$33.31)
Brasil Foods S.A. (BRFS3.SA, R$44.51)
Braskem (BRKM5.SA, R$14.5)
Brilliance China Automotive Holding (1114.HK, HK$8.79)
British American Tobacco (BATS.L, 3510.0p)
CNOOC Ltd (0883.HK, HK$14.36)
Carrefour (CARR.PA, €20.68)
Casino Guichard (CASP.PA, €80.75)
Cesp (CESP6.SA, R$21.95)
China Construction Bank (0939.HK, HK$6.07)
China Medical System Holdings Ltd. (0867.HK, HK$7.79)
China Merchants Bank - H (3968.HK, HK$15.3)
China Pacific (601601.SS, Rmb18.64)
China Resources Power Holdings (0836.HK, HK$23.2)
China Shenhua Energy Company Limited (1088.HK, HK$27.35)
Cielo (CIEL3.SA, R$60.04)
Colgate-Palmolive (CL.N, $116.72)
Compagnie Financiere Richemont SA (CFR.VX, SFr71.1)
Cyrela Brazil Realty (CYRE3.SA, R$18.13)
Diageo (DGE.L, 1997.0p)
Estacio Participacoes (ESTC3.SA, R$43.8)
GS Home Shopping Inc (028150.KQ, W205,000)
GlaxoSmithKline plc (GSK.L, 1519.5p)
HCL Technologies (HCLT.BO, Rs757.45)
Haitong Securities (600837.SS, Rmb10.1)
Hyundai Mobis (012330.KS, W287,000)
Imperial Tobacco (IMT.L, 2260.0p)
Industrial & Commercial Bank of China (1398.HK, HK$5.2)
Intime Department Store Group Company Ltd (1833.HK, HK$8.72)
Itau Unibanco (ITUB4.SA, R$33.82)
KT Corp (030200.KS, W35,350)
Klabin (KLBN4.SA, R$14.29)
Kraft Foods Group (KRFT.OQ, $51.24)
Kunlun Energy (0135.HK, HK$16.0)
L'Oreal (OREP.PA, €121.55)
LVMH (LVMH.PA, €129.9)
Lenovo Group Ltd (0992.HK, HK$7.35)
Mahle Metal Leve (LEVE3.SA, R$28.5)
Marisa S.A. (AMAR3.SA, R$30.5)
Mead Johnson Nutrition Co. (MJN.N, $75.76)
Meda (MEDAa.ST, Skr77.1)
Millennium & Copthorne (MLC.L, 550.0p)
Minerva (BEEF3.SA, R$12.61)
NTPC Ltd (NTPC.BO, Rs140.85)
Nestle (NESN.VX, SFr67.3)
New Oriental Education (EDU.N, $16.07)
Nike Inc. (NKE.N, $58.97)
Novartis (NOVN.VX, SFr65.5)
Pernod-Ricard (PERP.PA, €94.38)
Petrobras (PBR.N, $16.37)
Philip Morris International (PM.N, $92.72)
Ping An Bank (000001.SZ, Rmb20.45)
Procter & Gamble Co. (PG.N, $78.23)
Prudential (PRU.L, 1032.0p)
QUALICORP (QUAL3.SA, R$19.7)
Reckitt Benckiser (RB.L, 4554.0p)
Reliance Industries (RELI.BO, Rs780.35)
SABMiller (SAB.L, 3399.0p)
SK Hynix Inc. (000660.KS, W28,550)
SK Telecom (017670.KS, W186,500)
Samsung Electronics (005930.KS, W1,505,000)
Samsung Heavy Industries (010140.KS, W33,200)
Sanofi (SASY.PA, €77.56)
Sterlite Industries (India) Ltd (STRL.BO, Rs89.25)
Suzano (SUZB5.SA, R$7.75)
Swatch Group (UHR.VX, SFr517.5)
Tata Motors Ltd. (TAMO.BO, Rs255.3)
Tegma (TGMA3.SA, R$29.74)
Telefonica (TEF.MC, €10.37)
Telenor (TEL.OL, Nkr125.0)
TeliaSonera (TLSN.ST, Skr42.78)




Global Equity Strategy                                                  51
                                                                                                                                                           09 April 2013



Tencent Holdings (0700.HK, HK$237.2)
Tesco (TSCO.L, 369.05p)
Tractebel Energia (TBLE3.SA, R$34.58)
Unilever (ULVR.L, 2725.0p)
Vale (VALE.N, $17.33)
Vodafone Group (VOD.L, 182.6p)
WPP (WPP.L, 1024.0p)
Yonyou Software (600588.SS, Rmb10.2)
Yum! Brands, Inc. (YUM.N, $66.97)




                                                                  Disclosure Appendix
Important Global Disclosures
The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views
expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
 *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total
return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevan t sector, with Outperforms representing the
most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings
are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd
October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a
stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total
return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and
7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese rat ings were
based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or
valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution
Rating                                                                                    Versus universe (%)                            Of which banking clients (%)
Outperform/Buy*                                                                                             43%                                     (53% banking clients)
Neutral/Hold*                                                                                               39%                                     (46% banking clients)
Underperform/Sell*                                                                                          16%                                     (41% banking clients)
Restricted                                                                                                   3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely
correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to
definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.




Global Equity Strategy                                                                                                                                                52
                                                                                                                                             09 April 2013




Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the
market that may have a material impact on the research views or opinions stated herein.
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Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the
target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (0883.HK, 0700.HK, 2020.HK, 1880.HK, 600837.SS, MLC.L, GSK.L, 010140.KS, CARR.PA, HCLT.BO, 1114.HK, BBDC4.SA,
CYRE3.SA, 000660.KS, SAB.L, DGE.L, TAMO.BO, ABI.BR, EDU.N, BATS.L, 0939.HK, NESN.VX, RELI.BO, 601601.SS, 005930.KS, PRU.L,
012330.KS, TEF.MC, TLSN.ST, KLBN4.SA, 017670.KS, TSCO.L, TBLE3.SA, BEEF3.SA, IMT.L, ESTC3.SA, ADSGn.F, BMWG.F, 1398.HK,
0836.HK, ULVR.L, ITUB4.SA, CASP.PA, 000001.SZ, AMBV4.SA, NOVN.VX, 0992.HK, LVMH.PA, 3968.HK, QUAL3.SA, 1088.HK, 030200.KS,
0753.HK, BRPR3.SA, VALE.N, CL.N, MJN.N, PBR.N, PG.N, PM.N, SUZB5.SA, KRFT.OQ) currently is, or was during the 12-month period
preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (0883.HK, 0700.HK, 600837.SS, GSK.L, CARR.PA, 1114.HK, DGE.L,
ABI.BR, 0939.HK, NESN.VX, 601601.SS, 005930.KS, PRU.L, TEF.MC, 017670.KS, BEEF3.SA, IMT.L, ESTC3.SA, BMWG.F, 1398.HK, CASP.PA,
AMBV4.SA, NOVN.VX, 0992.HK, LVMH.PA, 3968.HK, QUAL3.SA, BRPR3.SA, VALE.N, MJN.N, PBR.N, PG.N, PM.N, KRFT.OQ) within the past 12
months.
Credit Suisse provided non-investment banking services to the subject company (0700.HK, GSK.L, CARR.PA, BBDC4.SA, DGE.L, TAMO.BO,
BATS.L, 0939.HK, NESN.VX, RELI.BO, 005930.KS, PRU.L, TEF.MC, KLBN4.SA, 017670.KS, TSCO.L, TBLE3.SA, IMT.L, ADSGn.F, BMWG.F,
1398.HK, ULVR.L, ITUB4.SA, CASP.PA, 000001.SZ, NOVN.VX, 0992.HK, LVMH.PA, 3968.HK, VALE.N, CL.N, PG.N, PM.N, KRFT.OQ) within the
past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (0883.HK, 0700.HK, 600837.SS, GSK.L, DGE.L,
0939.HK, NESN.VX, 601601.SS, PRU.L, 017670.KS, ESTC3.SA, BMWG.F, NOVN.VX, 0992.HK, LVMH.PA, 3968.HK, QUAL3.SA, PBR.N, PG.N,
PM.N, KRFT.OQ) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (0883.HK, 0700.HK, 600837.SS, GSK.L, CARR.PA,
1114.HK, DGE.L, ABI.BR, 0939.HK, NESN.VX, 601601.SS, 005930.KS, PRU.L, TEF.MC, 017670.KS, BEEF3.SA, IMT.L, ESTC3.SA, BMWG.F,
1398.HK, CASP.PA, AMBV4.SA, NOVN.VX, 0992.HK, LVMH.PA, 3968.HK, QUAL3.SA, BRPR3.SA, VALE.N, MJN.N, PBR.N, PG.N, PM.N,
KRFT.OQ) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0883.HK, 0700.HK,
2020.HK, 1880.HK, 600837.SS, MLC.L, GSK.L, 010140.KS, CARR.PA, HCLT.BO, 1114.HK, BBDC4.SA, CYRE3.SA, 000660.KS, SAB.L, DGE.L,
ABI.BR, EDU.N, BATS.L, 0939.HK, NESN.VX, RELI.BO, 601601.SS, 005930.KS, PRU.L, 012330.KS, TEF.MC, PERP.PA, KLBN4.SA, 017670.KS,
MEDAa.ST, BEEF3.SA, NTPC.BO, IMT.L, ESTC3.SA, ADSGn.F, BMWG.F, 1398.HK, 0836.HK, CASP.PA, 000001.SZ, AMBV4.SA, NOVN.VX,
028150.KQ, 0992.HK, LVMH.PA, 3968.HK, QUAL3.SA, 1088.HK, 030200.KS, 0753.HK, BRPR3.SA, YUM.N, VALE.N, CL.N, MJN.N, NKE.N,
PBR.N, PG.N, PM.N, SUZB5.SA, KRFT.OQ) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (0700.HK,
GSK.L, CARR.PA, BBDC4.SA, DGE.L, TAMO.BO, BATS.L, 0939.HK, NESN.VX, RELI.BO, 005930.KS, PRU.L, TEF.MC, KLBN4.SA, 017670.KS,
TSCO.L, TBLE3.SA, IMT.L, ADSGn.F, BMWG.F, 1398.HK, ULVR.L, ITUB4.SA, CASP.PA, 000001.SZ, NOVN.VX, 0992.HK, LVMH.PA, 3968.HK,
VALE.N, CL.N, PG.N, PM.N, KRFT.OQ) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (EDU.N, YUM.N, VALE.N, CL.N, MJN.N, NKE.N,
PBR.N, PG.N, PM.N, KRFT.OQ).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (STRL.BO, CARR.PA,
CIEL3.SA, SAB.L, DGE.L, NESN.VX, PRU.L, LEVE3.SA, TSCO.L, BEEF3.SA, TGMA3.SA, IMT.L, ADSGn.F, VOD.L, NOVN.VX, 3968.HK, 1088.HK,
600588.SS).
Credit Suisse has a material conflict of interest with the subject company (0883.HK). Credit Suisse is acting as financial advisor to both CNOOC Ltd.
and SINOPEC on the acquisition of Marathon Oil Corporation's 20% interest in Block 32, offshore Angola.
Credit Suisse has a material conflict of interest with the subject company (000001.SZ). Credit Suisse is acting as International Advisor to the Special
Committee of the Board of Directors of Shenzhen Development Bank ("Special Committee"). Credit Suisse Founder Securities is acting in the role of
Independent Financial Advisor to the Special Committee.
Credit Suisse has a material conflict of interest with the subject company (VALE.N). The analyst Ivano Westin has a relationship with a natural
person who may provide remunerated services to one or more of the companies covered in this report. I, Ivano Westin, hold directly or indirectly,
securities referenced in the research reports I prepare [VALE].




Global Equity Strategy                                                                                                                                  53
                                                                                                                                                 09 April 2013



As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject
company (PG.N). An analyst or a member of the analyst's household has a long position in the common stock of (PG).

Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (RB.L, 0883.HK, 600271.SS,
0867.HK, STRL.BO, 0700.HK, 2020.HK, OREP.PA, 1880.HK, MLC.L, 0135.HK, GSK.L, 010140.KS, CARR.PA, CIEL3.SA, HCLT.BO, 1114.HK,
BRFS3.SA, BBDC4.SA, CESP6.SA, CYRE3.SA, 000660.KS, SAB.L, DGE.L, WPP.L, TAMO.BO, ABI.BR, EDU.N, BATS.L, 0939.HK, BRKM5.SA,
NESN.VX, RELI.BO, 601601.SS, 2018.HK, 005930.KS, UHR.VX, PRU.L, 012330.KS, LEVE3.SA, TEF.MC, PERP.PA, TLSN.ST, KLBN4.SA,
017670.KS, TSCO.L, MEDAa.ST, TEL.OL, TBLE3.SA, BEEF3.SA, NTPC.BO, TGMA3.SA, IMT.L, ESTC3.SA, ADSGn.F, BMWG.F, 1398.HK,
0836.HK, BVMF3.SA, ULVR.L, ITUB4.SA, CASP.PA, CFR.VX, 000001.SZ, VOD.L, AMBV4.SA, NOVN.VX, 028150.KQ, 0992.HK, LVMH.PA,
3968.HK, SASY.PA, QUAL3.SA, 1088.HK, 030200.KS, AMAR3.SA, 600588.SS, 0753.HK, BRPR3.SA, YUM.N, VALE.N, CL.N, MJN.N, NKE.N,
PBR.N, PG.N, PG.N, PM.N, SUZB5.SA, KRFT.OQ) within the past 12 months
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Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (MLC.L, DGE.L, IMT.L).
The following disclosed European company/ies have estimates that comply with IFRS: (RB.L, OREP.PA, MLC.L, CARR.PA, SAB.L, DGE.L, WPP.L,
ABI.BR, BATS.L, NESN.VX, PRU.L, TEF.MC, PERP.PA, TLSN.ST, TSCO.L, TEL.OL, IMT.L, ADSGn.F, BMWG.F, CASP.PA, VOD.L, SASY.PA).
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Credit Suisse Securities (Europe) Limited. Andrew Garthwaite ; Marina Pronina ; Mark Richards ; Sebastian Raedler ; Robert Griffiths ; Nicolas
Wylenzek

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user then may adjust the default variables to produce alternative scenarios, any of which could occur.




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Additional information about the Credit Suisse HOLT methodology is available on request.
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suisse.com/researchdisclosures or call +1 (877) 291-2683.




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Description: GEM: stay overweight, despite the headwinds