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					                                                                                                                                               17 May 2013
                                                                                                                                                     Global
                                                                                                                                          Equity Research
                                                                                                                                        Investment Strategy




                                                   Global Equity Strategy
                           Research Analysts
                                                    STRATEGY
                          Andrew Garthwaite
                            44 20 7883 6477
          andrew.garthwaite@credit-suisse.com      Only a mild slowdown: become more cyclical
                             Marina Pronina
                            44 20 7883 6476        We think the global slowdown is going to be mild (unlike those over the past
             marina.pronina@credit-suisse.com      three years, when every spring ISM new orders fell by around 10 points), given
                              Mark Richards
                                                   that: our US 10 factor model has now stabilised and is registering c2% GDP
                            44 20 7883 6484        growth (despite c2½% of GDP of fiscal tightening); US private sector
              mark.richards@credit-suisse.com      deleveraging is well advanced; Japan is pursuing aggressive reflationary
                            Sebastian Raedler      policies; the fall in commodity prices adds 0.4% to developed GDP; tail risks in
                              44 20 7888 7554      Europe have been sharply reduced by the OMT and a balanced current account
           sebastian.raedler@credit-suisse.com     in the periphery; real money growth has improved (and leads GDP growth); and
                                Robert Griffiths   most emerging markets are no longer overheating, enabling them to cut rates
                               44 20 7883 8885     (China and Brazil being the exception). Global GDP growth exited 2012 at just
              robert.griffiths@credit-suisse.com   2.5%, against our forecast of 3.3% for this year. In fact, there are some signs
                           Nicolas Wylenzek        that global growth momentum is already in the process of troughing, with
                             44 20 7883 6480       global macro surprises now stabilising close to ex-09 lows.
           nicolas.wylenzek@credit-suisse.com
                                                   Cyclicals: we stay overweight US cyclicals and raise European cyclicals to
                                                   overweight (from benchmark): the ratio of cyclicals to defensives is consistent
                                                   with IFO of 97 in Europe (=0% German GDP growth) and ISM of 50 in the US;
                                                   we think this is too bearish. Cyclicals tend to trough in line with the trough in
                                                   economic momentum—which we are close to. The P/B of European cyclicals
                                                   relative to defensives is close to its post-2009 lows. 80% of the time bond yields
                                                   rise, cyclicals rise; the gap between overall risk appetite and sector risk appetite
                                                   is at a record high. The price relatives of cyclicals is still 5% below its 6-mth MA.
                                                   We raise autos to overweight from benchmark, having reduced in
                                                   December; we continue to focus on premium makers. We cut food producers
                                                   to underweight from benchmark and add to our underweight of tobacco.
                                                   Our favoured cyclicals themes are: a) exposure to US corporate spend focusing
                                                   on short-cycle areas (advertising, high-end hotels, software and short-cycle
                                                   capital goods): SAP, WPP, Experian, Assa Abloy; b) airlines (Lufthansa,
                                                   Ryanair); c) UK housing-related stocks (Kingfisher, homebuilders); d) US
                                                   housing (Wolseley). Stocks with more than 20% upside potential on HOLT, a
                                                   P/B rel below the norm and positive earnings momentum include Mediaset.
                                                   Figure 1: European cyclicals’ price relative is consistent with IFO expectations
                                                   of around 97, a much lower reading than the current level of 101.6
                                                                  85                                                                          115
                                                                  80                                                                          110
                                                                  75                                                                          105
                                                                  70                                                                          100
                                                                  65                                                                          95
                                                                  60                                                                          90
                                                                                                  European cyclicals/defensives, lhs
                                                                  55                                                                          85
                                                                                                  IFO business expectations
                                                                  50                                                                          80
                                                                  45                                                                          75
                                                                    2007   2008    2009    2010         2011           2012            2013

                                                   Source: Thomson Reuters, Credit Suisse research
DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON
TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER
IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S.
Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,
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.
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                                                                                                17 May 2013




Table of contents
Close to the trough of a mild downturn, adding to cyclicals                                 3
   Another spring, another downturn – but we think this time it is different                3
The growth slowdown is likely to be mild this year                                          5
   (1) Global year-on-year GDP growth exited 2012 at just 2.5%                              5
   (2) The ‘stress amplifiers’ in the financial system have been switched off               6
   (3) The healing in the US private sector is far more advanced                            8
   (4) Commodity prices are now a tailwind, not a headwind to growth                       11
   (6) Emerging markets in general are no longer clearly overheating in aggregate          14
   (7) Improving money supply growth                                                       14
Has the cycle troughed?                                                                    15
The positives for cyclicals                                                                17
   (1) Cyclicals are pricing in a sharper decline in economic activity than seems likely   17
   (2) European cyclicals now look attractively valued on P/B relatives                    18
   (3) Cyclicals have lagged the market recovery                                           18
   (4) Cyclicals are oversold                                                              20
   (5) Cyclicals typically outperform as bond yields rise                                  20
   (6) Sector risk appetite is abnormally low relative to overall risk appetite            21
   The problems with cyclicals                                                             22
Major sector changes                                                                       25
   Autos: upgrade from benchmark to overweight                                             25
   Food producers: downgrade to underweight                                                33
Which cyclicals to focus on?                                                               37
Our preferred cyclicals themes                                                             39
   (1) US corporate spend-related plays: adding more money                                 39
   (2) Airlines: increasing our overweight                                                 44
   (3) Software: stay overweight                                                           48
   (4) Advertising: stay overweight                                                        52
   (5) UK housing-related plays                                                            55
   (6) US housing-related spending plays                                                   60
   (7) Peripheral European cyclicals                                                       62
   What are the cheap cyclicals in Europe and the US?                                      63
Tobacco: downgrade to a larger underweight                                                 64
Appendices                                                                                 69
   Appendix 1: Global growth contributions                                                 69
   Appendix 2: Falling inventories can be a positive signal                                70
   Appendix 3: Pan European valuation scorecard                                            71
   Appendix 4: CPI / PPI pricing monitor                                                   72
   Appendix 5: European sector recommendations                                             73




Global Equity Strategy                                                                                   2
                                                                                                                               17 May 2013



Close to the trough of a mild
downturn, adding to cyclicals
We believe that the current slowdown is much milder than the slowdowns that have
occurred for each of the last three springs and there is some evidence that growth
momentum might already be troughing.

Another spring, another downturn – but we think this
time it is different
Before 2007, 10-point corrections in the ISM new orders – equivalent to a slowdown in US
GDP growth of around 1.5 percentage points – happened only once every four to five
years. Since then, however, there has been a correction of at least 10 points on the ISM
new orders nearly every year (five out of the last six years) – and in each of the past three
years (with the slowdown starting in April on each occasion).

Figure 2: In each of the past three years, economic             Figure 3: Economic momentum has displayed an unusual
momentum corrected sharply in spring                            seasonal pattern over the past few years
                                                                          ISM new orders            2010-11          2011-12      2012-13
                        S&P 500             Subsequent fall       65
    ISM peak
                  Peak    Lag (months)      ISM      S&P          63
  Nov-80         Nov-80          0           -17      -9%
  Dec-83         Oct-83         -2           -28     -11%         61
  Jun-94         Jan-94         -5           -22      -8%         59
  Sep-99         Mar-00          6           -14     -11%
                                                                  57
  Mar-02         Mar-02         -2           -13     -32%
  Dec-03         Mar-04          3           -14      -6%         55
  Jul-07         Jul-07          0           -13      -9%         53
  Jun-08         May-08         -1           -27     -52%
  Apr-10         Apr-10          0           -11     -15%         51
  Apr-11         May-11          1           -11     -17%         49                                      Start of the year
  Apr-12         Apr-12          0           -10      -9%
                                                                  47
Average                          0           -16     -16%
Median                           0           -14     -11%         45
                                                                       May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

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



As in previous years, economic momentum appears to have slowed again this spring:

■     ISM new orders dropped by six points in March.

■     Our economists base materials index, a proxy of global IP growth, has fallen close to
      its lowest level since June 2012.




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                                                                                                                                               17 May 2013


Figure 4: The CSBMI has fallen close to its June 2012                           Figure 5: Global macro surprises have turned clearly
trough                                                                          negative
                                                                         13%
    2
                                                                                                                                                         60
                                                                                 40
    1
                                                                         8%                                                                              55

    0                                                                                                                                                    50
                                                                                 -10
                                                                         3%
 -1                                                                                                                                                      45

                                                                                 -60
 -2                                                                      -2%                                                                             40


 -3            CS CSBMI, 3mma                                                                                   Global macro surprise, lhs               35
                                                                                -110
               Global IP growth, 4-month lag, rhs                        -7%                                    Global PMI manufacturing new orders
 -4                                                                                                                                                      30


 -5                                                                      -12%   -160                                                                     25
  Mar-00    Mar-02    Mar-04      Mar-06      Mar-08   Mar-10   Mar-12              2008      2009      2010        2011            2012          2013

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



■       Global macro surprises (a measure of the degree to which global macro data surprises
        on the upside or downside) turned sharply negative at the beginning of the year.


However, we would be very surprised if this slowdown were as severe as the previous
years – and, if anything, we see macro momentum as being close to its trough.




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                                                                                                              17 May 2013



The growth slowdown is likely to be
mild this year
The slowdown is likely to be milder this year for the following reasons:

(1)       Global year-on-year GDP growth exited 2012 at
          just 2.5%
Year-on-year global GDP growth peaked at 5.1% in Q1 2010 – and has slowed in 11
consecutive quarters, dropping to 2.5% in Q4 2012. This is 1 percentage point below the
20-year average growth rate – and even assuming GDP growth below expectations in all
global regions, it is difficult to see it dropping significantly below 2.5%, barring a major
exogenous shock. Indeed, as we show in Appendix 1, for global GDP growth to be below
2.5%, US GDP growth would have to drop below 1%, Chinese GDP growth below 6% and
Europe staying in recession: the first two look unlikely in our view. Consequently, we think
global GDP growth is set to accelerate in 2013 from its exit rate of 2012. Our economists
forecast global GDP growth of 3.3% for this year, an 0.8% improvement on its 2012 exit
rate.

Figure 6: Global PMIs indicate the first pick-up in global growth since Q4 2009 with
global GDP growth exiting 2012 at just 2½% and slowing every quarter (yoy) since Q1
2010
                                   Global manufacturing PMI new orders
                                   Global GDP at PPP, 6m lag (w ith CS 2013 forecast)                 5.7%
59
                                                                                                      4.7%
54
                                                                                                      3.7%

49                                                                                                    2.7%

44                                                                                                    1.7%

                                                                                                      0.7%
39
                                                                                                      -0.3%
34
                                                                                                      -1.3%
29                                                                                                    -2.3%

24                                                                                                    -3.3%
  2004      2005         2006   2007     2008       2009       2010       2011          2012   2013

Source: Thomson Reuters, Credit Suisse research




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                                                                                                                                                     17 May 2013


(2)       The ‘stress amplifiers’ in the financial system
          have been switched off
In previous years, a slowdown in global growth momentum was associated with worsening
fiscal arithmetic in the European periphery and this in turn led to a sharp widening of
spreads, which in turn fed through to weaker European and global confidence.

Figure 7: Over the past three years, Spanish bond                            Figure 8: The European periphery is running a balanced
spreads were very sensitive to global growth momentum                        current account balance for the first time in more than a
– however, this year spreads have continued tightening,                      decade
even as growth has started to slow
                             Global PMI manufacturing new orders       0.5    2%
59                                                                                       Peripheral European 5: 3-month annualized current account
                             Spanish bond spreads, 6w lag, inv., rhs
                                                                                         balance, % of GDP
57                                                                     1.5
                                                                              0%

55
                                                                       2.5
                                                                              -2%
53
                                                                       3.5
51                                                                            -4%
                                    p
49                                                                     4.5
                                                                              -6%
47
                                                                       5.5
                                                                              -8%
45
                                                                       6.5
43                                                                           -10%
 Jan-10         Oct-10     Jul-11           Apr-12            Jan-13            Feb-05             Feb-07             Feb-09             Feb-11           Feb-13

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

Since mid-2012, however, two things have happened that have effectively switched off this
stress amplifier:

■    The ECB’s OMT promise to be lender of last resort in potentially unlimited quantities.

■    As our European economist Neville Hill points out, the European periphery is running
     a balanced current account balance for the first time in more than a decade, which
     indicates that the peripheral Europe is no longer dependent on foreign capital to
     finance its budget deficits.


The situation in the Euro-area might further benefit from the following factors:

■    The president of the European Commission, Manuel Barroso, German Finance
     Ministry officials and the Italian and Spanish Prime Ministers have all hinted over the
     past two to three weeks that austerity needs to be tempered. According to Bild am
     Sonntag (5 May 2013), the German Finance Minister, Wolfgang Schäuble, said “The
     European Union's growth and stability pact allows a certain flexibility for meeting the
     rules… The (European) Commission and the (German) government are in complete
     agreement that there must not be any relaxation of (structural) reforms.”

■    Finally, the ECB is likely to do something to help improve the monetary transmission
     mechanism in the Euro-area. The problem is that nearly 70% of GDP in the periphery
     is generated by small- and medium-sized enterprises (SMEs), lending rates are still
     very high (c 5.5%) and nearly half of SMEs have difficultly accessing finance.




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                                                                                                                                                                                               17 May 2013


Figure 9: 70% of GDP in the European periphery is linked                                                                  Figure 10: Around half of peripheral European SMEs have
to small- and medium-sized enterprises                                                                                    trouble accessing bank financing
                                                    30                                                                     60
                                                                                                                                   did not apply due to expectation of rejection
                                                                                                 SPA
Proportion of SMEs for which access to finance is




                                                                                                                                   received only limited amount
                                                                                                                           50      costs too high
                                                    25
                                                                         IRE                                                       application rejected
              most pressing problem




                                                                                                                           40
                                                    20                                                         ITA
                                                                                                   POR
                                                                                                                           30
                                                    15                              NET
                                                                                                                           20
                                                                    FRA
                                                    10
                                                                                                                           10
                                                              GER
                                                     5
                                                         50         55         60          65          70            75     0
                                                                                                                                  EA        GER           FRA         ITA          SPA   IRE      POR
                                                                % share SMEs in value added (2009/2010 data)

Source: Credit Suisse European economics research                                                                         Source: Credit Suisse European economics research



It seems most probable that we will eventually see some policies aimed at unblocking
SME-related lending (for some details on this, see our economists’ report Supporting
SMEs: ECB faces rocky road ahead, May 13). The problem is that enacting these policies
will take time – and could come with another stress test for the banks (which this time
around might force banks to raise capital as opposed to reducing assets).




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                                                                                                                                                             17 May 2013


(3)           The healing in the US private sector is far more
              advanced
In spite of fiscal tightening of 2.6% of GDP, our lead indicator of US GDP growth suggests
growth is still running at around 2% GDP, in line with our economists’ forecasts of 1.9%
and consensus forecasts of 2.0% for 2013). Assuming a multiplier of 1x for the fiscal
measures enacted this year, this suggests that in the absence of any fiscal tightening, US
GDP growth could have been around 4.5%. (Given that what matters for growth is the
change in the tightening stance and that fiscal tightening in 2012 was equivalent to 1.3%
of GDP, this points to an underlying growth rate of around 3.2%).

Figure 11: Our proxy of US GDP growth suggests growth                                  Figure 12: US GDP growth adjusted for fiscal tightening
is running at around 2.3%                                                              should be around 3.2% this year
                                                                                          6                              5.5
                          US lead indicator: Implied GDP growth (6wk lead)
    7%
                          US GDP qoq %, saar
    5%                                                                                    4                                                                      3.2
                                                                                                                                      3.0
                                                                                                                   2.4                              2.5
    3%                                                                                                                                        2.2
                                                                                                                                1.8                        1.9
                                                                                          2
    1%

                                                                                          0
 -1%
                                                                                               -0.3
 -3%
                                                                                          -2
                                                                                                                          GDP, y/y%
 -5%                                                                                              -2.3
                                                                                                         -3.1             GDP ex fiscal policy (CS forecast), y/y%
                                                                                          -4
 -7%                                                                                                        -4.0

 -9%                                                                                      -6
         03   04   05    06      07       08      09       10       11       12   13            2008      2009     2010           2011         2012          2013


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

In particular, the following factors related to the US private sector look much better than
they have over the past few years:

■        Household debt is back to trend – and the private sector is borrowing again
Household debt relative to assets and to GDP is back to trend levels. More importantly,
there are signs that households have now finished deleveraging: we highlight the increase
in private sector debt in Q4 2012 at its highest level since 2007 with—for the first time—
both the corporate sector and the consumer sector borrowing.




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                                                                                                                                                                        17 May 2013


Figure 13: US household leverage is back at trend relative                          Figure 14: Both the corporate and consumer sector are
to assets and relative to liabilities                                               borrowing again
     30%                                                                              700                   Change in credit market debt for US sectors ($bn)
                         US household debt/assets - devn from trend
     25%                                                                                                                                        Non-financial business sector
                         US household debt/GDP - devn from trend                      600
     20%                                                                                                                                        Household sector
                                                                                      500
     15%
                                                                                      400
     10%
                                                                                      300
      5%

      0%                                                                              200

      -5%                                                                             100
     -10%                                                                               0
     -15%
                                                                                      -100
     -20%
         1961     1969       1978         1986         1995           2003   2012     -200

                                                                                      -300
                                                                                         Q3 2003             Q3 2005         Q3 2007          Q3 2009          Q3 2011
Source: Thomson Reuters, Credit Suisse research                                     Source: Thomson Reuters, Credit Suisse research

■   US banks leverage is at a 25-year low and banks are lending again
Since the end of 2008, listed US banks have increased equity by around $430bn, or 75%.
As a consequence, US banks leverage has fallen to a 25-year low. Furthermore, the
concerns in 2010 and 2011 that the considerable increase in banks’ reserves with the Fed
did not translate into bank loan growth no longer apply, given that loan growth to
corporates and households is now positive (albeit still not overly strong). This is shown in
the lending data above. The so called ‘money multiplier’ is working.

Figure 15: US bank leverage has fallen to a 25-year low                             Figure 16: Banks are lending again to the household
                                                                                    sector
                                                                                         20%             US commercial banks: y ear-on-y ear loan grow th

                                                                                         15%

                                                                                         10%

                                                                                             5%

                                                                                             0%

                                                                                         -5%                      Ov erall corporate
                                                                                                                  Ov erall household
                                                                                        -10%

                                                                                        -15%
                                                                                                  2005     2006    2007     2008       2009   2010      2011     2012     2013


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


■   Housing is set to add 0.8% to GDP p.a., double its 2H 2012 contribution
Bernanke reminded investors in his 2011 Jackson Hole speech that there has not been a
strong recovery from recession since World War II that was not driven by housing. We
believe that housing could easily add 0.75pp a year to US GDP growth, from 0.3-0.4%
over the past two quarters. The indirect effects of a stronger housing market are probably
underestimated (housing is a third of household wealth and 40% of banks assets—a rise
in house prices helps refinancing as fico scores improve and also leads to a rise in
household formation).



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                                                                                                                                                                17 May 2013


Figure 17: The contribution to US GDP growth from                                    Figure 18: The NAHB index suggests residential
residential investment has been much more muted than in                              investment should rise to c4% of GDP from 2.6%
previous recoveries
12                   Cumulative contribution to GDP growth from residential                 90             US NAHB index                                              7.0%
                     investment post NBER recessions (% pt)                                                US residential construction (% GDP rhs)
                                                                                            80
                                                                                                                                                                      6.0%
10                                                                                          70

                                                                                            60                                                                        5.0%
 8
                                                                                            50
                                                                                                                                                                      4.0%
                                                                                            40
 6
                                                                                            30                                                                        3.0%

                                                                                            20
 4                                                                                                                                                                    2.0%
                                                                                            10

 2                                                                                          0                                                                         1.0%
                                                                                             1985   1989       1993      1997      2001     2005        2009   2013

 0
     Q4 1982 Q4 1970 Q1 1975 Q1 1961 Q2 1958 Q2 1954 Q4 2001 Q1 1991 Q2 2009

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


■    The corporate sector is strong
Corporate leverage is still low, while free cash-flow relative to GDP is close to a record
high.

Figure 19: Corporate leverage is still low                                           Figure 20: Free cash flow of US corporates as a
                                                                                     proportion of GDP is close to an all-time high
 2.20                US non-financials, net debt to EBITDA                           10%                   FCF, % of non-financial GDP
                                                                                      8%                   FCF post div idends, % of non-financial GDP
 2.00
                                                                                      6%
 1.80                                                                                 4%

                                                                                      2%
 1.60
                                                                                      0%
 1.40
                                                                                     -2%

 1.20                                                                                -4%

                                                                                     -6%
 1.00
                                                                                     -8%
 0.80                                                                                -10%
     1981     1985      1989     1993     1997      2001     2005      2009   2013     Q1 1950         Q3 1965                  Q1 1981              Q3 1996           Q1 2012

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



Furthermore, return on assets is at an all-time high, while the cost of borrowing is at an all-
time low. This should incentivise corporates to invest. This is further supported by the fact
that even after the recent rebound in investment US non-residential private sector
investment is only back to typical recession levels. This suggests that for the past five
years, US corporates have been underinvesting. This is consistent with the observation
that the average age of the US corporate capital stock is at its highest level since at least
1970.




Global Equity Strategy                                                                                                                                                       10
                                                                                                                                                   17 May 2013


Figure 21: US private non-residential fixed investment is                                Figure 22: The corporate capital stock is unusually old
still close to the trough level of the 2002 recession
 15%                                                                                       17            Current-cost average age at
                                                                                                         yearend of fixed assets and
                       US priv ate non-residential fix ed inv estment, % of GDP
                                                                                                         consumer durable goods:
 14%                                                                                      16.5
                                                                                                                           Nonresidential
 13%                                                                                       16


 12%                                                                                      15.5


 11%                                                                                       15


 10%                                                                                      14.5


    9%                                                                                     14
       1980     1985          1991         1996         2002         2007         2013           1970       1980              1990          2000        2010

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


■    The energy boom
Shale oil has added 800k barrels to oil production over the last year – and is likely to add
0.3% a year to GDP alone. Indirectly, the energy boom helps corporates with high energy
needs by pushing further down energy costs.

■    The outsourcing boom appears to be coming to an end
In 2012, US manufacturing jobs were growing for the first time since 1997.


We think underlying US private sector GDP growth should be around 3.5% this year



(4)           Commodity prices are now a tailwind, not a
              headwind to growth
Until early 2012, rising markets were correlated with rising commodity prices (and mining
outperformance), in that any rise in economic momentum was self-defeating, as it led to
an increase in the ‘commodity tax’ on growth and also led central banks to be less
aggressive than they should have been in easing policy (the ECB actually target headline
not core inflation).
While directionally, commodities continue to move in line with economic momentum (for
example, the three-month rate of change in the oil price correlates strongly with ISM), they
are clearly underperforming the cycle. Oil prices are now down 20%, metal prices down
22% and food prices down 19% from peak.




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                                                                                                                                                      17 May 2013


Figure 23: Oil prices continue to move in the same                               Figure 24: Rising equity markets are no longer led by
direction as economic momentum – but have recently                               resource sectors – but rather by financials
started to underperform the cycle
  60                                                                                                   Global market                                             220
                                                                    70                                 Global materials, relative to financials
  40
                                                                                 360                                                                             200
                                                                    64
  20
                                                                    58
                                                                                                                                                                 180
                                                                                 310
   0                                                                52
                                                                                                                                                                 160
 -20                                                                46
                                                                                 260
                                                                    40
 -40                                                                                                                                                             140
                                 Brent Crude, 3m%ch
                                                                    34
                                 ISM new orders, rhs                             210
 -60                                                                                                                                                             120
                                                                    28

 -80                                                                22
    2008       2009      2010     2011         2012          2013                160                                                                             100
                                                                                   Mar-08     Mar-09         Mar-10          Mar-11          Mar-12     Mar-13

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


We believe this underperformance is largely due of the loss of capital discipline and the
resultant increase in supply, in combination with the slowdown in China fixed asset
investment growth from 28% in the last decade to closer 8% over the next decade.
Lower commodity prices should help growth in three ways:
       (1) The boost to global growth from lower oil prices
According to the IMF, each 10% off oil prices boosts global GDP growth by 0.1% in the
first year (this is because the savings ratios of the commodity importers is above that of
the commodity exporters).

Figure 25: The IMF estimates a 10% fall in the oil price adds c.0.1 percentage points to
global GDP growth in the first year (0.2% to the US)
                                                         Years after shock
             Region                      1               2                   3               4
             US
             GDP                      -0.15            -0.20             -0.20              -0.10
             CPI rate                  0.40            0.25              0.15               0.10
             Euro area
             GDP                      -0.10            -0.20             -0.20              -0.10
             CPI rate                  0.35            0.25              0.20               0.15
             Japan
             GDP                      -0.05            -0.10             -0.15              -0.10
             CPI rate                  0.15            0.10              0.05               0.05
             GEM
             GDP                      -0.05            -0.10             -0.10              -0.10
             World
             GDP                      -0.10            -0.15             -0.15              -0.10
Source: IMF, Credit Suisse research




Global Equity Strategy                                                                                                                                           12
                                                                                                                                               17 May 2013



       (2) Lower inflation boosts real disposable income
This is particularly the case in emerging markets where food prices account for a third of
the CPI basket.


       (3) Lower inflation helps the ECB and other central banks to be more dovish
The ECB targets headline inflation and is currently forecasting 1.3% for 2014 (the mid-
point of its forecast range) with Euro-area GDP falling by -0.5%. Our economists estimate
that if oil prices remain at current levels, headline inflation will fall to 1% in
September/October, almost a full percentage point below the ECB’s target of “close to, but
below 2%”. Thus, low commodity prices could help to nudge the ECB to be more
aggressive (and on this occasion not to save the euro but to avoid under-shootings its
inflation target).



(5)        Reflationary policies in Japan

Japan is the world’s third largest economy, accounting for around 7% of global outlook –
but it has had zero nominal GDP growth over the past 20 years. However, Japan has now
taken—in our view—ground-breaking policies to reflate the economy. This includes both
monetary and fiscal monetary. Fiscal policy has been eased by 0.7% (and we doubt the
consumption tax will be implemented unless growth recovers) – and the Bank of Japan
has committed to a significantly increase in its balance sheet in order to meet its inflation
target of 2% over the next two years (more specifically, it plans to expand its balance
sheet by 11% of GDP a year in net terms). As a consequence of these reflationary policies,
economic momentum in Japan has rebounded strongly over the past few months. In the
medium term, we think Japanese nominal GDP growth will be 3%.
There seems to be a clear commitment for change in Japan – we await details of the ‘third
arrow’.

Figure 26: The BoJ’s balance sheet is set to rise to 60% of            Figure 27: Japan’s economic momentum has continued
GDP                                                                    rebounding, even as it has weakened in the rest of the
                                                                       world
 70%                                                                            PMI manufacturing new orders
                                                                                                         China                      EMU
                    Central Bank balance sheets, % GDP                     59
 60%                                                                                                     US                         Japan
                 BoJ             Fed          BoE        ECB                                             Brazil
                                                                           57
 50%
                                                                           55
                                                                           53
 40%
                                                                           51
 30%                                                                       49
                                                                           47
 20%
                                                                           45
 10%                                                                       43
                                                                           41
  0%
    2008     2009         2010         2011    2012      2013   2014       39
                                                                            Jan-12   Mar-12   May-12   Jul-12     Sep-12   Nov-12     Jan-13    Mar-13

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




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                                                                                                                                                                                                              17 May 2013


(6)                                  Emerging markets in general are no longer
                                     clearly overheating in aggregate
80% of global growth has come from emerging markets (GEM) over recent years, making
GEM the key driver of global GDP growth. The problem is that for the most part emerging
markets have been overheating over the past three years.
We proxy whether a country is overheating by looking at the output gap (as estimated by
Oxford Economics). If a country appears on the right hand side on Figure 28, then it is
operating above full capacity. The chart suggests that among emerging markets only
China is operating above capacity as well as having accelerating inflation.
Consequently, monetary policy for the emerging markets in aggregate is being loosened
(our economists expect the GEM aggregate policy rate to fall by another 120bps in 2013).
Korea, Poland and India have all recently cut rates.

Figure 28: Only China has rising inflation and a negative                                                                        Figure 29: Our economists expect a further 120bps cuts in
output gap                                                                                                                       aggregate GEM policy rates
                               2                                                                                                        15%          Policy rates
                                                                                  Russia                                                                                             Developed markets
                                                                            Brazil
                               1                                                 Indonesia                                              13%                                          Emerging markets
                                                                                         China
                                                                              South Africa                                                                                           EM 2013 CS forecasts
                                                                Argentina           Malaysia                                            11%
                               0                                        Hong Kong
    CPI inflation, 6m change




                                                                                                             Philippines                9%
                               -1                          Thailand           Korea
                                                                         Taiwan                                      Singapore
                                                                       Chile                                                            7%
                                                                                                       Turkey
                               -2                      Czech Republic                      India                                        5%
                                                                                               Poland
                               -3                                                                                                       3%

                               -4                                                                                                       1%
                                              Hungary
                                                                                                                                        -1%
                               -5
                                    -6          -4                    -2               0                     2               4                2000   2002       2004       2006        2008      2010       2013
                                                                      2012 output gap
Source: Thomson Reuters, Credit Suisse research                                                                                  Source: Thomson Reuters, Credit Suisse economics research

(7)                                  Improving money supply growth
Global real M1 growth is accelerating strongly. This is consistent with a slight improvement
in global growth momentum. Similarly, real M1 growth in the Euro-area is rebounding,
which is consistent with an improving growth outlook.

Figure 30: Accelerating global real M1 growth is                                                                                 Figure 31: Euro-area real M1 is consistent with slightly
consistent with improving global growth momentum                                                                                 negative GDP growth
                                14%                 Global real M1 growth, lhs, 3m average, 3m lead                                     15                                                                         6
                                                    Global manufacturing PMI new orders                                                 13
                                12%                                                                                     75                                                                                         4
                                                                                                                                        11

                                10%                                                                                                      9
                                                                                                                        65                                                                                         2
                                                                                                                                         7
                                    8%
                                                                                                                        55               5                                                                         0

                                    6%                                                                                                   3
                                                                                                                        45                                                                                         -2
                                                                                                                                         1
                                    4%
                                                                                                                                         -1
                                                                                                                                                     Euro-area real M1 y oy (1y r ahead)                           -4
                                                                                                                        35               -3
                                    2%
                                                                                                                                                     Euro-area GDP y oy (rhs)
                                                                                                                                         -5                                                                        -6
                                    0%                                                                                  25
                                      1999   2001        2003      2005       2007         2009       2011       2013                    Q1 1996 Q4 1998 Q3 2001 Q2 2004 Q1 2007 Q4 2009 Q3 2012


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




Global Equity Strategy                                                                                                                                                                                                  14
                                                                                                                                                     17 May 2013



Has the cycle troughed?
In the previous section we argued that the downturn in economic momentum this year
should be milder than those over the past three years. In fact, there are some tentative
signs that the cycle might already have troughed. In particular, we would highlight that:
     (1) Global macro surprises are no longer deteriorating
We find global macro surprises a useful monitor of the moves in the cycle, given that they
tend to trough in line with global macro momentum, but – unlike lead indicators – are
available on a daily basis, allowing for a more timely snapshot of momentum. We note that
macro surprises are already very close to 2011 and 2012 trough levels (at minus 30,
compared to minus 45 and minus 40, respectively; see Figure 5 above) – and that,
crucially, while macro surprises were deteriorating sharply in March and April, they are no
longer falling (they have remained stable around current levels for the past four weeks).
This is tentative support for the view that the strong downward move in economic
momentum in March and April might have come to a halt.

Figure 32: Macro surprises tend to trough in line with                           Figure 33: Global macro surprises have hovered around
economic momentum                                                                current levels for the past four weeks (see page 4 for the
                                                                                 full time series)
                                                                                   10                         Global GDP-weighted macro surprise indicator

                         Global                                                     5
  Global macro                          Lead / lag   Global macro   Global PMI
                    manufacturing PMI
  surprise trough                       (months)       surprise        NO           0
                       NO trough
      Oct-04             Nov -04           0.6           -31           53.9         -5

      Jun-05             May -05          -1.2           -35           52.5        -10
      Feb-09             Dec-08           -2.9           -102          26.7
                                                                                   -15
      Aug-11             Nov -11           2.3           -45           48.1
      Jun-12             Jul-12            0.5           -44           47.8        -20
     Av erage                              -0.1          -51           45.8        -25
     Median                                0.5           -44           48.1
                                                                                   -30

                                                                                   -35
                                                                                     Oct-12          Dec-12              Feb-13             Apr-13


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



     (2) The first lead indicators are starting to turn up
Our 10 factor model in the US shown above (refer to it) has turned up from a low of 1.9%
to 2.3% (see Figure 11). The gap between ISM new orders and inventories is now
consistent with an acceleration in the growth rate of global industrial production and we
would note that it is usually a slowdown in the rate of restocking that causes turning points
in growth.




Global Equity Strategy                                                                                                                                       15
                                                                                                                                          17 May 2013


Figure 34: The gap between US ISM new orders and                              Figure 35: US bond yields have risen by 25 basis points
inventories points to an acceleration in year-on-year                         since the beginning of May
global IP growth
              Global industrial production, y/y, %, lhs                                                                                          66
              ISM new orders - inventories, 3mma, inv, 4m lead                 3.6                               US ISM new orders, rhs
 16%                                                                                                                                             64
              Latest ISM new orders - inventories                       24
 13%                                                                                                             US 10-year bond yields
                                                                        21                                                                       62
 10%                                                                    18     3.1
                                                                        15                                                                       60
  7%                                                                    12                                                                       58
  4%                                                                    9      2.6
                                                                        6                                                                        56
  1%                                                                    3
                                                                        0                                                                        54
 -2%                                                                           2.1
                                                                        -3                                                                       52
 -5%
                                                                        -6
 -8%                                                                    -9     1.6                                                               50
                                                                        -12
-11%                                                                                                                                             48
                                                                        -15
-14%                                                                    -18    1.1                                                               46
       2003              2006               2009                 2012            May-10   Nov-10   Jun-11    Dec-11     Jul-12      Jan-13

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



       (3) Bond yields have started rising again
US 10-year bond yields dropped by 40bps to 1.6% between the beginning of March and
the beginning of May. Since then, however, they have risen by 30bps, consistent with a
trough in economic momentum.




Global Equity Strategy                                                                                                                            16
                                                                                                                                                              17 May 2013



The positives for cyclicals
     (1) Cyclicals are pricing in a sharper decline in
         economic activity than seems likely
European cyclicals price relative to defensives is consistent with IFO expectations of
around 97 – a significant fall from the current levels of around 102 and consistent with
German GDP growth of around zero. US cyclicals relative to defensives are discounting
ISM at around the current level (52.3).

Figure 36: European cyclicals’ price relative is consistent                                 Figure 37: US cyclicals relative to defensives are
with IFO expectations of around 97, a much lower reading                                    discounting ISM at around the current level
than the current level of 101.6
                    European cyclicals/defensives, lhs
   85                                                                             115         115                       US cyclicals/defensives, lhs                 65
                    IFO business expectations
                                                                                                                        US ISM mfg new orders                        63
   80                                                                             110
                                                                                              110
                                                                                                                                                                     61
                                                                                  105
   75                                                                                                                                                                59
                                                                                              105
                                                                                  100
   70                                                                                                                                                                57
                                                                                  95          100                                                                    55
   65
                                                                                  90                                                                                 53
                                                                                               95
   60                                                                                                                                                                51
                                                                                  85
                                                                                                                                                                     49
   55                                                                                          90
                                                                                  80
                                                                                                                                                                     47
   50                                                                             75           85                                                                    45
     2007          2008             2010                 2011             2013                   2011                  2012                            2013


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

Cyclicals typically trough in line with economic momentum. Hence, if we are right in our
view that macro momentum is troughing, this suggests that the macro conditions priced
into cyclicals are too bearish.

Figure 38: Cyclicals tend to trough in line with the trough in economic momentum
                                                    Trough                       Lead/lag
                                            IFO           Eur cy c rel def       (months)
                                           Aug-82               Jan-83             -5.4
                                           Dec-87               Jan-88             -1.5
                                          Nov -92               Dec-92             -1.1
                                           Feb-99               Oct-98             4.3
                                           Oct-01               Oct-01             0.4
                                          Nov -02               Oct-02             1.2
                                          May -05               May -05            0.3
                                           Sep-06               Jul-06             1.7
                                           Dec-08               Nov -08            0.8
                                           Oct-11               Oct-11             0.4
                                           Sep-12               Jun-12             2.6
                                     Av erage                                      0.3
Source: Thomson Reuters, Credit Suisse research




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                                                                                                                                                                   17 May 2013


       (2) European cyclicals now look attractively valued
           on P/B relatives
European cyclicals are half a standard deviation below average on P/B relative to
defensives – close to their four-year trough levels. We believe that the key valuation tool
for cyclicals is price to book, not price to earnings (as earnings are depressed at the
trough of the cycle and thus P/Es are inflated).

Figure 39: European cyclicals are trading below average                                     Figure 40: … as well as on 12-month forward P/E relatives
on P/B relative to defensives…
 120%                                            Eur cy clicals inc tech rel defensiv es     150%
                                                 inc telecom: P/B
                                                 Av erage (+/- 1 SD)                         140%             Eur Cy c inc Tech rel. Def inc Telecom:
 110%                                                                                                         12m fw d P/E
                                                                                             130%             Av erage (+/- 1SD)

 100%                                                                                        120%

                                                                                             110%
  90%
                                                                                             100%

  80%                                                                                         90%

                                                                                              80%
  70%
                                                                                              70%

  60%                                                                                         60%
        1995       1998       2001            2004        2007        2010         2013             1995     1998       2001        2004       2007        2010        2013

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




       (3) Cyclicals have lagged the market recovery
Markets have risen over the last three months, while European cyclicals have
underperformed, though they have started to catch up in recent weeks (this is more
apparent in the US).

Figure 41: Markets have risen, while cyclicals have                                         Figure 42: Cyclicals relative to defensives have
underperformed in Europe, though they have started to                                       underperformed the S&P, though recently started to
catch up                                                                                    catch up
 112                                                                                         115                                   US cy clicals rel defensiv es          150
                                   European cy clicals relativ e to defensiv es
                                                                                                                                   S&P 500, rhs
 107                               Euro Stox x 600
                                                                                                                                                                          140
                                                                                             110
 102
                                                                                                                                                                          130
                                                                                             105
  97
                                                                                                                                                                          120
  92                                                                                         100
                                                                                                                                                                          110
  87
                                                                                              95
                                                                                                                                                                          100
  82

  77                                                                                          90                                                                          90
   Jan-11      May -11    Sep-11     Jan-12     May -12    Sep-12     Jan-13      May -13     May -10      Nov -10   May -11    Nov -11    May -12      Nov -12     May -13

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




Global Equity Strategy                                                                                                                                                        18
                                                                                                                                                                                                        17 May 2013

Looking at European data over the last 20 years, this decoupling is particularly unusual.
The recent episode of cyclicals underperforming defensives is the first such instance since
1997/98 and only the second time in 20 years. Six months after that cyclicals ended up
outperforming defensives by 13% in the next three months.

Figure 43: The decoupling between cyclicals / defensives                                                                             Figure 44: … having only occurred on one other occasion
and the market is extremely unusual…                                                                                                 in the last 20 years
                                                                                                                                                         ------ Cyc / Def ------                        Market
450                                                                                                                            102
                                                                                                                                               Peak              Trough                % ch               % ch
                                                 Stoxx 600
                                                                                                                                            01/08/1994         23/03/1995            -13.9%              -6.7%
                                                 Cyc / Def, rhs                                                                             19/09/1995         19/12/1995             -8.6%              -0.7%
400
                                                                                                                               92           15/09/1997         04/02/1998            -18.9%              15.4%
                                                                                                                                            24/04/1998         08/10/1998            -24.5%             -25.7%
350
                                                                                                                               82           02/05/2001         20/09/2001            -26.1%             -28.6%
                                                                                                                                            07/03/2002         09/10/2002            -25.4%             -36.7%
300
                                                                                                                                            11/04/2006         13/06/2006             -8.8%              -9.6%
                                                                                                                               72
                                                                                                                                            20/06/2007         10/01/2008            -18.9%             -13.2%
250
                                                                                                                                            14/05/2008         20/11/2008            -34.0%             -42.9%
                                                                                                                               62           29/04/2011         04/10/2011            -20.7%             -23.4%
200
                                                                                                                                            03/02/2012         28/06/2012            -13.7%              -7.5%
                                                                                                                               52           02/01/2013         22/04/2013            -12.3%               0.1%
150
                                                                                                                                     NB.    02/01/2013            latest              -9.1%               7.1%

100                                                                                                                            42
      1997
             1998
                    1999
                           2000
                                  2001
                                         2002
                                                2003
                                                        2004
                                                               2005
                                                                      2006
                                                                             2007
                                                                                    2008
                                                                                           2009
                                                                                                  2010
                                                                                                         2011
                                                                                                                2012
                                                                                                                       2013




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



On the 9 occasions since 1980 that US cyclicals have underperformed defensives in a
rising market, 7 have been followed by a period of cyclicals outperforming defensives in
the subsequent 6 months.

Figure 45: On 7 out of 9 occasions that cyclicals have underperformed in rising market, the decoupling has been
closed by cyclicals outperforming defensives
                    Periods when markets rise and US cyclicals underperform defensives                                           Subsequent
                                                                                                  After defensives outperformance stopped performance
                                                                      Change in                    US cyclicals relative to defensives
                                                                                                  US cyclicals relative to defensives                                                         S&P 500
      Start                 End       Duration
                                                   US cyc rel def    S&P 500      ISM new orders 2w     1m             3m            6m         1m                                              3m          6m
  24/08/1984               20/06/1985                  9.8               -18.3%                   11.5%                       -3.3         3.9%      6.4%          6.4%            4.5%        -1.8%       12.5%
  01/02/1989               28/12/1989                  10.8              -20.1%                   18.0%                       -6.9         5.4%      9.3%          1.3%            -7.1%       -2.8%       2.0%
  27/04/1990               29/06/1990                  2.1                   -5.2%                 8.8%                       -1.7         -2.6%    -13.0%        -15.6%           -1.3%      -14.5%       -8.2%
  17/07/1995               16/01/1996                  6.0               -18.6%                    8.1%                       -8.6         4.8%     13.8%          5.8%            7.0%        6.0%        3.3%
  18/12/1996               18/02/1997                  2.0                   -8.3%                11.6%                       -4.1         1.3%      5.4%          16.3%           -4.1%       3.1%        13.4%
  27/10/1997               12/01/1998                  2.5                   -9.5%                 7.1%                       -3.8         6.9%      7.8%          9.5%            8.6%       18.2%        24.1%
  13/06/2006               26/07/2006                  1.4                   -6.0%                 3.7%                       0.8          1.9%      8.1%          11.1%           2.1%        9.0%        13.5%
  05/03/2007               19/04/2007                  1.5                   -1.2%                 7.0%                       7.2          1.7%     10.2%          9.4%            3.5%        5.6%        4.7%
  01/03/2011               29/04/2011                  1.9                   -2.7%                 4.4%                       1.1          -4.0%     -2.5%         -3.4%           -2.4%       -5.2%       -5.8%
  02/01/2013               11/04/2013                  3.2                   -7.3%                 9.0%                       -1.0         2.9%       n/a           n/a            2.5%         n/a         n/a
                Median                                 2.3                   -7.8%                 8.5%                       -2.5         2.4%      7.8%          6.4%            2.3%        3.1%        4.7%

Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                                                             19
                                                                                                                                                                                    17 May 2013


     (4) Cyclicals are oversold
European cyclicals are now slightly oversold (trading roughly one standard deviation below
its six-month moving average), while defensives are mildly overbought.

Figure 46: European cyclicals are now oversold…                                             Figure 47: … while defensives are mildly overbought, but
                                                                                            not significantly so
    15%                                                                                        25%
                                   Ov erbought                                                                                       Ov erbought
                                                                                               20%
    10%
                                                                                               15%
     5%                                                                                        10%

                                                                                                5%
     0%
                                                                                                0%
    -5%                                                                                        -5%

                                                                                              -10%
   -10%
                                   Ov ersold                                                  -15%                                   Ov ersold
   -15%                                                                                       -20%
          1995        1998        2001         2004       2007            2010     2013           1995        1998       2001         2004        2007   2010                             2013
                 European Cy clicals rel to mkt % dev from 6mma                  Av erage                European Defensiv es rel to mkt % dev from 6mma                                Av erage

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

When cyclicals have been this oversold in the past, they have typically outperformed by
4% over the next 6 months.



     (5) Cyclicals typically outperform as bond yields
         rise
US bond yields have risen to 1.9%, up some 30bps from their trough in early May – and
only 35bps above their all-time low reached in July 2102. Our US rate strategists expect
bond yields to rise to 2.25% in Q1 2014. 80% of the time US bond yields rise, cyclicals
outperform. Credit Suisse European rates strategist Helen Haworth thinks that the 10-year
German Bund yield is likely to rise to 1.6% in Q3.

Figure 48: Approximately 80% of the time cyclicals and                                      Figure 49: Cyclicals tend to outperform around 80% of the
bond yields move in the same direction                                                      time bond yields rise
                                                                                                     Periods when US 10 yr yield rises                              Change in
                                                 Eur cyclicals rel defensives                                                              Duration
     82
                                                                                                                                           (months)
                                                 US 10-year bond yield, %, rhs                          From                  To                      US 10y yield(bps)   Global cyc rel def
     80                                                                             3.5                Feb-96               Jul-96            4.9           140                 2.6%
                                                                                                       Dec-96               Apr-97            4.8           86                  -4.5%
     78
                                                                                                       Oct-98               Jan-00           15.5           263                 57.8%
     76                                                                             3.0                Mar-01               May-01            2.3           69                  2.0%
                                                                                                       Nov-01               Apr-02            4.8           124                 8.2%
     74                                                                                                Jun-03               Sep-03            2.7           150                 14.2%
                                                                                    2.5                Mar-04               Jun-04            2.9           118                 -1.4%
     72                                                                                                Feb-05               Mar-05            1.5           65                  -0.4%
                                                                                                       Jun-05               Aug-05            2.3           50                  1.3%
     70                                                                                                Sep-05               Nov-05            2.1           61                  2.5%
                                                                                    2.0                Jan-06               May-06            3.7           87                  5.2%
     68                                                                                                Mar-07               Jun-07            3.0           72                  3.3%
                                                                                                       Mar-08               Jun-08            3.0           87                  6.8%
     66                                                                             1.5                Dec-08               Jun-09            5.7           185                 21.4%
                                                                                                       Oct-10               Feb-11            4.0           131                 9.6%
     64
                                                                                                       Jan-12               Mar-12            1.6           57                  1.6%
     62                                                                             1.0          Average                                                    109                 8.1%
       Jul-10       Dec-10     Jun-11     Dec-11          Jun-12        Dec-12                   % of times cyclicals outperforms                                               81.3%


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




Global Equity Strategy                                                                                                                                                                         20
                                                                                                                                    17 May 2013


       (6) Sector risk appetite is abnormally low relative
           to overall risk appetite
We look at sector risk appetite (effectively a sharp ratio of sector returns), and this is very
low compared to overall risk appetite indicators, which are elevated. Sector risk appetite in
the US is still particularly depressed relative to that in Continental Europe.

Figure 50: Global risk appetite has rebounded to the               Figure 51: US sector risk appetite also continues to lag
highest level since September 2009, but sector risk                Continental European risk appetite
appetite is lagging
                                  Global equity sector RA
 2.0                                                               2.0                                 Europe ex UK risk appetite
                                  Wilmot's Global RA,
                                                                                                       US risk appetite
 1.5                              standardised                     1.5

 1.0                                                               1.0

 0.5                                                               0.5

 0.0                                                               0.0

-0.5                                                               -0.5

-1.0                                                               -1.0

-1.5                                                               -1.5

-2.0                                                               -2.0

-2.5                                                               -2.5
    2008       2009      2010      2011            2012     2013       2010            2011             2012                        2013


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

We highlighted in slides published two weeks ago why we remain overweight US cyclicals
(see our presentation for the US morning call, 7th May 2013).




Global Equity Strategy                                                                                                                      21
                                                                                                                                                             17 May 2013


The problems with cyclicals
      (a) Valuations for European cyclicals on Credit Suisse HOLT® are not cheap
Over the past 20 years, European cyclicals have consistently generated lower cash-flow
returns on investment (CFROI®s) on HOLT than the European market overall. However,
given our assumptions about real asset growth rates and the discount rate (3.6% and
5.7%, respectively), they would have to generate the same levels of returns as the market
over the next five years in order to justify current valuation levels.

Figure 52: Required profitability for European cyclicals on HOLT is somewhat high
  9
                      Pan European cyclicals (incl. tech) CFROI, %

  8                   European market (ex fins and utils) CFROI, %


  7


  6


  5


  4


  3


  2
   1992        1994     1996      1998     2000      2002     2004     2006     2008   2010     2012   2014E    2016E

Source: Credit Suisse HOLT, Credit Suisse research

      (b) Cyclicals in aggregate are over-owned
Fund managers’ overweight in cyclicals is the largest it has been for the past six years,
according to the EPFR data. Sell-side analysts are also more optimistic on cyclicals than
on the market overall.

Figure 53: Fund managers are close to their largest                                    Figure 54: Sell side analysts are also more optimistic on
overweight for the past six years                                                      cyclicals than on the market overall
  10%                                                                                     3%                                                                           2.2

   8%
                                                                                          2%                                                                           2.3

   6%
                                                                                          1%                                                                           2.4
   4%

                                                                                          0%                                                                           2.6
   2%

   0%                                                                                    -1%                                                                           2.7

  -2%
                                                                                         -2%                                                                           2.8
      Sep-06      Oct-07    Nov -08      Dec-09      Jan-11    Feb-12       Mar-13
                    Pan Eur Cy clicals: fund w eightings less market w eightings,             1995     1998        2001        2004        2007      2010       2013
                    pp; AUM = 104 Bln USD                                                              Eur Cy clicals rel mkt on analy st recomms: + =Buy ; - =Sell
                    Av erage                                                                           Analy st recommendations (1=Buy ; 5=Sell)

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




Global Equity Strategy                                                                                                                                                   22
                                                                                                                                                                                                                     17 May 2013

       (c) The euro
Around three quarters of sales for Euro-area cyclicals come from outside Continental
Europe, compared with around half for defensives and around 57% for the market overall.
This means Euro-area cyclicals’ earnings tend to suffer particularly hard from a rising euro.
The euro trade-weighted is up 9% from its July trough – and given the shrinking ECB
balance sheet, a record Euro-area current account surplus and positive real bond yields,
we think that until the ECB expands its balance sheet, there is a risk that the euro will
continue appreciating.

Figure 55: Euro-area cyclicals have a higher sales                                       Figure 56: Euro-area cyclicals have high sales exposure
exposure outside Continental Europe                                                      outside Continental Europe
  80%           74%        Sales outside Cont Eur, % of total for Euro-area sector           100%                                 Sales outside Cont Eur, %of total for Euro-area sector

                                                                                              90%                                 Cyclicals
  70%
                                                                                              80%
                                           57%
  60%                                                                                         70%
                                                                  47%                         60%
  50%
                                                                                              50%
  40%                                                                                         40%

  30%                                                                                         30%
                                                                                              20%
  20%                                                                                         10%

  10%                                                                                          0%




                                                                                                                                                                                                  Cons Dur
                                                                                                        Retailing




                                                                                                                                                                                                             Autos
                                                                                                                                                        Transport




                                                                                                                                                                                      Materials
                                                                                                                                                                    Media




                                                                                                                                                                                                                     Semis
                                                                                                                                                                            Cap Gds




                                                                                                                                                                                                                             Tech H/w
                                                                                                                    Comm Svs



                                                                                                                                            Cons Svs
                                                                                                                               S/w & svs
   0%
              Cy clicals                Market                 Defensiv es

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



Euro strength is generally bad for cyclical earnings.

Figure 57: Euro-area cyclicals’ EPS relative to defensives tends to fall when the euro
rises

 130                                                                                                                                                   70
                                                            Euro-area cy clicals rel defensiv es, EPS
 120                                                                                                                                                   75
                                                            Euro TWI, rhs, inv
 110
                                                                                                                                                       80
 100
                                                                                                                                                       85
  90
                                                                                                                                                       90
  80
                                                                                                                                                       95
  70
                                                                                                                                                       100
  60

  50                                                                                                                                                   105

  40                                                                                                                                                   110
       1999        2001             2003             2005             2007           2009               2011                               2013

Source: Thomson Reuters, Credit Suisse research

Given Japanese monetary easing, the euro is particularly likely to strengthen relative to
the yen. Our FX strategists expect the euro to strengthen to around €/¥170, compared with
the current €/¥130.



Global Equity Strategy                                                                                                                                                                                                                  23
                                                                                                                       17 May 2013

     (d) Relative earnings revisions have rolled over (and are now mildly negative)
However, we note that cyclicals troughed in 2003 when earnings revisions were turning
down and were at similar levels to where they are now.

Figure 58: Cyclicals’ relative earnings revisions have rolled over (lines indicate trough in
cyclicals price rel to defensives)

  10%


   5%


   0%


  -5%


 -10%

                                                             Lines indicate trough in cy clicals
 -15%
                                                                  price rel to defensiv es

 -20%
      1995               1998                2001               2004               2007                  2010   2013
                                Eur Cy c rel. market: 3m breadth of rev isions         Rel defensiv es

Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                         24
                                                                                                                                                               17 May 2013



Major sector changes
Below, we highlight the two major changes we have made: to upgrade autos from
benchmark to overweight and downgrade food producers from benchmark to underweight.
We then discuss in more details which cyclicals we like and why we are underweight
tobacco. See Appendix 5 for the full list of our sector recommendations.

Autos: upgrade from benchmark to overweight
What are the positives for autos?
We recognise that our analysts are cautious on the sector (see their report, Lost in
Stagnation, 10 May). However, we see the following positives for the sector, which lead us
to upgrade the sector to overweight from benchmark:


       1)   Improving year-on-year comparisons and rebounding consumer confidence
There has been a decoupling between European auto sales and consumer confidence.
The current level of consumer confidence is consistent with auto sales some 14% above
current levels.
Furthermore, sales for European car companies are already down 12% year-on-year – a
fall that is in line with the experience of the 2009 slump. This again suggests to us that
sales growth might have little further downside from here. We note that earnings growth
estimates tend to trough when year-on-year auto sales growth troughs.

Figure 59: European consumer confidence is consistent                                   Figure 60: Year-on-year car sales growth are at the
with strong auto sales                                                                  bottom end of their historical range
   5                                                                                     15%                                                                           50

                                                                                  115                                                                                  40
   0
                                                                                         10%

  -5                                                                                                                                                                   30
                                                                                  105
                                                                                          5%
 -10                                                                                                                                                                   20
                                                                                  95
 -15                                                                                      0%                                                                           10

 -20                                                                              85                                                                                   0
                                                                                         -5%             European car sales,
 -25                                                                                                     y/y%, 12m average, lhs
                                                                                                                                                                       -10
                            EU Consumer Confidence
                                                                                  75
 -30                                                                                     -10%            European autos, 12m
                                                                                                         forward EPS growth                                            -20
                            EU New Car registrations index (rhs)
 -35                                                                              65
       90   91   93   95   97   99     01      03     05     07    09   11   13          -15%                                                                          -30
                                                                                                2004   2005   2006   2007   2008   2009   2010   2011   2012    2013

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




Global Equity Strategy                                                                                                                                                 25
                                                                                                                                                                                                                                                                           17 May 2013

Lastly, growth in global car sales was accelerating strongly at the beginning of year when
it was running at 16% y/y, the highest rate since 2010.

Figure 61: Global car sales growth is accelerating                                                                                                  Figure 62: Inventories remain high on the IFO survey of
                                                                                                                                                    auto companies
                                         40%                                                                                                               90            IFO auto industry survey: assessment of inventory
                                                                      Global car sales, y/y%                                                                                     Wholesale autos
                                         30%
                                                                                                                                                           70                    Retail - new vehicles
                                         20%
                                                                                                                                                           50
                                         10%

                                                0%                                                                                                         30


                              -10%                                                                                                                         10

                              -20%
                                                                                                                                                       -10
                              -30%
                                                                                                                                                       -30
                              -40%                                                                                                                              1997          1999          2001          2003          2005           2007          2009          2011            2013
                                                     2004      2005     2006      2007    2008      2009       2010       2011      2012    2013

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



                                                2)     A peak in inventories can coincide with a trough in relative performance
There is much concern about the continued rise in inventories, not least from our own
analysts (Lost in Stagnation, 10 May). The IFO survey of auto companies shows that the
assessment of inventory positions is above average. Even on our team’s below consensus
production numbers, they forecast inventory days to be above average for the rest of the
year.

Figure 63: Credit Suisse analysts expect production cuts                                                                                            Figure 64: … inventories may be close to a peak
to ease in H2…
                                                5.0
                                                                                                                                                      120
 European Passenger Car Production Units (Mn)




                                                4.5
                                                4.0                                                                                                   100

                                                3.5
                                                                                                                                                       80
                                                            -1.1%
                                                3.0
                                                                                  -3.6%
                                                2.5                   -4.8%               -5.3%                                                        60
                                                                                                                                           -5.9%
                                                                                                                                 -6.9%
                                                2.0
                                                                                                                                                       40
                                                1.5                                                  -11.7% -11.5%
                                                1.0                                                                                                    20

                                                0.5
                                                                                                                                                       -
                                                0.0
                                                                                                                                                                                                                                                                                1Q13e
                                                                                                                                                                                                                                                                                        3Q13e
                                                                                                                                                                1Q05
                                                                                                                                                                       3Q05
                                                                                                                                                                              1Q06
                                                                                                                                                                                     3Q06
                                                                                                                                                                                            1Q07
                                                                                                                                                                                                   3Q07
                                                                                                                                                                                                          1Q08
                                                                                                                                                                                                                 3Q08
                                                                                                                                                                                                                        1Q09
                                                                                                                                                                                                                               3Q09
                                                                                                                                                                                                                                      1Q10
                                                                                                                                                                                                                                             3Q10
                                                                                                                                                                                                                                                    1Q11
                                                                                                                                                                                                                                                           3Q11
                                                                                                                                                                                                                                                                  1Q12
                                                                                                                                                                                                                                                                         3Q12
                                                                                            4Q12e


                                                                                                       1Q13e


                                                                                                                      2Q13e


                                                                                                                                  3Q13e


                                                                                                                                            4Q13e
                                                             1Q12


                                                                        2Q12


                                                                                   3Q12




                                                                                                                                                                       CSe Inventory Days @ CSe Prod                                     CSe Inventory Day Avg 2005-8
                                                                               CSe Production                         CSe YoY %

Source: Credit Suisse autos research                                                                                                                Source: Credit Suisse autos research




Global Equity Strategy                                                                                                                                                                                                                                                                          26
                                                                                                                                                              17 May 2013

However, we believe that the critical point is that inventories appear to have peaked. The
last peak in inventories occurred in Q4 2008, shortly before the trough in the sector’s price
relative. Our experience with both commodities and semis shows that stock prices tend to
trough when inventories peak. For example, in Appendix 2 we show that the trough in the
copper price can occur when LME inventories peak (as opposed to get back to below
average levels).


     3)      Auto demand should benefit from credit easing
Autos are one of the most credit sensitive parts of the economy, since purchases of new
cars often require financing. This is why autos were the best performing sector after the 2
LTROs.
We expect the ECB to follow up on its comments about addressing the “transmission of
monetary policy” via restoring credit flow to the periphery. The problem is illustrated by the
widening differential of lending rates (both to households and SMEs) in the Euro-area. For
more details on how the ECB could implement a credit-easing strategy, please see our
economists’ latest note, Supporting SMEs: ECB faces rocky road ahead (14 May).

Figure 65: Lending rates for households remain high in                             Figure 66: Peripheral European corporates face higher
Italy and Spain relative to those in Germany and France                            lending rates than core European economies
 10.5            Loan rates for household consumption, new business (%)                    Interest rates charged by banks for small, short-term loans to firms (%)
   10                   Italy                                                      7
                        Spain
  9.5                   France
                        Germany
    9                                                                              6                                                                        Periphery

  8.5

    8                                                                              5

  7.5

    7                                                                              4

  6.5
                                                                                                                                                            Core
    6                                                                              3
        Jun-10        Dec-10       Jun-11       Dec-11       Jun-12       Dec-12    2003   2004   2005    2006    2007     2008    2009    2010    2011     2012      2013

Source: Credit Suisse Economics research                                           Source: Credit Suisse Economics research



Car sales in the periphery have stabilised over the past six months despite a fall in
economic activity – and are currently nearly half of peak levels. Consequently, any
improvement in the monetary transmission mechanism should help car sales. We note
that consumer confidence is starting to improve in Italy and Spain.




Global Equity Strategy                                                                                                                                                       27
                                                                                                                                            17 May 2013


Figure 67: Consumer confidence is picking up in Italy and                Figure 68: Autos were the best performing sector in the
Spain                                                                    one month after the ECB launched their two 3-year LTROs
 20                                                                        6%
                 European Commission Consumer Confidence                   5%             Average relative Stoxx 600 sector performance in the one-
                                                                                          month period after each of the ECB's two 3-year LTROs
 10                                                                        4%
                                                                           3%
  0
                                                                           2%
 -10                                                                       1%
                                                                           0%
 -20
                                                                           -1%
 -30                                                                       -2%
                                                                           -3%
 -40
                      Italy            France                              -4%




                                                                                      Real estate




                                                                                     Food & Bev
                                                                                   Financial Svs
                                                                                       Insurance




                                                                                      Chemicals




                                                                                           Media
                                                                                     Technology




                                                                                           Retail
                                                                                           Banks




                                                                                    Health Care
                                                                                   Travel & Leis
                                                                                 Inds Gds & Svs




                                                                                 Basic Resource




                                                                                       Oil & Gas
                                                                                          Utilities
                                                                                    Auto & Parts




                                                                                 Pers & H/H Gds




                                                                                         Telecom
                                                                                      Con & Mat
 -50                  Germany          Spain

 -60
       1998    2000      2002   2004     2006    2008      2010   2012
Source: Thomson Reuters, Credit Suisse research                          Source: Thomson Reuters, Credit Suisse research



        4)    Corporate spending could boost demand
Any rebound in corporate spending on the back of unblocking the SME related financing
should favour some of the premium makers, as nearly 50% of spend is corporate related
(i.e. fleet).


        5)    Concerns over Chinese demand misplaced
For the premium makers, one of the main areas of concern has been China related sales.
These have slowed from 17% in mid-2012 to +6% y/y. Interestingly, other indicators of
luxury goods demand in China (Hong Kong watch and jewellery sales and Macau casino
revenue growth) have both strengthened in recent months. We struggle to believe that the
authorities would clamp down on the purchases of luxury cars, but not on gambling by
VIPs in Macau.
Auto penetration rates in emerging markets are still very low compared to that for other
consumer durables in China (Figure 70) and other countries (China’s penetration is 11% of
US levels and India’s is 3% of US levels).




Global Equity Strategy                                                                                                                                28
                                                                                                                                                                        17 May 2013


Figure 69: Other indicators of Chinese consumer demand                        Figure 70: Cars still have a low penetration rate in China
are accelerating                                                              compared with other consumer durables
                    China, car sales, volume, y/y%, 3mma                                        45%                     Low penetration
                    Hong Kong, jewellery and watch sales, y/y%, 3mma                                         Car        with high growth
                                                                                                40%
                    Macua casino revenue, y/y%, 3mma
100%                                                                                            35%
                                                                                                                                                                        Mobile phone
                                                                                                30%




                                                                               CAGR 1999-2011
 80%
                                                                                                25%                             Computer

 60%                                                                                            20%

                                                                                                15%                                           Air conditioner
 40%
                                                                                                10%
                                                                                                                         Washing
                                                                                                5%                       machine Refridgerator
 20%                                                                                                      Camera
                                                                                                                                                  Colour TV
                                                                                                0%
                                                                                                      0            50            100              150             200          250
  0%
                                                                                                                          Goods owned per 100 households

-20%
       2006     2007       2008      2009      2010    2011     2012   2013

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



       6)     Autos are attractively valued
The European autos sector trades on a 35% P/E discount to the market, compared to the
historical average discount of 18%. Similarly, the price-to-sales ratio, relative to the
market, is at the bottom end of its range of the last few years.

Figure 71: 12m fwd P/E relative is 17% points below                           Figure 72: The price-to-sales relative to the market is
average                                                                       close to the bottom end of the range of the last few years
 1.5                                                                             0.6                               European autos, 12m fwd price / sales relative to market
                       European autos, 12m fwd PE
                       relative to market
                                                                              0.55
 1.3

                    Earnings expectations                                        0.5
 1.1               reached virtually zero in
                          mid-2009                                            0.45

 0.9                                                                             0.4

 0.7                                                                          0.35

                                                                                 0.3
 0.5
                                                                              0.25
 0.3
       97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13                        0.2
                                                                                    2004              2005   2006       2007    2008       2009   2010     2011     2012     2013

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

On HOLT, the implied CFROI is very low (at just 2%) and the implied CFROI is effectively
in line with its average (while the market as a whole has an implied CFROI well above its
historic average, as illustrated earlier).




Global Equity Strategy                                                                                                                                                              29
                                                                                                                                                          17 May 2013


Figure 73: The required profitability for European autos is                            Figure 74: …with the implied CFROI around its 15 year
relatively low, at around 2%...                                                        average
 6.0                                                                                    4.50

                   European autos CFROI (%)                                             4.00
 5.0                                                                                                                European autos market implied CFROI (%)
                                                                                        3.50

 4.0                                                                                    3.00

                                                                                        2.50
 3.0
                                                                                        2.00

 2.0                                                                                    1.50

                                                                                        1.00
 1.0
                                                                                        0.50

 0.0                                                                                    0.00
       92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17           1998   2000   2002     2004       2006       2008   2010       2012

Source: Credit Suisse HOLT, Credit Suisse research                                     Source: Credit Suisse HOLT, Credit Suisse research



Autos look to be relative attractively valued on our aggregate scorecard, scoring better
than most other cyclicals (see Appendix 3).


       7)   Some auto companies are highly leveraged
Autos have among the highest leverage ratios of any European sector (net debt to
EBITDA of 2.6x). We note that there is still plenty of scope for highly leveraged companies
to outperform lowly leveraged further given the rally in credit. This catch-up would be
further supported if the monetary transmission mechanism improves as outlined above.

Figure 75: Autos have among the highest leverage of any                                Figure 76: High debt companies are starting to
European sector                                                                        outperform low debt companies
 4                                                                                      1.1                    European high debt companies / low debt companies     300
                      Net debt / EBITDA                                                                        (CSERHDET / CSERLDET)
 3                                                                                                                                                                   350
                                                                                                               Itraxx crossover, rhs, inverted
                                                                                       1.05
 2                                                                                                                                                                   400
 1                                                                                                                                                                   450
                                                                                         1
 0                                                                                                                                                                   500
-1
                                                                                       0.95                                                                          550
-2
                                                                                                                                                                     600
-3                                                                                      0.9
                                                                                                                                                                     650
-4
                                                                                                                                                                     700
       Semis
       Tech h/ware
       Aerospace & def
       Retail
       Software
       Luxury
       Energy
       H'hold products
       Pharma
       Food producers
       Chemicals
       Cap gds
       Hotels/Leisure
       Food retail
       Comm svcs
       Transport
       Media
       Healthcare equip
       Tobacco
       Beverages
       Mining
       Autos
       Construction
       Telecom
       Utilities
       Paper




                                                                                       0.85
                                                                                                                                                                     750

                                                                                        0.8                                                                          800
                                                                                          Jan-12 Mar-12 May-12 Jul-12     Sep-12 Nov-12 Jan-13 Mar-13 May-13

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




Global Equity Strategy                                                                                                                                               30
                                                                                                                                         17 May 2013

Autos should have outperformed the market by more given the rally in credit.

Figure 77: Autos should have outperformed the market by more given the rally in credit
 1.5                                                                                                                               300
                             Autos price relative to market              Itraxx crossover, rhs, inverted
1.45
                                                                                                                                   400
 1.4

1.35
                                                                                                                                   500
 1.3

1.25                                                                                                                               600

 1.2
                                                                                                                                   700
1.15

 1.1
                                                                                                                                   800
1.05

   1                                                                                                                               900
    Jul-11    Sep-11    Nov-11     Jan-12     Mar-12   May-12   Jul-12      Sep-12       Nov-12     Jan-13      Mar-13    May-13

Source: Thomson Reuters, Credit Suisse research



What are the negatives for autos?
We recognise the following negatives for the European autos sector:
       1)    Threat from the Japanese
There tends to be a strong correlation between the performance of European autos
relative to Japanese autos and the EUR JPY exchange rate.

Figure 78: Given the weakness in the yen, the European sector should have
underperformed by more
                                                                JPY / EUR            Japan autos / Euro area autos, rhs   2.4

             1400
                                                                                                                          2.2

                                                                                                                          2
             1200

                                                                                                                          1.8
             1000
                                                                                                                          1.6


              800                                                                                                         1.4

                                                                                                                          1.2
              600
                                                                                                                          1

              400                                                                                                         0.8
                 2006       2007            2008       2009       2010            2011            2012           2013

Source: Thomson Reuters, Credit Suisse research

       2)    EPS revisions are worse than those for the market
The autos sector’s earnings revisions are worse than those for the market – and,
consequently, autos score below most other cyclical sectors on our earnings revisions
scorecard (that said, tech hardware, chemicals, mining and paper score worse).




Global Equity Strategy                                                                                                                           31
                                                                                                                                                                                         17 May 2013

       3)     Pricing is weak
The CPI component for new cars has continued to decline relative to the overall CPI in the
Euro area, UK and US.

Figure 79: Relative earnings momentum is weak                                                       Figure 80: Pricing for new cars continues to decline
                                                                                                    against the overall index
       120%        Net upgrades (up minus down / up plus down), 4-wk avg                                                  CPI new cars, relative to core CPI, Jan 2003 = 100
                                                                                                            105
       100%                   Autos relative to market

        80%                                                                                                 100
        60%

        40%                                                                                                  95

        20%
                                                                                                             90
        0%
                                                                                                                                   UK
       -20%                                                                                                                        Eurozone
                                                                                                             85
       -40%                                                                                                                        US

       -60%
           1996      1998      2001        2003      2006         2008     2011                              80
                                                                                                                  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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



Stock picks
Below we show a screen of the European autos companies that are Outperform-rated by
Credit Suisse analysts. We agree with the focus on premium.

Figure 81: European autos that are Outperform-rated by Credit Suisse analysts
                                    -----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
Volkswagen Pref.              6.9          68%              -2%            1.0          -10%         3.5            2.6          101.8         -9.7         -0.6               1.8     Outperform
Bmw                           9.1          89%              -25%           1.5          -25%         9.9            3.8           79.6         -0.5         -0.4               2.4     Outperform
Porsche Aml.Hldg.Pref.        5.2          51%              -63%           0.6          -82%         na             0.5            na          -6.3          nm                2.4     Outperform

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




Global Equity Strategy                                                                                                                                                                                32
                                                                                                                                                            17 May 2013


Food producers: downgrade to underweight
Reasons for more caution
We take weightings in food producers to underweight from benchmark for the following
reasons:
     1)      Reducing defensive exposure
For the reasons highlighted in the first part of the note, we want to reduce some of our
exposure to defensive sectors. As shown below, food producers’ correlation to economic
lead indicators are among the lowest for any sector.

Figure 82: Food producers has one of the most negative correlations with ISM new
orders
    0.60

    0.45                                            European sectors correlation with ISM new orders

    0.30

    0.15

    0.00

    -0.15

    -0.30

    -0.45

    -0.60
             Div Fin
             Met & min
             Semiconductors
             Banks
             Capital Goods
             Consumer Durables
             Insurance
             Transport
             Chemicals
             Construction Materials
             Software
             Technology Hardware
             Real estate
             Automobiles
             Pulp & Paper
             Hotels & Leisure
             Retailing
             Media
             Beverages
             Healthcare Equip
             Energy
             Commercial Services
             Telecoms
             Utilities
             Food Retail
             Food Producers
             Household Products
             Tobacco
             Pharmaceuticals


Source: Thomson Reuters, Credit Suisse research



Furthermore, European food producers should have underperformed by more, given the
change in the IFO over the last six months.

Figure 83: Food producers should have underperformed                                     Figure 84: Relative earnings momentum has fallen
by more, given the change in the IFO
 40%               Food producers price relative, 6m%ch                            -30
                   IFO business expectations, 6m abs ch, rhs, inverted                                 Europe Food Products 3m breadth          Rel mkt
                                                                                          15%
 30%
                                                                                   -20
                                                                                          10%
 20%
                                                                                           5%
                                                                                   -10
 10%                                                                                       0%

  0%                                                                               0       -5%

                                                                                          -10%
 -10%
                                                                                   10
                                                                                          -15%
 -20%
                                                                                          -20%
                                               Rising IFO / food producers         20
 -30%                                          underperform                               -25%

 -40%                                                                              30         1995      1998       2001      2004        2007        2010       2013
        93    95     97     99     01     03      05      07     09      11   13

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




Global Equity Strategy                                                                                                                                              33
                                                                                                                                                            17 May 2013

        2)      Deteriorating earnings revisions
Relative earnings revisions seem to be rolling over and have for most of the past three
months been worse than the market.


        3)      Valuations are quite expensive
Food producers are expensive on P/E and DY relative to the market.

Figure 85: On P/E relative to the market, food producers                              Figure 86: DY rel for food producers is close to the
trade on the highest valuation of any of the consumer                                 bottom end of its historical range
staples
  180%                     European sectors 12m fwd P/E rel                            130%
                     Food Producers                 Beverages
  160%                                                                                 120%
                     Tobacco                        Food Retail
  140%                                                                                 110%

                                                                                       100%
  120%
                                                                                        90%
  100%
                                                                                        80%
      80%
                                                                                        70%
      60%
                                                                                        60%
      40%
                                                                                        50%
      20%                                                                                  1995   1997   1999    2001    2003     2005   2007       2009   2011   2013
         1995       1997         2000         2003          2006    2009     2012
                                                                                                  European Food Products DY rel              Average


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

If we incorporate growth expectations, food producers look more expensive than other
consumer staples on a PEG ratio.
According to HOLT, food producers’ value to cost ratio is more extended, relative to its
history, than most other European sectors.

Figure 87: The PEG ratio of food producers remains the                                Figure 88: Food producers value to cost ratio is more
highest of any of the staples, and has been for around the                            extended, relative to its history, than most other
past 5 years                                                                          European sectors
 3                         PEG ratio (12m fwd P/E / long-term EPS growth)             140%
                                                                                      120%
                                        Food Producers                                                             VCR relative to the market, %
                                                                                      100%
                                        Beverages                                                                  deviation from 15 year average
                                                                                       80%
2.5                                     Tobacco                                        60%
                                        Food Retail                                    40%
                                                                                       20%
                                                                                        0%
 2                                                                                    -20%
                                                                                      -40%
                                                                                      -60%
                                                                                              Beverages
                                                                                              Tobacco
                                                                                              Household & Personal Products
                                                                                              Food Products
                                                                                              Consumer Durables
                                                                                              Retailing
                                                                                              Software & Services
                                                                                              Commercial Services
                                                                                              Health Care Equipment
                                                                                              Capital Goods
                                                                                              Consumer Services
                                                                                              Pharma
                                                                                              Autos
                                                                                              Real Estate
                                                                                              Transportation
                                                                                              Materials
                                                                                              Utilities
                                                                                              Media
                                                                                              Semiconductors
                                                                                              Energy
                                                                                              Food Retailing
                                                                                              Diversified Financials
                                                                                              Telecoms
                                                                                              Insurance
                                                                                              Banks
                                                                                              Tech Hardware




1.5



 1



0.5
   1996           1998         2001          2004           2007      2010     2013

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




Global Equity Strategy                                                                                                                                               34
                                                                                                                                                    17 May 2013

     4)     Slower growth
According to Credit Suisse analysts, the organic sales growth rates for food producers are
now slower than those for the wider consumer staples group.
Part of the reason for slower growth may be that in some areas of emerging markets
pricing has risen to a level that leaves volumes vulnerable (e.g. for Danone’s infant milk).
In a recent report, Credit Suisse analyst Alex Molloy highlighted that in China it costs 65%
of the average monthly wage to feed a three-month old baby (assuming 335g consumption
per day). Comparative figures for the US and UK are 11% and 5% respectively (for more
details see Danone – New world, old story, April 9).
Furthermore, relative to other consumer staples, most notably in spirits, food producers
have a lower income elasticity of demand (i.e. as people get richer they spend more on
spirits relative to food).

Figure 89: Food producers now have slower organic sales                                 Figure 90: The price of baby milk in China is becoming
growth than for the wider consumer staples group                                        prohibitively expensive
      10%                                                                                                                 China          US               UK
                   Organic sales growth
                                                                                        Daily Consumption (g)              335           335              335
       9%
                            Food                                                        Cost per 100g (USD)                4.5           3.5              1.5
       8%                                                                               Daily cost (USD)                  15.1          11.7              5.0
                            All consumer staples
                                                                                        Montly cost (USD)                  452           352              151
       7%
                                                                                        Monthly income (USD)               700          3300             3100
       6%                                                                               % of monthly income               65%           11%               5%

       5%

       4%

       3%

       2%

       1%
            3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13

Source: Credit Suisse consumer staples research                                         Source: Credit Suisse Consumer staples research, World Bank,
                                                                                        Monthly income at PPP

     5)     Sentiment is optimistic
Net buy recommendations for the food producers are now higher than those for the market
overall.

Figure 91: Net buy recommendations are now more                                         Figure 92: Nestle is intending to cut its payout ratio,
positive than those for the market overall                                              implying only mid-single digit DPS growth
    4%                                                                            2.2       70%       Nestle                                              20%
                                                                                                                                                          18%
                                                                                            65%
    2%                                                                            2.3                                                                     16%
                                                                                                                                                          14%
                                                                                            60%
    0%                                                                            2.4                                                                     12%
                                                                                            55%                                                           10%

    -3%                                                                           2.6                                                                     8%
                                                                                            50%
                                                                                                                                                          6%

    -5%                                                                           2.7                                                                     4%
                                                                                            45%
                                                                                                                                                          2%

    -7%                                                                           2.8       40%                                                           0%
       1995      1998       2001          2004      2007       2010        2013                   2006 2007 2008 2009 2010 2011 2012 2013e 2014e 2015e

                Eur Food Producers rel mkt on analyst recomms: + =Buy; - =Sell                                  DPS growth, rhs     Payout ratio
                Analyst recommendations (1=Buy; 5=Sell)

Source: Thomson Reuters, Credit Suisse research                                         Source: Company data, Thomson Reuters, Credit Suisse estimates




Global Equity Strategy                                                                                                                                          35
                                                                                                                                                                     17 May 2013

        6)    Some slightly unwelcome corporate action: Lower payout ratio, slower DPS
              growth, expensive-looking acquisitions
Nestle has attracted investors looking for high yield (the current dividend yield is 3.2%).
However, the company has recently guided towards a lower pay-out ratio (our analysts
estimate 60% in 2015E down from 63% in 2013E) leading to lower DPS growth (6% in
2014e down from a peak of 17.3% in 2008). We believe that, at the margin, this will weigh
on the share price.
We are also concerned about the fact that Unilever is in the process of increasing its stake
in Hindustan Unilever by 23% at a price 20% above the prevailing share price and on a
multiple of 36x forecast earnings (FT, 30 April). On the face of it, this seems like a poor
use of their cash.


Stock screen
Below we show screen of food producers ranked by how far their P/E relative to the
market is above its historical average.

Figure 93: Food producers ranked by how far their P/E relative to the market is above its historical average
                                  -----P/E (12m fwd) ------          ------ P/B -------           2013e, %      HOLT       2013e Momentum, %
                                                                                                                                                   Consensus
                                                    rel to mkt %             rel to mkt %                       Price, %                        recommendation
                                         rel to
Name                        Abs                     above/below    Abs       above/below    FCY          DY    change to   3m EPS    3m Sales    (1=Buy; 5=Sell) Credit Suisse rating
                                       Industry
                                                      average                  average                            best
Associated Brit.Foods      19.2         107%            66%        2.7           77%        2.8          1.6    -13.7       2.7        2.0            3.0         Neutral
Dairy Crest                12.1          67%            59%        2.3           14%        -1.0         4.5    -27.5       3.6        -1.1           2.5         Neutral
Unilever (Uk)              18.7         104%            45%        26.5         207%        3.8          3.1    -25.6       0.9        2.1            2.5         Neutral
Tate & Lyle                13.7          76%            40%        3.9           70%        9.6          3.2    -22.4       -0.9       2.9            2.4         Outperform
Unilever Certs.            18.4         103%            37%        6.0          -24%        4.9          3.2    -20.2       -4.2       -1.6           2.6         Neutral
Aryzta                     12.5          70%            36%        2.0           23%        7.4          1.2     76.6       -3.7       2.8            2.3         Outperform
Lindt&Sprungli 'P'         25.3         141%            27%        4.6           27%        2.8          1.8    -34.5       2.9        0.8            2.4         Neutral
Nestle 'R'                 18.3         102%            25%        3.5            0%        4.1          3.2    -15.9       -3.3       -2.7           2.5         Outperform
Orior                      10.4          58%            24%        1.6           -5%        72.2         3.9    -36.9       -4.9       -0.3           2.4         Outperform
Danone                     17.9         100%            18%        2.8            0%        4.9          2.6    -34.2       -2.3       0.8            2.8         Underperform
Ros Agro Gdr Reg S          3.4          19%           -18%        0.4          -47%        0.4          0.0      na        -0.1       -1.9           1.6         Neutral
Premier Foods               3.1          17%           -49%        0.3          -97%        27.5         0.0     40.4      -15.7       -7.8           3.2         Neutral

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




Global Equity Strategy                                                                                                                                                            36
                                                                                                                                                                                                17 May 2013



Which cyclicals to focus on?
When selecting which cyclical sectors to buy, we want to choose those sectors which offer
a combination of high positive correlation with the cycle and which fit into our long-term
macro themes.
The sectors with the highest correlation to the cycle are mining, semis, capital goods,
financials and advertising agencies. However, our structural concerns about commodities
and China preclude us being positive on mining and many capital goods companies, given
their dependence on mining and oil capex (see our recent note Commodities: stay bearish,
29 April 2013 for details). We are overweight semis, but would acknowledge that within
Europe this is a very small sector.
Of the European cyclical sectors, five have outperformed the market since the aggregate
cyclicals price relative peaked in early January (semis, media, construction, tech hardware
and consumer durables). Moreover, 79% of the underperformance of cyclicals has been
accounted for by just three sectors: mining, autos and paper.

Figure 94: Nearly 80% of cyclical underperformance is just three sectors—mining, autos
and paper
    15%   13.0%
                                                        Europe Cyclicals performance rel to market since cyc rel peaked (Jan 2nd)
    10%
                   3.7% 3.5%
    5%                       2.4% 1.5%
                                       0.3%
    0%
    -5%                                                                          -0.6% -0.8% -0.9% -1.2%
                                                                                                                                -2.7% -4.0%
                                                                                                                                            -4.9% -5.9%
 -10%
                                                                                                                                                                             -8.7%
 -15%
 -20%
 -25%
                                                                                                                                                                                      -24.9%
 -30%
                                                                                                                                             Transport
           Semis




                                                                                                                       Retail




                                                                                                                                                                     Autos
                   Media

                           Tech h/ware

                                         Construction




                                                                                                                                                                                       Mining
                                                                                             Hotel/Leisure




                                                                                                                                 Chemicals




                                                                                                                                                                              Paper
                                                                     Cons dur.




                                                                                                                                                         Cyclicals
                                                         Comm. Svs




                                                                                  Software




                                                                                                             Cap gds




          0.8% 1.8% 0.8% 0.8% 1.3% 2.3% 1.5% 0.8% 8.5% 1.5% 4.1% 1.1% 31.6% 2.6% 0.1% 3.5%


Source: Thomson Reuters, Credit Suisse research

Below we rank the cyclical sectors on our composite scorecard in which we combine
valuation, earnings momentum, positioning, price momentum and macro factors. The best
ranked sectors on this scorecard are semis, pulp & paper, software and autos.

■     Our valuation metric is based on a composite measure of P/B, P/E and dividend yield
      relative to the market. On this basis, the cheapest sectors are software, tech hardware
      and pulp and paper;

■     For earnings momentum, we look at the change and rate of change in earnings
      estimates;

■     On positioning, we look at net buy recommendations by sell-side analysts and the
      relative positioning of fund managers using EPFR data;

■     Our macro factor component looks at the correlation of sectors with our central macro
      scenario. Currently, we assume a small uptick in ISM/PMI, a small rise in bond yields
      and strengthening in the US dollar. The more positively a sector is correlated with
      such a scenario, the higher we score it.




Global Equity Strategy                                                                                                                                                                                  37
                                                                                                                                                     17 May 2013


Figure 95: Pan-European cyclicals scorecard
                                                                                              Z-scores
          Pan-European cyclical
                                                                                    Earnings
                   sectors                    Valuation              Macro                               Price momentum     Positioning         Total
                                                                                   momentum

       Weight                                   40%                  20%              20%                     10%              10%             100%
       Semiconductors                           -0.58                 1.89            3.00                    -1.1             2.18             0.85
       Pulp & Paper                             1.21                  0.35            -1.00                   0.0              -1.47            0.21
       Softw are                                0.68                  0.01            -0.15                   0.0              -1.23            0.12
       Capital Goods                            -0.21                 0.84            -0.11                   0.6              -0.28            0.09
       Automobiles                              0.33                  1.27            -0.64                   0.0              -1.92            0.07
       Construction Materials                   -0.58                 1.49            0.74                    0.0              -1.47            0.07
       Technology Hardw are                     0.62                 -0.27            -1.44                   0.0              0.52             -0.04
       Media                                    0.08                 -0.60            0.50                    0.0              -1.36            -0.12
       Metals and Mining                        0.49                 -0.35            -1.70                   1.4              -1.47            -0.22
       Commercial Serv ices                     -1.00                 0.67            0.03                    0.6              -0.22            -0.22
       Transport                                -0.04                -0.91            0.20                    0.0              -0.65            -0.22
       Retailing                                -1.37                -0.07            0.02                    0.0              1.29             -0.43
       Hotels & Leisure                         -1.69                 0.59            0.29                    0.6              -0.97            -0.54
       Chemicals                                -0.91                 0.12            -0.88                   0.9              -1.47            -0.58
       Consumer Durables                        -1.07                 0.73            0.20                    0.0              -4.35            -0.68


       A high z-score indicates a positive for each indicators - i.e. attractive valuations, strong earnings momentum, negative price momentum and
       bearish positioning (we treat the latter two as contrarian indicators).
Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                       38
                                                                                                                                                    17 May 2013



Our preferred cyclicals themes
        (1)    US corporate spend-related plays: adding
               more money
We add more money to US corporate spend-related plays. We moved to overweight
advertising and hotels last December.
The fundamental backdrop is simple: US FCF is triple normal levels, leverage is low and
the average age of the capital stock is the oldest on record (since 1970).

Figure 96: Free cash flow of US corporates as a                            Figure 97: Corporate leverage is close to historical trough
proportion of GDP is close to an all-time high                             levels
10%                FCF, % of non-financial GDP                              2.20                US non-financials, net debt to EBITDA
 8%                FCF post div idends, % of non-financial GDP
                                                                            2.00
 6%

 4%                                                                         1.80

 2%
                                                                            1.60
 0%
                                                                            1.40
 -2%

 -4%                                                                        1.20
 -6%
                                                                            1.00
 -8%

-10%                                                                        0.80
   Q1 1950        Q3 1965           Q1 1981          Q3 1996     Q1 2012          1981   1985     1989     1993      1997     2001        2005    2009       2013

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



Figure 98: The corporate capital stock is unusually old                    Figure 99: US private non-residential fixed investment is
                                                                           still at the trough level of the last recession

   17             Current-cost average age at                               15%
                  yearend of fixed assets and
                                                                                                  US priv ate non-residential fix ed inv estment, % of GDP
                  consumer durable goods:
 16.5                                                                       14%
                                    Nonresidential
   16                                                                       13%


 15.5                                                                       12%


   15                                                                       11%


 14.5                                                                       10%


   14                                                                        9%
        1970         1980              1990             2000       2010           1980     1985          1991         1996         2002          2007         2013

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




Global Equity Strategy                                                                                                                                          39
                                                                                                                                                               17 May 2013

Even now having rallied from the trough, the investment share of GDP is still close to
normal recession lows. Corporate confidence has fallen relative to consumer confidence,
and we think there is scope for it to catch up. And, as we show below, corporate
discretionary spend tends to be tied quite closely to corporate confidence.

Figure 100: Philly Fed capex intentions survey is lagging                              Figure 101: Core capital goods orders have recovered
US consumer confidence
 80            Consumer confidence                                          45                             Philly Fed capex intentions
               Philly Fed capex intentions, rhs                                                            US core capital goods orders, 3m/3m, %,rhs                  40%
 70                                                                         35
                                                                                       28

                                                                            25                                                                                         20%
 60                                                                                    18
                                                                            15
                                                                                                                                                                       0%
 50                                                                                     8
                                                                            5
 40                                                                                                                                                                    -20%
                                                                                        -2
                                                                            -5

 30                                                                         -15        -12                                                                             -40%


 20                                                                         -25        -22                                                                             -60%
  May -08     May -09        May -10      May -11      May -12       May -13                 2005   2006   2007     2008       2009   2010   2011       2012    2013

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



Historically, investment spending has been positive when US GDP growth is above 1.8%.
Our 10-factor model of US GDP growth implies that growth will stay above this level even
despite fiscal tightening worth 2½% of GDP, suggesting that once fiscal tightening
slackens, growth could easily accelerate to c.3%.

Figure 102: Capex historically tends to grow if US GDP growth is above 1.8% (although
this relationship is less clear since 2010)

  25                                                US Real fix ed Inv estment, y oy                                       10
                                                    US real GDP, y oy (RHS)
  20
                                                                                                                           8
  15
                                                                                                                           6
  10

   5                                                                                                                       4

   0                                                                                                                       2

  -5
                                                                                                                           0
 -10
                                                                                                                           -2
 -15

 -20                                                                                                                       -4

 -25                                                                                                                       -6
   Q2 1981               Q3 1987             Q4 1993              Q1 2000                Q2 2006                Q3 2012

Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                  40
                                                                                                                   17 May 2013

We would point out that that corporate discretionary spend-related stocks have lagged
consumer cyclicals by 39% in the US as corporate confidence has fallen relative to
consumer confidence.

Figure 103: US consumer cyclicals have outperformed industrials by 39% over the past
four and a half years
                                         US consumer discretionary v ersus industrials
                                         US consumer v s business sentiment, rhs                             47
90

85                                                                                                           37


80                                                                                                           27

75
                                                                                                             17
70
                                                                                                             7
65

                                                                                                             -3
60

55                                                                                                           -13
     2002          2003           2005              2007              2009               2011         2013
Source: Thomson Reuters, Credit Suisse research

Investment implications
We continue to prefer those sectors that have a high proportion of revenue from corporate
spend, and where that corporate spending is more productivity rather than capacity
enhancing.

Figure 104: Sectors with high % of revenue that is corporate spend related
                                                                                         Relative performance
                          Sales to corporates, Sales from US, %           12m fwd
European Sector                                                                          since Market trough in
                                 % total            of total                P/E
                                                                                                June '12
IT Services                      95%                       14%               13.2                11.3%
Employment Agencies              95%                       21%               14.2                 6.0%
Software                         79%                       23%               17.1                 7.5%
Capital Goods                    70%                       17%               13.1                 1.0%
Advertising Agencies             70%                       34%               14.1                13.2%
Hotels                           65%                       34%               16.3                 0.5%
PCs                              58%                       17%               16.9                -7.2%
Airlines                         50%                       14%               11.9                44.6%
Premium Automobiles              50%                       18%                8.3                -3.7%
Source: Thomson Reuters, Credit Suisse research

Regionally, we are particularly bullish of US corporate spend, given our optimism on the
outlook for US growth, as discussed above.
Credit Suisse’s Delta One basket of European corporate spend plays (Bloomberg ticker
CSERCORP Index) has outperformed the European market by 7% since mid-November
2012 (i.e. since the market trough) and the Delta One basket of US corporate spend plays
(Bloomberg ticker CSUSCORP Index) has outperformed the US market by 1% since mid-
November last year.




Global Equity Strategy                                                                                                     41
                                                                                                                                                                                                       17 May 2013


Figure 105: Credit Suisse’s Delta One basket of European                                                          Figure 106: Credit Suisse’s Delta One basket of US
corporate spend plays (Bloomberg ticker CSERCORP                                                                  corporate spend plays (Bloomberg ticker CSUSCORP
Index): price relative to European market                                                                         Index): price relative to US market
 160                                                                                                               106
                                                                                                                                                      CS US corp spend price rel
                                   CS Europe corp spend price rel
 150                                                                                                               104

                                                                                                                   102
 140
                                                                                                                   100
 130
                                                                                                                     98
 120
                                                                                                                     96
 110
                                                                                                                     94

 100                                                                                                                 92

    90                                                                                                               90
    Nov -09 May -10            Nov -10 May -11         Nov -11 May -12             Nov -12 May -13                     Jan-12               May -12              Sep-12             Jan-13                May -13

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



Stock picks
We focus on companies that have high exposure to US productivity enhancing corporate
spending. Our overweights tend to be short-cycle and focused on hotels, advertising and
software.
Below we show screens of US-related corporate spending plays, listed in both Europe and
the US, that are rated Neutral or Outperform by our analysts.

■        European corporate spending exposed stocks that have at least 20% sales from
         the US

Figure 107: European corporate spend exposed stocks that have at least 20% sales from the US and are Neutral- or
Outperform-rated by Credit Suisse analysts

                                                                       -----P/E (12m fwd) ------             ------ P/B -------       Yield (2013e)      HOLT       Momentum
                                                                                                                                                                                       Consensus
                                 Exposure to Corp.                                          rel to mkt %             rel to mkt %                        Price, %
                                                   Sales from                                                                                                                       recommendation
Name                                spending                    Abs       rel to Industry   above/below    Abs       above/below    FCY          DY     change to 3m EPS 3m Sales
                                                      US                                                                                                                             (1=Buy; 5=Sell) Credit Suisse rating
                                                                                              average                  average                             best
Micro Focus International Plc        100%            42%        11.4          75%              22%         17.4         106%        9.1         4.0      45.1       -0.1   0.3            2.5         Outperform
Ubm Plc                              100%            48%        12.8          78%              24%         1.4            -85%      7.6         3.9      -41.6     -15.4   -19.0          2.3         Outperform
Software Ag                          100%            22%        12.5          83%              -14%        2.2            -48%       na         1.7      57.7      -13.4   -6.6           2.5         Neutral
SAP                                  100%            26%        17.6         116%              -34%        5.3            -49%      5.4         1.5      136.7      -3.3   -1.9           2.2         Outperform
Alcatel-Lucent Sa                    100%            33%        -8.5           nm               na         1.4            -46%      -20.7       0.0      46.7       nm     -0.8           3.0         Neutral
Wpp Plc                               95%            31%        13.1          79%              -8%         2.1            -83%      7.5         3.0       -2.4      4.0    3.0            2.1         Outperform
Publicis Groupe Sa                    95%            43%        14.9          90%              2.8%        2.4            -57%      7.1         1.8      12.0       3.9    1.8            2.5         Outperform
Dassault Systemes Sa                  93%            27%        23.9         158%               1%         4.8            -41%      4.4         1.0      -18.7      -4.4   -4.3           2.8         Neutral
Daily Mail And General Trust          90%            24%        13.7          83%               2%         17.4           22%       7.0         2.7      -28.6      2.1    0.3            2.6         Outperform
Plc
Informa Plc                           75%            35%        11.5          70%              -5%         2.2            -91%      8.6         3.9      -52.1      2.1    -0.4           2.4         Outperform
Assa Abloy Ab                         70%            28%        17.1         129%              -2%         3.7            -4%       3.6         2.1      -24.1      -3.5   -1.1           3.1         Outperform
Millennium & Copthorne Hotels         70%            30%        15.9          85%              11%         0.8            -3%        na         2.5      23.0       -6.8   -2.5           2.6         Neutral
Plc
Intercontinental Hotels Group         65%            34%        18.3          98%              48%         26.8           30%       5.8         2.4      -42.7      -0.1   -0.7           2.3         Neutral
Plc
Experian Plc                        60-70%           48%        19.5         111%              52%         4.5            54%       4.9         2.0      12.3       -0.7   -0.7           2.0         Outperform
Smiths Group                          25%            49%        13.0          98%              40%         5.2            -9%       5.4         3.2      17.7       -2.0   0.4            2.8         Outperform
Pearson Plc                            9%            59%        14.1          85%              -15%        1.7            -63%      7.3         4.0       -3.7     -11.8   -2.4           2.8         Outperform

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

Of these, the following are cheap on P/E relatives and are Outperform-rated: SAP, WPP,
Informa, Assa Abloy and Pearson. We note that Smiths Group, Experian and SAP are
both Outperform-rated by our analysts and look cheap on HOLT.




Global Equity Strategy                                                                                                                                                                                               42
                                                                                                                                                                                                     17 May 2013


■      Domestically focused US corporate spending plays

Figure 108: US stocks with relatively high exposure to corporate spending (i.e. 40% sales or more), with at least 30%
domestic sales that are either cheap on HOLT or have FCF yield above 5% and are Outperform rated by Credit Suisse
analysts
                                                                 -----P/E (12m fwd) ------              ------ P/B -------       Yield (2013e)     HOLT        Momentum
                                                                                                                                                                                     Consensus
                                                                                      rel to mkt %              rel to mkt %                       Price, %




                                                                                                                                                                       3m Sales
                                                                                                                                                              3m EPS
                                Exposure to     Domestic                                                                                                                          recommendation     Credit Suisse
Name                                                       Abs      rel to Industry   above/below    Abs        above/below    FCY          DY    change to                        (1=Buy; 5=Sell)
                               Corp. spending    Sales                                                                                                                                               rating
                                                                                        average                   average                            best
Cummins Inc                       100%           41%       13.2        100%              17%         3.3            48%        3.51        1.79     62.6      -12.1    -3.5             2.1          Outperform
Flowserve Corp                    100%           33%       14.7        111%              27%         4.1            54%        6.76        1.02     28.0      -2.6     -0.7             2.0          Outperform
Parker-Hannifin Corp              100%           58%       12.1         91%               3%         2.8            25%        6.79        1.84     41.6      -0.3     1.0              2.3          Outperform
Google Inc                        100%           46%       17.8        118%              -20%        4.0           -33%        5.10        0.00     30.0      -0.4     14.8             2.0          Outperform
Vmware Inc -Cl A                   93%           48%       22.0        146%              -37%        5.6           -36%        6.05        0.00     56.3      1.5      -4.5             2.4          Outperform
Emc Corp/Ma                        91%           53%       12.1        107%              -56%        2.2           -58%        10.96       0.00     68.5      -2.4     -0.6             1.8          Outperform
Oracle Corp                        90%           43%       11.5         76%              -45%        3.8           -58%        8.37        0.75    126.5      -1.0     -2.4             2.1          Outperform
National Cinemedia Inc             90%           100%      23.8        144%              17%         -2.1            na        6.02        5.36     12.0      0.4      -3.3             2.2          Outperform
Gardner Denver Inc                 89%           39%       13.3        100%              21%         2.6            30%        7.08        0.27     15.8      0.4      1.7              2.8          Outperform
Emerson Electric Co                88%           44%       15.3        115%               3%         4.1            2%         6.97        2.91     26.4      -1.8     -1.0             2.5          Outperform
Kennametal Inc                     86%           43%       13.1         99%              15%         2.0            16%        5.53        1.56     26.2      -21.7    -6.3             2.2          Outperform
General Electric Co                80%           46%       13.1         99%              -22%        1.9           -57%        7.05        3.37     17.0      -0.7     -6.6             2.1          Outperform
Ingersoll-Rand Plc                 79%           59%       14.6        110%              30%         0.0           -99%        6.61        1.51     10.8      0.1      -1.1             2.4          Outperform
Jacobs Engineering Group Inc       75%           62%       14.0        106%               2%         1.8           -30%        5.07        0.00     5.6       1.9      -2.2             2.1          Outperform
Marriott Intl Inc                  60%           90%       19.8        106%              17%         -10.5           na        5.90        1.16    -75.0      0.8      0.4              2.4          Outperform
Microsoft Corp                     60%           54%       10.4         69%              -52%        4.1           -45%        10.75       2.88     80.2      -3.8     -1.6             2.3          Outperform
Symantec Corp                      60%           49%       12.6         84%              -12%        3.5            1%         6.95        1.38     38.1       3.3     -1.1             2.2          Outperform
Textron Inc                        59%           63%       12.3         93%               -5%        2.5            -8%        2.24        0.30     45.7      -10.8    -3.0             2.0          Outperform

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

Of these, the following look cheap on P/E relatives and HOLT: Google, VMware, EMC
Corp/Ma, Oracle, General Electric, Microsoft, Symantec, Textron.




Global Equity Strategy                                                                                                                                                                                               43
                                                                                                                                                                    17 May 2013


        (2)          Airlines: increasing our overweight
We increase our weighting in airlines. Airlines rank well on capital discipline, have strong
pricing power and earnings momentum, benefit from a fall in oil prices, have exposure to
corporate spend and reasonable valuations.
Capital discipline: new capacity is essentially flat (0% capacity growth in Europe,
according to our analyst) as airlines have become more rational in a concentrating global
marketplace. We proxy capital discipline by looking at capex to sales, which is abnormally
low.

Figure 109: New capacity growth is extremely modest for                                     Figure 110: Airline capex-to-sales is falling
the airlines sector, and zero in Europe

                                              Q2 13
                                                                                             16                               European airlines capex / sales (%)
           Europe to Europe         0%
                                                                                             14
          Total from Europe          1%

  Europe to North America                 2%                                                 12

              Europe to Asia                   3%
                                                                                             10
   Europe to Latin America                            5%
                                                                                              8
       Europe to Middle East                                              10%

            Europe to Africa                                               10%                6

                               0%        2%     4%     6%       8%      10%      12%
                                                                                              4
                                                                                                   Q2     Q2     Q2     Q2     Q2     Q2      Q2      Q2     Q2        Q2     Q2
                                                                                                  1993   1995   1997   1999   2001   2003    2005    2007   2009      2011   2013

Source: Company data, Credit Suisse Travel Research team                                    Source: Thomson Reuters, Credit Suisse research

Airlines rank well on our capital discipline monitor (a scorecard based on capex-to-sales,
capex-to-depreciation and the deviation of capex from its trend).

Figure 111: Airlines rank well on our capital discipline monitor
2.5                                                   Sectors ranked on a combination of:
2.0                                                   1) capex / sales - stdev from avg
1.5
                                                      2) capex / depn - stdev from avg
                                                      3) capex - deviation from trend
1.0

0.5

0.0

-0.5

-1.0

-1.5                 average z-score, based on 20-yrs of data
-2.0
       Mining
       Ind. Met & Mines
       Eltro/Elec Eq
       Oil & Gas Prod
       Fd Producers
       Tobacco
       Inds Eng
       Electricity
       Support Svs
       Chemicals
       Oil/Eq Svs/Dst
       Leisure Gds
       Aero/Defence
       H/H Gds,Home Con
       Alt. Energy
       Gs/Wt/Mul Util
       Beverages
       Personal Goods
       S/W & Comp Svs
       Forestry & Pap
       Airlines
       Auto & Parts
       Fxd Line T/Cm
       Media
       Tch H/W & Eq
       Con & Mat
       Inds Transpt
       H/C Eq & Svs
       General Inds
       Travel & Leis
       Mobile T/Cm
       Gen Retailers
       Pharm & Bio
       Fd & Drug Rtl




Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                       44
                                                                                                                                                       17 May 2013

As a result of this capital discipline, airlines rank top of our European pricing monitor (see
Appendix 4). As illustrated below, European airlines have been increasing prices
significantly ahead of inflation, with prices having increased by just under 6% on average
since the first quarter of 2011. This has, in turn, allowed relative earning momentum to be
very strong, as shown below.
Figure 112: Pan European airlines’ relative earnings                                   Figure 113: Over the last two years, rises in airline pricing
momentum is strong                                                                     power have consistently exceeded broader pricing power
                                                                                       with a CAGR of 7%
  60%                                                                                   10

                                                                                         8
  40%
                                                                                         6

  20%                                                                                    4

                                                                                         2
   0%
                                                                                         0
 -20%
                                                                                        -2
                                                                                                                                  % chg Y/Y
 -40%                                                                                   -4
                                European Airlines 3m breadth                                                                      Air transport
                                Rel European Market                                     -6                                        CPI - all items
 -60%
                                                                                        -8
        1992    1995     1998      2001     2004      2007       2010      2013
                                                                                          May-10      Nov-10   May-11    Nov-11       May-12         Nov-12

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

We have not seen one quarter of negative unit revenues in the past two years (at constant
currency); see European Airlines: TA route rationalisation confirms returns focus, 24 April.
Corporate spend: As our airlines analyst, Neil Glynn, highlights, 50% of spend for the flag
carrier is corporate related.
Falling oil price: Airlines are clearly very sensitive to falling oil prices (c.40% of Ryanair
costs are fuel related, for example). We think the summer season will demonstrate that
structural change will bolster yields and enable the sector to capitalise on jet fuel prices
that have fallen 9% YTD.
Beneficiaries of a stronger euro: airlines are one of the few sectors that actually has
more dollar costs than revenues and thus benefits from a stronger euro.
Figure 114: Ryanair tends to outperform as oil prices fall                             Figure 115: Ryanair 12-mo. forward P/E relative to easyJet
100%                                       Ry anair rel to mkt 3m % chg         -80%    200%                            Ry anair 12m fw d P/E rel to Easy jet
                                           Oil price 3m % chg (rhs inv erted)                                           Av erage (+/- SD)
 80%                                                                            -60%    180%

 60%                                                                            -40%    160%

 40%                                                                            -20%    140%

 20%                                                                            0%      120%

  0%                                                                            20%     100%

-20%                                                                            40%      80%

-40%                                                                            60%      60%

-60%                                                                            80%      40%

       2006    2007    2008      2009     2010     2011        2012     2013                   2001    2003     2005     2007        2009           2011        2013

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




Global Equity Strategy                                                                                                                                            45
                                                                                                                                                           17 May 2013

A potential further consolidation story: There is still a consolidation story to come. In
the US by the end of 2013, the top 4 carriers will account for 85% of capacity (if the
American/US airlines deal goes through) and have a margin of 2.6%, according to the
IATA. In Europe, the top 5 carriers account for c.50% of the market and have a margin of
0.6%.
The benefit of consolidation is clear- the transatlantic pricing (as proxied by a steady 8% to
10% increase in Revenue per Available Seat Kilometre (RASK)) has remained robust over
the past eight quarters with three airlines accounting for three-quarters of capacity.

Figure 116: Healthy transatlantic market structure in                             Figure 117: …helping each carrier firm pricing as
transatlantic…                                                                    illustrated by LHA transatlantic RASK vs US ISM 2011-
                                                                                  2012
                                                                                   70                                                                             12%
                                 Other
                                 14%                                               65                                                                             10%
                                                            oneworld JBA
               Virgin Atlantic                                  24%                60                                                                             8%
                     6%
               US Airways                                                          55                                                                             6%
                  5%
                                                                                   50                                                                             4%

                                                                                   45                                                                             2%

                                                                                   40                                                                             0%
                            STAR JV                   SkyTeam JV                        1Q11 1Q11 2Q11 3Q11 3Q11 4Q11 1Q12 1Q12 2Q12 3Q12 3Q12 4Q12 1Q13 1Q13
                             26%                         25%
                                                                                                        US ISM new orders          LHA Americas RASK yoy

Source: Company data, Credit Suisse Travel Research team, Diio Mi                 Source: Company data, Credit Suisse Travel Research team
data (2Q13)

Valuations are not demanding
European airlines are trading below average on 12-month forward P/Es and price-to-book
relatives to the market.

Figure 118: Pan European airlines are trading below                               Figure 119: …as well as on P/B relatives
average on 12-mth fwd P/E relative to the market…


                     European Airlines 12m fw d P/E rel                            85%
 300%                                                                                                        European Airlines P/B rel European Market
                     European Market
                     Av erage
                                                                                   75%                       Av erage (-/+ 1 std dev )
 250%


 200%                                                                              65%


 150%                                                                              55%


 100%                                                                              45%


  50%                                                                              35%


   0%                                                                              25%
        2001      2003             2005   2007       2009        2011      2013          2001       2003       2005         2007         2009       2011       2013

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




Global Equity Strategy                                                                                                                                                46
                                                                                                                                                                              17 May 2013

European airlines are only neutral on our price momentum monitor, having been
significantly overbought in recent months, and positioning by sell-side analysts is not
extreme.

Figure 120: Pan European airlines: consensus net                                                  Figure 121: European airlines look neutral on our price
recommendations – not extended                                                                    momentum monitor
  20%                                                                                   3.5         40%

  15%                                                                                   3.3         30%
                                                                                        3.1
  10%                                                                                               20%
                                                                                        2.9
   5%                                                                                               10%
                                                                                        2.7

   0%                                                                                   2.5          0%
                                                                                        2.3        -10%
  -5%
                                                                                        2.1
 -10%                                                                                              -20%
                                                                                        1.9
                                 European Airlines on analy st
 -15%                                                                      1.7                     -30%
                                 recommendations rel to European Market
                                                                                                                        European Airlines %dev from 6mma, rel to European
 -20%                            (+=Buy ; -=Sell)                          1.5                     -40%
                                 Analy st recommendations (1=Buy ; 5=Sell)                                              Market
                                                                                                                        Av erage
       1995   1997   1999    2001 2003 2005 2007 2009 2011 2013                                            1995         1998      2001        2004     2007         2010            2013

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



The budget airlines continue to look particularly appealing given their superior cost base.

Figure 122: Budget airlines have lower operating costs than their peer group
                                                                                IAG             Air France Lufthansa                  easyJet       Ryanair
                         Labour % of revenue                                     24                  30        22                       11            10
                         Labour % of ex-fuel costs                               36                  41        28                       18            20
Source: Company data, Credit Suisse Transport team, Thomson Reuters, Credit Suisse research



Our analyst, Neil Glynn’s, top picks are Lufthansa and Ryanair. We would highlight that
the FCF yields are both close to 10% for our preferred stocks.

Figure 123: Outperform-rated European airlines stocks on our aggregate valuation screen
                                   -----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
Deutsche Lufthansa          10.3          66%             -31%         0.9          -40%            9.4           3.2       5.8         17.1       0.1           2.3        Outperform
Ryanair Holdings            13.7          89%             -16%         2.7          -19%            9.4           1.7      -14.3        8.5        1.2           2.2        Outperform
Source: MSCI, IBES, Thomson Reuters, Credit Suisse HOLT, Credit Suisse research




Global Equity Strategy                                                                                                                                                                     47
                                                                                                                                    17 May 2013


      (3)              Software: stay overweight
The software sector has the following attractive characteristics:

■     Software is high growth
Software remains one of the fastest growth sectors of the economy.

Figure 124: Trend growth of volume demand in the US: tech overall and software in
particular are better than any other sector
 RANK (out of                                                                                                     % quarters with
              Item (volume)                                                        yoy        10Y trend growth
  227 items)                                                                                                         growth>0


1                   Televisions                                                    19%              31%                  100%
2                   Personal Computers & Peripheral Equipment                      16%              19%                  98%
3                   Information Processing Equipment                               12%              17%                  94%
4                   Computer Software & Accessories                                8%               15%                  82%
5                   Photographic Equipment                                         2%               15%                  77%
6                   Video & Audio Equipment                                        11%              14%                  93%
7                   Internet Access                                                0%               13%                  88%
8                   Telephone & Facsimile Equipment                                3%               13%                  87%
9                   Games, Toys, & Hobbies                                         8%               10%                  92%
10                  Recreational Goods & Vehicles                                  8%               9%                   94%
11                  Cellular Telephone Services                                    10%              9%                   98%
Source: Thomson Reuters, Credit Suisse research



Software has delivered high EPS growth and sales growth over the past five years.

Figure 125: Software has delivered high EPS growth and sales growth over the past five
years

    10%                  US sectors CAGR, last 5 years
                                                                       Fd/Drug Rtl
                                                                     Bev erages Transpt Softw are
                                                                       Fd Prd H/C Eq/Sv s          Media
     6%                                                                   Pharm
            Sales




                                                                               Chem           Tech H/W
                                  T/Cm Sv s                     HH Prd                               Pap/For
                                                       Energy Market      Retail Semis
     2%                                                                 Hot & Lei
                                                          Cap Gds

    -2%                                                         Utilities
          Met & Min
    -6%                                                                                                   Cons Dur (30.8%, -
                                       Comm/Prof        Tobacco
      Con Mat (-36%, -6.9% )                                                                                     4.2% )
 -10%

 -14%

                                                                                      EPS                        Autos
 -18%
       -16%               -11%            -6%            -1%                4%   9%         14%           19%             24%

Source: Thomson Reuters, Credit Suisse research

The growth of Hana and Fusion (HDD to nan and flash based storage) looks to be a
significant shift in the growth potential of software (or rather Oracle and SAP). We suspect
that even now some investors have not appreciated the potential breadth of applications
for much faster processing speeds.




Global Equity Strategy                                                                                                                      48
                                                                                                                                                                                                                                                                                                                  17 May 2013


■     High barriers to entry
Software has high barriers to entry via after-market sales, cost of switching, and high
capitalised R&D as % of sales.

Figure 126: High barriers to entry in tech and software                                                                                                                                            Figure 127: SAP’s Q1 2013 revenue split shows more than
especially                                                                                                                                                                                         60% of sales are from maintenance and its cloud
                                                                                                                                                                                                   businesses, which are recurring revenue streams
 25%                                                                                                                                                                                                  70.0%
                                          IT Serv ices
           2012e CFROI




                                                                                                                                                                                                                                                                             58.1%
                                                                                             Softw are                                                                                                60.0%
 20%
                                                                                                                                                                                                      50.0%
                                  Computers                                           Internet
 15%                                                                              Sw &Sv s                                                                                                            40.0%

                                 Cons Sv s                                                                                                                                                            30.0%
                                                                 IT
 10%                                                                                                                                                   Health Care
                                                                                                                        Comm Equip                                                                                                      18.1%                                                                    19.2%
           Industrials Cons Dis                                                                     Semis                                                                                             20.0%
      Telecoms
    5% Energy MaterialsMarket
                                                                        Office Elec                                                                                                                   10.0%                                                                                    4.6%
                       Elec Equip
             Utilities
                                                                                                    Capitalized R&D as % of sales                                                                          0.0%
    0%                                                                                                                                                                                                                        Software revenue Support revenue                                Cloud           Professional
                                                                                                                                                                                                                                                                                         subscriptions and services and other
         0%                               20%                            40%                           60%                             80%                           100%                                                                                                                    support

Source: Thomson Reuters, Credit Suisse HOLT, Credit Suisse                                                                                                                                         Source: Company data, Credit Suisse Tech research team
research



■     Very strong balance sheets
Software has the strongest balance sheet of any global sector.

Figure 128: Software has net cash and the strongest balance sheet of any global sectors

 120%                                                                                                                        Global sectors net debt to market cap
                                                                                                                             Non-financials
 100%

    80%

    60%

    40%

    20%

     0%

    -20%
                                                                                                                                                  Healthcare


                                                                                                                                                                          Hotels & Lei


                                                                                                                                                                                                    H/H & Per Prod
                     Utilities




                                                                                                                                                                                                                                                          Tech H/W
                                                                                                                                                                                                                     Retail
                                                                  Met & Min




                                                                                                                                       Food Rtl




                                                                                                                                                                                                                                         Cons Dur & App
                                  Autos


                                                     Transport


                                                                              Media




                                                                                                                                                                                                                               Pharma
                                                                                                                                                                                         Tobacco




                                                                                                                                                                                                                                                                     Semis
                                                                                                                                                               Fd Prods
                                          Telecoms




                                                                                        Cap Goods




                                                                                                                                                                                                                                                                             S/W & Svs
                                                                                                                              Energy
                                                                                                     Beverages
                                                                                                                 Comml Svs




Source: Thomson Reuters, Credit Suisse research

■     80% of software sector’s revenues is corporate discretionary spend related

■     Software has one of the best combinations of valuation and fundamentals, in
      our view




Global Equity Strategy                                                                                                                                                                                                                                                                                                          49
                                                                                                                                                                                                                      17 May 2013

The chart below compares a sector’s aggregate score of RoE, growth and balance sheet
quality to a sector’s valuation score (based on the deviation of P/E, P/B and dividend yield
from their post-1995 average). Software is one of the best positioned sectors.
Figure 129: Sectors in the top right part of the chart scorecard well on RoE, growth and
balance sheets and are trading abnormally cheaply
                                                                2.1
  Higher RoE & growth, lower leverage & CDS and better rating




                                                                                                                                                 European sectors
                                                                1.7
                                                                                                                      Tobacco
                                                                1.3
                                                                                                                                        Pharma
                                                                0.9                                                                      H/H Pers Prd            S/W & Sv s
                                                                                     Bev erages           Fd Prd
                                                                0.5                                     Comm. Sv s      H/C Eq/Sv s
                                                                                                     Cons Dur
                                                                                                              Chemicals
                                                                                                                      Semis                                     Insurance                                 Energy
                                                                0.1                  Retailing                                              Media
                                                                                                                                Cap Gds                           Met & Min
                                                                -0.3          Cons Sv s                                                  Transpt                 Fd/StplUtilities
                                                                                                                                                                         Rtl
                                                                                                                      Cons Mat         Telecoms  Autos             Tech H/w
                                                                                                                                      Div Fin
                                                                -0.7
                                                                                                                               Real estate
                                                                                                                                               Banks
                                                                -1.1
                                                                                                                                                                                           Pap/For Prd
                                                                -1.5
                                                                       -2.0          -1.5         -1.0           -0.5          0.0          0.5                          1.0                  1.5               2.0
                                                                                    Composite v aluation score: Low er P/E, P/B and higher DY

Source: Thomson Reuters, Credit Suisse research
The European sector may be on a 40% P/E premium to the market, but this looks good
value to us given the 150% CFROI® premium, 7% percentage point EPS growth premium
and 9% point sales growth premium.
Figure 130: European software versus the market valuations
                                                                                                 EPS growth                               Sales growth
Europe                                                                                                                                                                         12m fwd PE            CFROI
                                                                                  2007-12 CAGR                2013           2007-12 CAGR                2013
Software                                                                              14%                     11.2%              9.9%                     9%                        16.7                 18.6%
Market                                                                                -3.6%                   6.5%               2.1%                    0.1%                       12.0                 7.4%
Prem / Disc                                                                               nm                  72%                360%                    7113%                      39%                  152%

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

Furthermore global software’s price-to-book and 12-month forward P/E relatives are more
than one standard deviation below their historical average.

Figure 131: Global software looks very attractive on 12-month forward P/E relatives
  245%                                                                                                                                  Global Softw are: 12m fw d
                                                                                                                                        P/E rel to market
  225%                                                                                                                                  Av erage x bubble

  205%

  185%

  165%

  145%

  125%

  105%

                     85%

                     65%
                                                                  1995                    1998                  2001               2004                   2007                      2010                   2013

Source: Thomson Reuters, Credit Suisse research




Global Equity Strategy                                                                                                                                                                                                        50
                                                                                                                                                                              17 May 2013

European software is also cheap on P/E relative.

Figure 132: European software is also cheap on P/E                                                  Figure 133: Software earnings breadth is approaching a
relative                                                                                            5-year low
 250%                                                                                                35%
                                         European Softw are : 12m fw d P/E rel
 230%                                    Av erage (+/- 1SD)                                          25%

                                                                                                     15%
 210%
                                                                                                      5%
 190%
                                                                                                      -5%
 170%                                                                                                -15%

 150%                                                                                                -25%

                                                                                                     -35%
 130%
                                                                                                     -45%
 110%
                                                                                                            1995         1998        2001        2004       2007     2010           2013
         2003       2005            2007               2009           2011            2013                                      Europe Softw are 3m breadth      Rel mkt

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



■      One negative: earnings revisions are weak
We recognise that recent earnings results from SAP and Oracle have disappointed,
reflected in some consensus earnings downgrades.
Stock screen
Below we show a screen of European and US software companies that our analysts
highlight as growth.

Figure 134: European and US Software companies that our analysts highlight as growth
                                  -----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
Oracle                     11.5          76%             -45%           3.8             -58%         8.4           0.7      126.5       -1.0      -2.4           2.1        Outperform
Check Point                13.6          90%             -38%           3.2             -60%         8.5           0.0       68.8       -2.4      -3.1           2.0        Outperform
Sftw.Techs.
SAP                        17.6         116%             -34%           5.3             -49%         5.4           1.5      136.7       -3.3      -1.9           2.2        Outperform
Teradata                   15.3         101%              -6%           5.1              -8%         6.0           0.0       82.3       -4.2      -4.6           2.0        Outperform
Vmware                     22.0         146%             -37%           5.6             -36%         6.1           0.0       56.3        1.5      -4.5           2.4        Outperform
Dassault Systemes          23.9         158%              1%            4.8             -41%         4.4           1.0      -18.7       -4.4      -4.3           2.8        Neutral
Salesforce.Com             61.9         409%             -17%           10.9             -5%         2.4           0.0      -60.0       0.7        0.3           2.0        Outperform
Netsuite                   167.2       1105%              94%           41.1            157%         0.7           0.0      -91.7      -14.2       2.9           2.5        Outperform
Source: MSCI, IBES, Thomson Reuters, Credit Suisse HOLT, Credit Suisse research




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     (4)         Advertising: stay overweight
■    Advertising spend remains depressed
Global advertising expenditure is 8% below trend and remains abnormally low as a
proportion of GDP.

Figure 135: Global advertising expenditure is 8% below                                            Figure 136: Advertising spending as a % of GDP is at the
trend                                                                                             lowest level since 2001 in all major European markets and
                                                                                                  the US
    570
                                                                                                       105
                   Global advertising expenditure with projection, real US$ bn
                   Trend                                                                               100
    520
                                                                                                        95

    470                                                                                                 90
                                                                                                        85
    420
                                                                                                        80

    370                                                                                                 75
                                                                                                        70       Advertising spending as a % of GDP
    320                                                                                                          index (2001=100)
                                                                                                        65                              US
    270                                                                                                 60                              UK
                                                                                                                                        Germany
                                                                                                        55                              France
    220                                                                                                                                 Spain
                                                                                                        50
    170                                                                                                 45
          1980   1985      1990       1995        2000       2005          2010   2015                          2001    2003     2005      2007       2009   2011   2013   2015

Source: Company data, Credit Suisse estimates, IMF, Zenith                                        Source: Company data, Credit Suisse estimates, IMF, Zenith
Optimedia                                                                                         Optimedia

■    Advertising spend is non-discretionary
Although advertising is clearly a cyclical sector, we think it is more relatively non-
discretionary than many investors give it credit for. For example, every time Unilever cuts
back on A&P, within two quarters it has tended to lose market share suggesting the largest
companies have to maintain spending or risk losing business.

Figure 137: As the example of Unilever shows, to some extent, A&P has becomes less
discretionary
          7.0%                                                                                                                  2.0%

          6.0%
                                                                                                                                1.5%
          5.0%
                                                                                                                                1.0%
          4.0%

          3.0%                                                                                                                  0.5%

          2.0%                                                                                                                  0.0%

          1.0%
                                                                                                                                -0.5%
          0.0%
            Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
                                                                                                                                -1.0%
      -1.0% 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12

                                        4 Qs moving average volume (LHS)            Change in A&P (4Q ma) RHS
      -2.0%                                                                                                                     -1.5%

Source: Company data, Thomson Reuters, Credit Suisse Consumer Staples Team




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■     Valuations appear reasonable
Valuations appear reasonable against both media and the market.

Figure 138: European advertising relative to the market                            Figure 139: … but their economic P/E on HOLT relative to
trades just above its average on 12-month forward P/E…                             that for the rest of the sector is below average
                                                                                   1.0
 160%              Europe adv ertisers 12m fw d P/E rel Europe market
                                                                                                                 European advertising HOLT
                   Av erage (+/1 1SD)                                                                            Economic P/E rel European
 150%
                                                                                                                 media
 140%                                                                              1.0

 130%

 120%
                                                                                   0.9
 110%

 100%

    90%                                                                            0.9

    80%

    70%
                                                                                   0.8
           2001   2003        2005        2007       2009        2011     2013           2005     2006   2007    2008     2009    2010       2011     2012     2013

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



■     Earnings revisions are improving
Consensus revenue numbers are at around 6% for 2013E and relative earnings
momentum for European advertisers has rebounded.

Figure 140: Consensus revenue growth expectations for                              Figure 141: Relative earnings momentum for European
ad agencies in 2013E is now 6.3%                                                   advertisers has rebounded
    9.0%                   European adv ertising agencies sales grow th             50%
                                                                                                          Europe adv ertisers 3m breadth
    8.0%                                                                            40%                   Rel Europe market

    7.0%                                                                            30%

                                                                                    20%
    6.0%
                                                                                    10%
    5.0%
                                                                                         0%
    4.0%
                                                                                    -10%
    3.0%
                                                                                    -20%
                                           2012        2013
    2.0%
                                                                                    -30%
    1.0%                                                                            -40%
       Apr-10            Jan-11          Oct-11             Jul-12        Apr-13           1993          1997        2001          2005             2009         2013

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




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Stock picks
Our focus has been on the advertising agencies. For WPP, 31% of sales is from the US
(25% from GEM). Our media team argues that increased complexity of advertising (with
digitalisation) is driving demand for advertising. Digital is now nearly a third of WPP
revenues. Most interestingly of all, nearly 80% of the model is now consultancy as
opposed to commission based and IT consultants trade on very much higher multiplies (for
example, Accenture trades on 18.8x 2013E consensus P/E, according to our media
analysts).
Elsewhere in media, there is an interesting story in Pearson. Pearson’s exposure to digital
education should, our media team think, enable the group to continue to take market share
in the US education market. The cyclical element is that 57% of Pearson’s earnings come
from US states and US state revenues are very cyclical (as US states have to have a
balanced budget), according to our media team.

Figure 142: European advertising agencies with high domestic exposure
                               % exposure to                -----P/E (12m fwd) ------             ------ P/B -------           2013e, %      HOLT       2013e Momentum, %
                                                                                                                                                                                Consensus
                                                                                 rel to mkt %             rel to mkt %                       Price, %                        recommendation Credit Suisse
Name              Corporate spend              US    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
Publicis Groupe          95%                   43%   14.9          90%               3%         2.4          -57%        7.1          1.8     12.0       3.9        1.8           2.5        Outperform
Wpp                      95%                   31%   13.1          79%              -8%         2.1          -83%        7.5          3.0     -2.4       4.0        3.0           2.1        Outperform
Jcdecaux              100%                     5%    20.1         122%              -2%         1.9          -14%        7.6          2.3    -16.1       -6.0       0.0           2.6        Neutral

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




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       (5)     UK housing-related plays
We have discussed our relatively positive stance on the outlook for the UK elsewhere (see
UK equities: don’t give up, Carney about, 22 January 2013). In particular, we believe that
the UK’s pursuit of reflationary policies (which are only likely to gain further momentum
once Mark Carney takes up his position as Governor of the Bank of England on July 1 st)
will be particularly positive for UK housing and the related listed plays.
Signs of a turn in the housing market
Even before the government’s announcement of the Help to Buy scheme in March’s
Budget, there were clear signs that the UK housing market was beginning to turn, with
new buyer enquiries picking up, and the RICS house price balance pointing to further
house price appreciation in the near-term.

Figure 143: Lead indicators of house prices are stable                         Figure 144: UK house prices are recovering
                                                                                90                                                                       30%
                          RICS - new buy er enquiries / new instructions
 80                       RICS - sales to stocks, rhs, lag 6m            0.6    70
                                                                                                                                                         20%
 60                                                                             50
                                                                        0.5
 40                                                                             30                                                                       10%

 20                                                                     0.4     10
                                                                                                                                                         0%
  0                                                                             -10

-20                                                                     0.3
                                                                                -30                                                                      -10%

-40                                                                             -50
                                                                        0.2                                                                              -20%
-60                                                                             -70                        RICS price balance,lhs
                                                                                                           Halifax house price inflation
-80                                                                     0.1     -90                                                                      -30%
      1998     2001      2004        2007         2010         2013                   1984   1988   1992   1996     2000      2004         2008   2012
Source: Thomson Reuters, Credit Suisse research                                Source: Thomson Reuters, Credit Suisse research

The BoE and Treasury announced in July last year the launch of the Funding for Lending
scheme, which incentivised banks to lend by offering low-cost funding to banks that
increased their stocks of lending. The impact of the scheme appears to have been broadly
positive from a housing perspective. Since July, mortgage approvals and mortgage
lending have both trended higher, and mortgage rates have moved significantly lower.




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Figure 145: Mortgage lending is picking up                                              Figure 146: UK mortgage rates are falling
 3.5                                                                               60    8
                               Net lending secured on dwellings (3m sum, £bn)                                        75% LTV 2yr fixed rate              75% LTV Tracker

                               Mortgage approvals (000's, rhs)                     58
 3.0                                                                                     7

                                                                                   56
 2.5                                                                                     6

                                                                                   54
 2.0                                                                                     5
                                                                                   52

 1.5                                                                                     4
                                                                                   50

 1.0                                                                                     3
                                                                                   48


 0.5                                                                               46    2
   Jan-12    Mar-12   May-12     Jul-12    Sep-12    Nov-12      Jan-13   Mar-13               99   00   01   02     03    04     05   06     07    08   09   10   11      12

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

Moreover, affordability is relatively attractive outside of London (where prices are down
7.5% from the 2007 level), while the UK rental yield on our economists’ numbers is 4.1%.

Figure 147: London property has rallied sharply since                                   Figure 148: UK residential property rental yield is high
2009, but ex-London values have stagnated                                               relative to history
 200                             2002 = 100                                              5.0                       Rental Yield

 190                      London               UK ex London                                                        Rental Yield long term average
                                                                                         4.5                       (1963 - 2011)
 180

 170
                                                                                         4.0
 160

 150                                                                                     3.5

 140
                                                                                         3.0
 130

 120
                                                                                         2.5
 110

 100                                                                                     2.0
       2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013                          1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Source: Thomson Reuters, Credit Suisse research                                         Source: Credit Suisse European Economics team, Thomson Reuters,
                                                                                        Credit Suisse research

The UK house price-to-wage ratio is marginally above its norm, but not excessively so.




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Figure 149: Our economists project that housing                                       Figure 150: The UK house price to earnings ratio is above
completions will continue to rise                                                     average, but not excessively so
    220                                                                               6.0
               Housing completions, 000s, with
               projection that housebuilding reaches                                                   Halifax UK house price/earnings ratio
    210
               1991-2004 avg by the end of 2018                                       5.5              average
    200

    190                                                                               5.0

    180                                                                               4.5
    170
                                                                                      4.0
    160

    150                                                                               3.5

    140
                                                                                      3.0
    130
                                                                                      2.5
    120                                                                                  1983   1986   1989   1992    1995    1998     2001    2004   2007    2010   2013
          92    94    96    98    00    02    04   06   08   10   12   14   16   18

Source: Thomson Reuters, Credit Suisse European Economics team                        Source: Thomson Reuters, Credit Suisse European Economics team



The catalysts for UK housing activity to continue to improve are:

■         A reduction in mortgage rates on the back of the Funding for Lending scheme. Since
          the launch of the scheme in July 2012, the average quoted mortgage rate on a 75%
          LTV 2-year fixed rate mortgage has fallen by nearly 90bps since June to 2.87%.

■         The Help to Buy scheme announced in March’s Budget (and due to start in January
          2014) will significantly reduce the deposit requirements for first time buyers and home
          movers buying new build properties. For £130bn worth of mortgages with an LTV of at
          least 75%, the government will offer an equity loan of up to 20%, allowing the home
          buyer to offer just a 5% deposit. The government equity loans are open to both first-
          time buyers and home movers on new build properties worth up to £600,000. This
          could fund c.400k homes compared to annual turnover of 900k and housing starts of
          100k.

■         A further expansion in the Funding for Lending scheme would, in all likelihood, bring
          down mortgage rates further. Thus, a combination of being able to buy on a 5% rather
          than a 20% down payment as well as a lower mortgage rate should boost housing
          related activity.

■         Annual housing supply of around 100k remains just half of the estimated required
          demand, of around 215k units.

■         The coalition government has taken steps to ease planning restrictions, notably in the
          Budget this year by allowing housing developers to renegotiate planning obligations to
          make development economically viable.


How to play it?
Fundamentally, we think there are two ways to play this:

■         Companies that benefit from a rise in housing transactions: such as Kingfisher,
          Travis Perkins and Countrywide.

■         The UK homebuilders.




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Our analyst, Harry Goad, maintains his long-held positive sector view, but highlights a shift
in his thinking about why he still sees the sector as attractively valued (see UK Housing -
The Power of Politics, April 4th). For the past 3 years Harry’s positive sector view was
primarily a function of the margin recovery story as builders were reinvesting cash flow in
land at lower valuations, which helped to bring profitability back to more normalised levels.
Our team now see the return of house price inflation as a consequence of government
actions through the Help to Buy scheme as providing the next leg of the investment case.
On Credit Suisse estimates, the UK homebuilders are trading on 16x 2013E earnings,
dropping to 12x in 2014E. We would highlight that P/B relatives are close to their pre-
bubble norms, and that earnings momentum remains extremely strong.

Figure 151: The P/B relative of UK homebuilders is looking a little extended (one
standard deviation above norm)




Source: Thomson Reuters, Credit Suisse research

We would also note that UK homebuilders are trading around half a standard deviation
cheap on 12-month forward P/E relative to their US peers.

Figure 152: UK homebuilders are trading around half a                             Figure 153: … and relative earnings momentum is very
standard deviation cheap on 12-month forward P/E                                  strong
relative to the US peers …
 160%                  UK homebuilders price to book rel US homebuilders           50%

                                                                                   40%
 140%
                                                                                   30%
 120%
                                                                                   20%
 100%                                                                              10%

  80%                                                                               0%

                                                                                   -10%
  60%
                                                                                   -20%
  40%
                                                                                   -30%                     UK homebuilders 3m breadth

                                                                                                            Rel UK market
  20%                                                                              -40%
        1995    1998        2001       2004       2007       2010          2013        1990     1993     1997      2001        2005      2009        2013

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




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                                                                                                                                                                               17 May 2013

Below, we show a screen of the UK housing-related plays.

Figure 154: UK housing-related plays on our aggregate valuations scorecard
                                           -----P/E (12m fwd) ------             ------ P/B -------           2013e, %         HOLT       2013e Momentum, %
                                                                                                                                                                  Consensus
                                                                rel to mkt %             rel to mkt %                          Price, %                        recommendation Credit Suisse
                       UK housing
Name                                Abs       rel to Industry   above/below    Abs       above/below    FCY          DY       change to   3m EPS    3m Sales    (1=Buy; 5=Sell) rating
                       exposure %
                                                                  average                  average                               best
Countrywide              100%       na             na               na         na             na        na               na      na         na        na            na         Outperform
Travis Perkins           100%       13.6         103%              41%         1.6          -21%        6.3          2.0       -26.3       0.1        -0.9          2.7        Neutral
Howden Joinery Gp.       100%       16.3          85%              42%         14.5          -2%        2.6          1.6       -24.1       5.0        -0.7          2.4        Not Rated
Barratt Developments     100%       15.3          89%               7%         1.1           -3%        na           1.0        -3.4       8.7        2.0           2.4        Neutral
Taylor Wimpey            100%       14.6          85%              -3%         1.5           73%        na           1.1        -0.5       13.9       4.5           2.7        Outperform
Persimmon                100%       14.8          86%              43%         1.8           48%        na           6.8       -12.2       10.0       3.6           2.4        Outperform
Kingfisher               40%        12.9          68%              15%         1.3          -30%        5.3          3.1        -7.2       -4.1       1.6           2.3        Outperform

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

We would particularly favour the transaction-orientated names. In this context, if Travis
Perkins margins rose to previous peak, then it is on a P/E of 10x.




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       (6)     US housing-related spending plays
We continue to believe that US housing sales in 2014 could be 1.3m compared to a
consensus of 1.05m. Affordability still looks surprisingly good. According to the latest
monthly survey by our US housing analyst, Dan Oppenheim, rising prices remains the
most common theme among realtors, while declining inventories is a close second (see
Monthly Survey of Real Estate Agents – April 2013, 13 May 2013). Our data shows
inventories close to 7-year lows.

Figure 155: The fall in the NAHB index is consistent with                              Figure 156: Housing affordability remains at high levels
c1.3m housing starts
 90                 NAHB index                    Housing starts, rhs                   210
                                                                                                                        US Housing affordability
 80                                                                            2,200
                                                                                        190                             Av erage
 70

 60                                                                            1,700    170

 50
                                                                                        150
 40                                                                            1,200

 30                                                                                     130

 20                                                                            700
                                                                                        110
 10

  0                                                                            200       90
      1985   1989        1994       1999        2003        2008        2013                  93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

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

US homebuilders have outperformed over the past two years, but they have still lagged
the improvement in the NAHB survey.

Figure 157: US homebuilders have outperformed, but                                     Figure 158: The rise in house prices suggests that book
have still lagged the improvement in the NAHB survey                                   value should have risen by a further 30%
                                 NAHB surv ey                                                            US homebuilders, book value per share                   250000
 80                              US homebuilders price relativ e, rhs            1.2    14000
                                                                                                         US median house price, rhs
 70                                                                                                                                                              230000
                                                                                 1      12000
 60                                                                                                                                                              210000
                                                                                 0.8    10000
 50
                                                                                                                                                                 190000
                                                                                         8000
 40                                                                              0.6
                                                                                                                                                                 170000
 30                                                                                      6000
                                                                                 0.4
 20                                                                                      4000                                                                    150000
                                                                                 0.2
 10
                                                                                         2000                                                                    130000
  0                                                                              0
                                                                                              0                                                                  110000
   2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
                                                                                                  1994     1997       2000      2003       2006    2009   2013

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



Furthermore, consensus estimates for US homebuilders’ book value should have risen by
more than they have, given the increase in home prices. If we adjust for the rise in home




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                                                                                                                                                                                               17 May 2013

prices, homebuilders are trading at an 36% discount to the market, compared to a
historical average discount of 50%-and this would be close to its historic norm.

Figure 159: If book value of homebuilders rises by 30%                                                    Figure 160: US homebuilders’ relative earnings revisions
then the P/B relative would be closer to its long-run                                                     remain strong
average
    0%                                                                                                         60%
                    US homebuilders, PB
 -10%               relative to the market                                                                     40%
                    ex-financials
 -20%
                    based on adjusting
                    book value for recent                                                                      20%
 -30%
                    house price changes
 -40%                                                                                                            0%

 -50%                                                                                                          -20%
 -60%
                                                                                                               -40%
 -70%

 -80%                                                                                                          -60%                    US home builders 3m breadth
                                                                                                                                       Rel US market
 -90%                                                                                                          -80%
     1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
                                                                                                                  1993                 1997            2001          2005           2009            2013

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



Stock picks
The European companies exposed to US housing are Wolseley and Electrolux and among
the US names we would highlight DR Horton, Toll Brothers, Standard Pacific Corp and
Stanley Black & Decker.

Figure 161: Plays on US housing that are Outperform- or Neutral-rated by Credit Suisse analysts
                                                    -----P/E (12m fwd) ------             ------ P/B -------                2013e, %           HOLT       2013e Momentum, %
                                                                                                                                                                                  Consensus
                                                                         rel to mkt %             rel to mkt %                                 Price, %                        recommendation Credit Suisse
                         Exposure to US
Name                                         Abs       rel to Industry   above/below    Abs       above/below         FCY          DY         change to   3m EPS    3m Sales    (1=Buy; 5=Sell) rating
                            housing
                                                                           average                  average                                      best
D R Horton                  100%             17.3         101%              -9%         2.4           53%             -8.3         0.6         -41.3       32.4      14.7           2.2        Outperform
Lennar 'A'                  100%             21.0         122%               2%         2.4           59%             na           0.4         -52.9       -1.7       7.8           2.5        Neutral
Toll Bros.                  100%             31.4         182%              24%         2.0           26%             -6.0         0.0         -48.9      -15.5       -2.7          2.5        Outperform
Standard Pacific            100%             21.5         125%              -8%         1.6           44%             -7.6         0.0         -64.4       23.1      18.9           2.5        Outperform
Lowe'S Companies             99%             19.0          99%              17%         3.1            0%             6.3          1.7         -10.6          0.0     1.4           2.3        Outperform
Home Depot                   89%             20.4         107%               7%         6.3           39%             4.7          2.0         -31.4          1.6     1.0           2.2        Outperform
Bed Bath & Beyond            30%             13.6          71%              -34%        4.2          -28%             6.8          0.0          26.9       -0.9       -0.3          2.2        Outperform
Electrolux 'B'               30%             13.1          76%              93%         2.6           30%             5.0          3.8         -13.9      -20.7       -0.4          2.6        Outperform
Wells Fargo & Co             30%             10.1          92%              -11%        1.4          -42%             na           2.9          -8.8          2.1     -0.5          2.3        Neutral
Stanley Black & Decker       25%             13.8         104%              17%         1.9          -38%             6.0          2.5          43.9       -4.2       0.8           2.2        Outperform
Terex                        24%             8.4           64%              -51%        1.7          -77%             8.3          0.0          11.9       -0.4       0.9           2.4        Outperform
Wolseley                     21%             15.8         119%              58%         3.0           32%             3.7          2.2         -26.7       -2.0       0.7           2.6        Outperform
Assa Abloy 'B'                6%             17.1         129%              -2%         3.7           -4%             3.6          2.1         -24.1       -3.5       -1.1          3.1        Outperform

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




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       (7)         Peripheral European cyclicals
As above, peripheral Europe has suffered from two particular problems: a high cost of
finance and the fact that nearly 50% of SMEs can’t obtain or are having difficulty obtaining
access to finance (compared to only 10% in Germany).
Thus, if there is an improvement in the monetary transmission mechanism, it will help
peripheral European GDP disproportionately.
There are also real-time signs of encouragement. Peripheral European economic
indicators have improved (consumer confidence has risen for the first time in four years;
see page 28) and the peripheral European current account position has improved to a
position of near-balance (see page 6).
Below, we show a screen of peripheral European cyclical stocks that are Outperform- or
Neutral-rated by Credit Suisse analysts.

Figure 162: Peripheral European cyclical stocks that are Outperform- or Neutral-rated by Credit Suisse analysts
                                 -----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
Paddy Power               21.6         116%              47%         13.7          92%        5.1          2.1     19.9       1.4        5.7           3.0        Outperform
Mediaset                  38.7         235%             115%         1.2          -68%        9.6          0.4     23.4      100.0       -3.2          3.3        Outperform
Autogrill                 21.9         118%               3%         3.3          -56%        na           2.2    -30.5      -17.9       -0.4          2.4        Outperform
Inditex                   22.9         120%              31%         7.5           24%        3.9          2.5    -19.1       -2.0       -0.6          2.5        Neutral
Mset.Esp.Comunicacion     35.8         217%             174%         1.8          -67%        2.3          1.7     12.7      -15.0       -4.6          3.8        Outperform
Antena 3 De Television    29.2         177%             116%         3.0          -57%        -1.7         1.5    -53.6       -4.5       -4.5          3.6        Outperform
Zon Multimedia            21.8         132%              -44%        5.2          -22%        8.6          4.3    -77.1       -4.7       -0.6          2.6        Neutral
Ryanair Holdings          13.7          89%              -16%        2.7          -19%        9.4          1.7    -14.3       8.5        1.2           2.2        Outperform
Smurfit Kappa Group       8.3           61%              41%         1.3           27%        12.2         2.4     21.6       2.8        -0.8          1.7        Outperform
Prysmian                  10.1          76%              15%         2.8          -29%        1.3          2.9    -16.0       -6.9       -4.7          2.0        Outperform
Fiat Industrial           9.5           72%               5%         2.2           -6%        5.8          3.1     -8.6       -7.5       -0.2          2.2        Outperform

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



Spanish media appears particularly attractive
Our media team would in particular highlight the positive impact of consolidation in the
Spanish TV advertising market, which has moved from six to two players since 2007. The
price (and overall value) of TV advertising has halved since the start of the recession
(increasing the scope for a rebound), and our analysts expect to see a cyclical recovery
start this year.
Analysis by our media team suggests TV advertising could expand 1.9-2.4x by the end of
this decade, and that this growth should translate into earnings for the remaining two TV
broadcasters, rising 6.4-9x over the same period,
Our analysts favour Mediaset Espana for direct exposure to Spanish TV advertising and
Mediaset for exposure to both Spain and Italy.




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What are the cheap cyclicals in Europe and the US?
We screen for European cyclical stocks that look cheap on P/B relatives and more than
20% cheap on HOLT, and have positive earnings revisions. Among these stocks, Mail.ru
and Mediaset are Outperform-rated.

Figure 163: European cyclicals stocks which are cheap on P/B, at least 20% cheap on HOLT, have positive earnings
momentum and are Outperform- or Neutral-rated by Credit Suisse analysts
                                                 -----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
Meggitt                                   11.7           88%                 14%              2.1            -15%                 4.7                2.5            62.5           1.7             0.3              2.2           Neutral
Upm-Kymmene                               10.2           92%                -12%              0.7            -37%                 4.0                7.2           167.9           1.8             -1.5             2.8           Neutral
Mediaset                                  38.7          235%                115%              1.2            -68%                 9.6                0.4            23.4          100.0            -3.2             3.3           Outperform
Tieto Oyj                                 10.5           69%                -31%              2.1            -47%                 10.4               5.5            35.9           1.4             -4.4             3.2           Neutral
Ericsson 'B'                              15.3          135%                -41%              1.9            -56%                 7.3                3.5            41.4           0.3             -0.8             2.3           Neutral
Kudelski 'B'                              11.5          102%                -58%              1.5            -77%                     na             1.8            33.9           12.8            -0.9             2.6           Neutral
Advanced Dig.Brdct.Hdg.                   6.7            39%                -32%              1.7            -47%                 7.9                4.9           495.6           39.7            6.4              2.3           Neutral
Ferrexpo                                  5.6            51%                -11%              1.2            -60%                 -2.0               2.4            50.4           2.9             5.1              2.4           Neutral
Mailru Group Gdr (Reg S)                  17.7          134%                -25%              1.8            -10%                 5.3                3.7            30.9           2.8             0.3              1.8           Outperform

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

An alternative approach is to look for stocks which look cheap on normalised margins (P/E
below 10x) and cheap on HOLT.

Figure 164: Pan European Outperform-rated cyclical stocks that are cheap on normalised margins, have margins below
average and look cheap on HOLT (2013E net margins below average and 12-month forward P/E on average margins
less than 10x)
                                                 -----P/E (12m fwd) ------                                   ------ P/B -------                    2013e, %              HOLT         2013e Momentum, %
                     2013e net margins,                                                                                                                                                                            Consensus
                                                                      rel to mkt %   12m fwd P/E on                    rel to mkt %
                      % above / below                   rel to                                                                                                          Price, %                                recommendation
Name                                       Abs                        above/below    average margins      Abs          above/below           FCY           DY                         3m EPS        3m Sales
                         average                      Industry                                                                                                       change to best                              (1=Buy; 5=Sell) Credit Suisse rating
                                                                        average                                          average
Vedanta Resources        -55.8%            8.7          79%              15%                3.6           1.2             -46%               10.7          2.8             13.7          -23.7        -8.7            2.3         Outperform
Salzgitter               -76.3%           25.0         229%             125%                4.1           0.5             -51%               7.0           1.0          147.8            -66.4        -1.6            2.9         Outperform
Mediaset                 -72.7%           38.7         235%             115%                6.2           1.2             -68%               9.6           0.4             23.4          100.0        -3.2            3.3         Outperform
Rio Tinto                 -9.8%            7.4          68%              -30%               5.2           2.0             -36%               3.2           3.8             41.1           -4.9        -3.3            2.0         Outperform
Arcelormittal Adr        -50.7%           14.8         135%              15%                4.8           0.4             -95%               11.9          1.6             80.2          -43.9        -1.2            2.3         Outperform
1:1
Stora Enso 'R'           -19.5%                                                             7.3
                                          14.1         128%              19%                              0.8             -30%               1.1           5.2          129.4            -32.8        -2.1            2.2         Outperform
Vallourec                -21.7%           14.8         111%              31%                9.9           1.0             -33%               -1.1          2.1             50.4          -15.1        -1.2            2.6         Outperform

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



We show the equivalent screen for the US.

Figure 165: US Outperform-rated cyclical stocks that are cheap on normalised margins, have margins below average
and look cheap on HOLT (2013E net margins below average and 12-month forward P/E on average margins less than
10x)
                                                 -----P/E (12m fwd) ------                                   ------ P/B -------                    2013e, %              HOLT         2013e Momentum, %
                     2013e net margins,                                                                                                                                                                            Consensus
                                                                      rel to mkt %     12m fwd P/E on                  rel to mkt %
                      % above / below                                                                                                                                   Price, %                                recommendation
Name                                       Abs      rel to Industry   above/below      average margins    Abs          above/below           FCY           DY                         3m EPS        3m Sales
                         average                                                                                                                                     change to best                              (1=Buy; 5=Sell) Credit Suisse rating
                                                                        average                                          average
Charm Comms.Adr           -46.5%          11.1          68%              56%                0.9           0.8             -45%                na           10.5            87.1          -32.0       12.1             2.0         Outperform
Memc Elt.Materials        -79.9%          17.4         105%              -42%               2.6           2.0             -78%               12.3          0.0             27.6           -7.0        -1.1            2.3         Outperform
Safe Bulkers              -51.8%           7.0          45%              85%                3.5           1.1             -88%               26.2          4.0             70.4          -28.1       -12.2            2.3         Outperform
Tal Education             -36.6%          15.1          81%              -29%               2.6           14.9            -23%                na           1.7             9.2            -0.5        -2.9            1.7         Outperform
Group Cl.A Adr 1:2
Ternium Spn.Adr           -45.1%                                                            4.3
                                           8.0          73%              21%                              0.8             -27%               0.6           2.7             44.8           -8.5        -0.4            2.2         Outperform
1:10
Tsakos Energy             -77.7%                                                            4.6
                                          12.8          96%              -38%                             0.2             -79%               0.8           6.5          106.3             nm          -4.1            3.0         Outperform
Nav.
Netease Adr 1:25          -17.7%                                                            9.1
                                          11.2          74%              -52%                             3.7             -22%               8.5           0.0          121.6             4.3         2.2             1.9         Outperform
US.Steel                  -46.5%           9.1          83%              -45%               6.4           0.8             -49%               -10.1         1.1          205.6         -173.1          -2.6            2.8         Outperform
Staples                   -15.7%           9.7          51%              -44%               9.0           1.5             -58%               14.2          3.4             40.2           -6.7        -1.7            2.6         Outperform
Google 'A'                -37.8%          17.8         118%              -20%               9.0           4.0             -33%               5.1           0.0             30.0           -0.4       14.8             2.0         Outperform
Kraton                    -9.4%           11.0          76%              49%                9.0           1.4             -21%                na           0.0             56.9          -34.8        -3.8            2.4         Outperform
Perf.Polymers
Source: MSCI, IBES, Thomson Reuters, Credit Suisse HOLT, Credit Suisse research




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Tobacco: downgrade to a larger
underweight
We downgraded tobacco to underweight in December 2012 having been overweight for
most of the prior decade and now we take more money out of this sector for the following
reasons:
        1)    Margins and revenue expectations are still very optimistic
We rank sectors according to how extended revenue growth and margin consensus
expectations for 2014E are relative to 2013E and their historical norms. On this basis
semis, tech, tobacco and retail have the most optimistic consensus expectations.

Figure 166: Semis, tech, tobacco and retail have the most optimistic 2014E revenue and margin forecasts relative to
their historical norms
                              Sales grow th               2014 sales grow th, dev n from            Net income margins            2014 net income margins, dev n from    Total z
Eur Sector
                    2013        2014     Long term av g       2013        Long term av g     2013       2014     Long term av g         2013          Long term av g     score
Div fin              5%         3%            19%              -2%            -16%           10%         11%          14%                1%                -3%             4.7
Mining               5%         6%            19%              1%             -13%           5%          6%              9%              1%                -3%             3.6
Energy               -6%        2%            23%              7%             -21%           6%          6%              6%              0%                0%              1.9
Autos                2%         5%            18%              3%             -13%           4%          5%              4%              0%                1%              1.6
Chemicals            2%         3%            12%              2%              -9%           7%          8%              7%              1%                1%              1.4
Paper                -2%        1%            10%              4%              -8%           3%          4%              3%              1%                0%              1.1
Telecom              -2%        0%            1%               2%              0%            10%         11%          11%                0%                -1%             0.9
Transport            4%         4%            3%               1%              1%            4%          5%              4%              1%                0%              0.8
Food retail          4%         6%            1%               2%              5%            2%          3%              3%              0%                0%              0.8
HPC                  5%         5%            3%               -1%             2%            12%         12%          11%                0%                2%              0.8
Hlthc equip          5%         5%            3%               0%              2%            7%          8%              7%              0%                1%              0.7
Comm prof sv s       4%         6%            9%               2%              -2%           6%          7%              5%              0%                1%              0.6
Utilities            -6%        3%            7%               9%              -4%           5%          5%              7%              0%                -3%             0.5
Cap Gds              2%         4%            6%               2%              -2%           6%          6%              5%              1%                1%              0.3
Cons dur             6%         7%            11%              1%              -3%           12%         12%          10%                1%                3%              0.2
Media                3%         4%            2%               1%              1%            11%         11%             9%              1%                2%              0.2
Pharma               2%         4%            3%               2%              1%            19%         20%          19%                1%                1%             -0.2
Softw are            5%         6%            14%              1%              -7%           14%         15%          10%                1%                5%             -0.2
Bev erages           8%         8%            6%               0%              2%            14%         15%          11%                1%                4%             -0.3
Food prod            5%         6%            -6%              1%              12%           8%          8%              8%              0%                1%             -0.3
Cons sv s            2%         7%            7%               5%              1%            4%          5%              4%              0%                1%             -0.4
Real estate          3%         4%            0%               1%              5%            46%         47%          45%                1%                2%             -0.7
Construction         3%         6%            2%               3%              4%            5%          6%              7%              1%                0%             -0.8
Banks                2%         4%            0%               1%              4%            17%         19%          21%                2%                -2%            -0.8
Retail               5%         7%            0%               1%              7%            9%          10%             6%              0%                3%             -1.1
Insur                -1%        3%            -8%              4%              12%           6%          6%              6%              0%                0%             -1.3
Tobacco              4%         4%            5%               0%              -1%           27%         28%          22%                1%                6%             -1.4
Tech                 -3%        4%            -1%              7%              5%            4%          5%              7%              1%                -2%            -2.0
Semi                 0%         12%           11%             12%              1%            10%         15%             6%              5%                9%             -10.8
Sectors at the top have the least optimistic consensus expectations for an expansion in net margins and an acceleration in sales growth in 2014 relative to 2013 and relative to
their 2004-2012 average.
Source: Thomson Reuters, Credit Suisse research




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     2)    Tobacco has the worst earnings momentum of all the major defensive
           sectors

Figure 167: Tobacco is close to the bottom on our earnings momentum scorecard
                                                 Change in 12m fwd EPS                 Earnings breadth
                  Pan Europe sectors                                                                              Total Z-score
                                                 1-month          3-month          1-month           3-month
          Semiconductors                           8.9%             0.4%             5.1%             1.2%             1.78
          Construction Materials                   2.9%             3.3%             3.1%             -0.5%            1.17
          Insurance                                2.4%             0.0%             4.9%             3.8%             1.12
          Household Products                       1.9%             0.7%             3.3%             1.6%             0.96
          Diversified Financials                   2.9%            -0.4%             3.4%             0.1%             0.91
          Hotels & Leisure                         1.1%            -1.7%             -1.0%            4.0%             0.64
          Media                                    0.9%            -2.7%             0.3%             0.4%             0.40
          Real Estate                              1.7%            -1.7%             -2.9%            -0.8%            0.40
          Pharmaceuticals                          1.0%            -2.1%             0.5%             -2.1%            0.34
          Transport                                2.5%            -0.3%             -7.7%            -5.4%            0.20
          Capital Goods                            0.9%            -1.1%             -4.4%            -3.0%            0.19
          Consumer Durables                        1.6%            -1.6%             -4.0%            -4.3%            0.18
          Commercial Services                      1.4%            -0.5%             -6.3%            -4.1%            0.16
          Food Retail                              1.3%            -4.5%             -1.0%            -1.9%            0.14
          Food Producers                           0.6%            -2.5%             -0.8%            -5.2%            0.06
          Utilities                                1.3%            -4.9%             -2.3%            -3.7%            -0.03
          Banks                                    0.9%            -2.4%             -7.2%            -5.7%            -0.16
          Software                                 0.8%            -1.6%             -8.0%            -6.3%            -0.17
          Beverages                                1.3%            -0.5%             -9.3%            -8.5%            -0.17
          Retailing                                0.9%            -1.2%             -11%             -7.9%            -0.32
          Automobiles                              1.5%            -3.8%             -8.7%            -8.0%            -0.37
          Telecoms                                 0.2%            -5.9%             -3.0%            -7.5%            -0.46
          Tobacco                                  1.2%            -0.2%             -13%             -12%             -0.47
          Healthcare Equip                         0.2%            -2.5%             -9.2%            -11%             -0.61
          Technology Hardware                     -4.5%             3.9%             -19%             -7.3%            -0.79
          Chemicals                               -0.5%            -4.8%             -13%             -10%             -0.93
          Energy                                  -0.4%            -5.1%             -9.4%            -13%             -0.99
          Metals and Mining                       -3.4%            -3.1%             -21%             -13%             -1.57
          Pulp & Paper                             0.3%             -13%             -16%             -10%             -1.63
          Breadth is calculated as sum of weekly revisions up less sum of weekly revisions down divided by sum of weekly total
          estimates, over the period under consideration
Source: Thomson Reuters, Credit Suisse research



Thus, tobacco has the worst score of any sector when we look at the combination of
revenue and margin risk and earnings momentum.




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Figure 168: Tobacco has the most ambitious revenue and margins forecasts versus their
norm than any other sector

  1.2                               Semi                                 Europe
        Earnings revisions score



                                                         Insur                                     HPC
                                                                                                                                                 Div fin
  0.8                                                                 Construction
                                                                                           Media
                                                                    Real estate                Cons dur
  0.4                                                                                Hlthc equip     Paper
                                                           Retail          Food prod       Utilities Transport
  0.0
                                                                    Banks                     Comm prof sv s
                                                                              Softw are Cap Gds                           Energy
 -0.4                                   Tech h/w are
                                                    Tobacco                Cons sv s

 -0.8                                                                    Bev erages                              Autos
                                                                                                   Food retail
                                                                                                                 Chemicals
                                   Most optimistic sales and margins          Pharma
 -1.2
                                           ex pectations for 2013                             Telecom

 -1.6                                                                                                                                           Mining
                                                                                                                    Margins and sales score
                  -3                            -2                  -1                 0                  1              2               3               4

Source: Thomson Reuters, Credit Suisse research



         3)                        Tobacco is one of the most negative correlated sectors to German bund
                                   yields and German IFO
Tobacco is one of the most negative correlated sectors to German bund yields and we
struggle to see how bund yields can fall much further (they are just within 20 bps of their
series low (data back to 1980) of 1.15% reached in May 2012). Credit Suisse European
rates strategist Helen Haworth expects 10-year bund yields to rise to 1.6% in Q3.
We expect a modest recovery in economic momentum in coming months. This should lead
to tobacco underperforming.

Figure 169: Tobacco tends to be the worst performing                                                                     Figure 170: …and one of the most negatively correlated
sector during rising bond yields…                                                                                        sectors with IFO expectations
  0.6                                                Eur sectors correlation w ith 10y y ield                             0.5
                                                                                                                          0.4                     European sectors correlation w ith IFO
  0.4
                                                                                                                          0.3                        business ex pectations, last 10y

  0.2                                                                                                                     0.2
                                                                                                                          0.1
  0.0                                                                                                                     0.0
                                                                                                                          -0.1
 -0.2
                                                                                                                          -0.2
 -0.4                                                                                                                     -0.3
                                                                                                                          -0.4
 -0.6                                                                                                                     -0.5
                         Healthcare
                       Construction




                        Real estate
                   Hotels & Leisure
                            Utilities
                         Met & min




                          Software




                           Retailing
                         Insurance




                        Food Retail
                         Household
                       Automobiles
                          Transport
                     Capital Goods

                   Semiconductors




                   Pharmaceuticals
                            Div Fin




                             Media
                      Pulp & Paper
                         Consumer




                       Commercial




                          Tobacco
                             Banks




                         Telecoms
                        Chemicals




                   Food Producers
                            Energy




                        Beverages
                       Technology




                                                                                                                                 Div. financials
                                                                                                                                 Advertising
                                                                                                                                 Banks
                                                                                                                                 Met & Min
                                                                                                                                 Semiconductors
                                                                                                                                 Capital Goods
                                                                                                                                 Transport
                                                                                                                                 Cons Dur
                                                                                                                                 Automobiles
                                                                                                                                 Insurance
                                                                                                                                 Cons Mat
                                                                                                                                 Real estate
                                                                                                                                 Chemicals
                                                                                                                                 Software
                                                                                                                                 Technology
                                                                                                                                 Retailing
                                                                                                                                 Pulp & Paper
                                                                                                                                 Hot & Lei
                                                                                                                                 Comm svs
                                                                                                                                 Food Retail
                                                                                                                                 Media
                                                                                                                                 Beverages
                                                                                                                                 Energy
                                                                                                                                 Healthcare
                                                                                                                                 Hh prdcts
                                                                                                                                 Telecoms
                                                                                                                                 Utilities
                                                                                                                                 Tobacco
                                                                                                                                 Food Producers
                                                                                                                                 Pharmaceutical




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




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       4)      Valuations are demanding
Valuations look demanding with P/B relatives at an all-time high.

Figure 171: European tobacco is very extended on price-                            Figure 172: ... but is less expensive on a 12-month
to-book relatives …                                                                forward P/E
 500%                               European Tobacco: P/B rel                       160%                          European Tobacco : 12m fw d P/E rel
                                    Av erage (+/- 1 SD)                                                           Av erage (+/- 1SD)
 450%
                                                                                    140%
 400%
                                                                                    120%
 350%

 300%                                                                               100%

 250%                                                                                80%
 200%
                                                                                     60%
 150%
                                                                                     40%
 100%

  50%                                                                                20%
        1998       2000           2003        2005        2008    2010      2013           1998          2001           2004           2007       2010           2013

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



On our composite sector valuations scorecard, tobacco ranks poorly (see Appendix 3).


       5)      High prices challenge the affordability of cigarettes
Tobacco prices have risen much faster than disposable income: 150% more in the US
over the last 15 years and 80% more in the UK over the same period.

Figure 173: Tobacco prices in the US have risen much                               Figure 174: …and in the UK
faster than disposable income…
 380                   1998 = 100
                                                                                    240
                       US tobacco CPI                                                                           1998 = 100
 330                   US disposable income                                         220                     UK tobacco CPI

                                                                                                            UK disposable income
 280                                                                                200

                                                                                    180
 230
                                                                                    160
 180
                                                                                    140

 130                                                                                120


  80                                                                                100
       1998     2000       2002      2004      2006       2008   2010    2012             1998    2000     2002        2004     2006      2008   2010     2012

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




Global Equity Strategy                                                                                                                                              67
                                                                                                                                                                      17 May 2013

Increasing illicit/counterfeit trade: We on the global equity strategy team fear that the
result of these sharp price rises is both trading-down and growth in the illicit trade. The
increase in illicit trade has been a big problem in the EU region (up from 10% in 2011 to
11% in 2012, according to our tobacco analyst) driven by noticeable increases in markets
like the UK (where it jumped from 16% to 25%), France, Italy and Spain. European
consumers are also trading down to cheaper alternatives like fine cut tobacco, which has
seen very strong volume growth in recent quarters. Stricter enforcement could bring
volumes back to the duty paid market as we have seen recently in Canada. We view the
recent results of Imperial (Outperform), which saw a 2% decline in organic sales revenues
in H1 owing to some of these factors, as possibly a sign of things to come for the industry.


       6)      Regulation
The growth in plain packaging brings with it a risk of trading down. Plain packaging has
been implemented in Australia and is under consideration in the UK and New Zealand.
Our tobacco analyst points out that no material impact has been seen in Australia so far
but long-term commoditisation risks and lower scope for innovation in the category may hit
the long-term pricing power of global premium cigarette brands.
Regulation is also on the rise in emerging markets like Brazil (for example, ban on menthol
from September) and Russia (graphic health warnings from May). The EU Health
Commission has recently proposed stricter regulation with bigger health warnings (up to
70% of pack size) and a ban on menthol and slimmer cigarettes. If this is approved by the
EU parliament, the risk of illicit trade will likely increase further. Implementation could be in
2015-2016 if the proposals are approved as they stand (but our analyst sees legal
obstacles ahead for member states).


       7)      Weaker volumes
This is not a growth sector in volume terms. Global volumes (ex-China and ex-Philippines)
are down 1-2% y/y in line with long-term recent history. China largely has to be excluded
because the market is effectively closed to foreign brands. The EU is the region suffering
from the largest duty-paid volume declines, relative to historical patterns, due to the growth
of illicit trade.
Screen
Below we show European and US tobacco companies on our aggregate screening
scorecard:

Figure 175: European and US tobacco companies on our aggregate valuations scorecard
                                   -----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
British American Tobacco    15.2         103%              71%         9.3            36%        6.0          4.2    -15.2       1.9        0.9           2.2        Outperform
Imperial Tobacco Gp.        10.3          69%               8%         3.7           -89%        8.9          5.2     34.8       -1.4       -0.4          2.4        Outperform
Swedish Match               14.5          98%              31%         -20.2           na        6.8          3.7    -40.6       -5.1       -1.2          2.5        Underperform
Reynolds American           14.3          97%              54%         4.9           145%        na           5.4    -25.1       2.9        -1.6          2.9        Not Rated
Altria Group                14.7          99%             230%         22.9          196%        na           5.2    -45.4       0.7        -0.1          2.2        Not Rated
Philip Morris Intl.         16.2         109%              38%         -45.3           na        5.5          3.8    -32.6       -3.1       -2.5          2.1        Neutral
Lorillard                   13.4          90%              41%         -9.2            na        na           5.0    -13.8       2.2        2.4           2.5        Not Rated

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




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Appendices
Appendix 1: Global growth contributions
Figure 176: Global growth
                                     Share of global   2012 GDP   2013 CS economics   2013 CS bearish   Growth contribution
           Region                                                                                                             Potential growth
                                         GDP*           growth         forecasts         scenario        core scenario (pp)

           US                              19%           2.2%           1.9%               1.0%                0.4%                2.4%
           Euro area                       14%          -0.5%           0.0%               -0.5%               0.0%                1.5%
           UK                              3%            0.2%           0.9%               0.5%                0.0%                1.5%
           Japan                           6%            2.0%           1.6%               1.0%                0.1%                1.2%
           Other developed                 9%            1.6%           0.9%               0.5%                0.1%                1.6%


           China                           15%           7.8%           8.0%               6.5%                1.2%                7.0%
           India                           6%            5.0%           6.5%               5.0%                0.4%                6.0%
           Other NJA                       8%            4.3%           4.9%               4.0%                0.4%                5.5%


           Brazil                          3%            0.9%           4.0%               2.5%                0.1%                4.0%
           Other Latam                     6%            3.6%           3.3%               3.0%                0.2%                4.0%


           Russia                          3%            3.4%           2.8%               2.0%                0.1%                3.0%
           Other EMEA                      6%            2.6%           2.8%               2.5%                0.2%                4.0%


           Other emerging                  4%            6.5%           6.4%               5.0%                0.2%                5.0%


           Global                          100%          3.1%           3.3%               2.5%                3.3%                4.0%


           Emerging                        50%           5.1%           5.5%               4.4%                83%                 5.5%
           Developed                       50%           1.2%           1.1%               0.5%                17%                 2.1%
           * IMF - at PPP exchange rates
Source: Thomson Reuters, Credit Suisse research




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Appendix 2: Falling inventories can be a positive
signal
Figure 177: Copper prices often rise when inventories peak
 1400                     LME & COMEX & SHFE copper inventories                                       12000

                          Copper price, rhs
 1200
                                                                                                      10000

 1000
                                                                                                      8000

  800
                                                                                                      6000
  600

                                                                                                      4000
  400

                                                                                                      2000
  200


    0                                                                                                 0
     1990     1992       1994    1996         1998   2000   2002   2004   2006   2008   2010   2012

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research




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Appendix 3: Pan European valuation scorecard
Figure 178: Pan European valuation scorecard
                                      12m fwd P/E                          P/B                           Div yield              Total Z-
  Pan Europe Sectors
                            Absolute     Relative   z-score   Absolute   Relative   z-score   Absolute   Relative    z-score     Score
Energy                         9.0         73%         1.6      1.3       78%          2.6     4.4%       127%          0.7        1.6
Pulp & Paper                  10.6         87%         0.5      0.8       45%          1.1     6.4%       186%          2.0        1.2
Utilities                     11.5         94%         0.3      1.2       73%          1.6     5.9%       170%          1.1        1.0
Software                      16.2        133%         1.0      4.2       254%         0.3     1.5%       44%           0.8        0.7
Insurance                      9.5         77%         0.4      1.0       62%          0.6     4.3%       125%          0.9        0.7
Technology Hardware           17.7        145%        -0.6      1.8       110%         1.2     3.7%       107%          1.3        0.6
Food Retail                   12.4        102%         0.5      1.8       108%         0.6     3.5%       100%          0.6        0.6
Metals and Mining              9.6         78%         0.2      1.3       78%          0.9     3.1%       91%           0.4        0.5
Automobiles                    7.9         65%         0.2      1.1       63%          0.1     3.4%       98%           0.8        0.3
Banks                          9.8         80%         0.2      0.8       48%          1.3     3.8%       110%         -0.5        0.3
Media                         13.9        114%         0.5      3.5       208%        -0.6     3.5%       101%          0.3        0.1
Telecoms                      10.7         88%         0.1      1.7       100%        -0.8     5.8%       169%          0.9        0.1
Household Products            19.5        160%        -0.2      3.8       230%        -0.2     2.1%       60%           0.5        0.0
Transport                     13.2        108%         0.1      1.6       98%          0.0     2.8%       81%          -0.2        0.0
Pharmaceuticals               14.2        116%         0.0      4.1       244%        -0.9     3.3%       96%           0.7       -0.1
Capital Goods                 13.1        107%         0.0      2.5       148%        -1.5     3.2%       92%           0.9       -0.2
Diversified Financials        10.4         85%        -0.6      1.0       58%          1.3     1.7%       48%          -1.6       -0.3
Real Estate                   17.8        146%         0.0      1.1       67%         -1.5     4.4%       127%          0.4       -0.4
Healthcare Equip              18.4        151%        -0.3      3.3       196%        -0.7     1.3%       39%          -0.4       -0.5
Semiconductors                25.9        212%         0.0      4.1       248%        -2.9     1.2%       34%           1.1       -0.6
Construction Materials        14.1        116%        -1.0      1.1       67%          0.7     1.9%       56%          -1.4       -0.6
Tobacco                       13.6        111%        -0.3      7.5       449%        -1.6     3.8%       111%         -0.3       -0.7
Food Producers                18.8        154%        -1.2      3.8       228%        -1.1     2.8%       82%          -0.2       -0.8
Chemicals                     13.9        114%        -0.5      2.6       156%        -1.6     2.7%       80%          -0.6       -0.9
Commercial Services           16.7        136%        -0.9      5.1       307%        -1.9     2.4%       69%          -0.2       -1.0
Consumer Durables             15.8        130%        -0.4      3.3       195%        -1.6     1.6%       45%          -1.2       -1.1
Retailing                     16.8        138%        -0.9      3.9       232%        -2.2     2.9%       85%          -1.0       -1.4
Beverages                     17.6        144%        -1.2      3.6       216%        -1.8     2.0%       58%          -1.2       -1.4
Hotels & Leisure              16.3        134%        -1.1      3.3       196%        -1.9     2.8%       80%          -2.1       -1.7
A high z-score indicates the sector is cheap
Source: Thomson Reuters, Credit Suisse research




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Appendix 4: CPI / PPI pricing monitor
Figure 179: Airlines have the best pricing power on our PPI/CPI monitor
                 Euro-area sector pricing             YoY%
                                                                            Rank
                          scorecard         Current   Z-score   6m change
              Trav el                       11.4%      3.3        8.2%       1
              Airlines                      6.7%       0.7        4.6%       2
              HC equipment                  3.6%       1.2        0.9%       3
              Water                         3.8%       1.4        0.7%       4
              Hotels/Rest./Leisure          2.7%       0.5        0.8%       5
              Softw are                     2.1%       1.0        0.5%       6
              Media                         1.0%       2.1        0.2%       7
              Energy Utilities              6.3%       0.9        -0.8%      8
              Pharma                        1.8%       0.9        0.9%       9
              Bev erages                    2.6%       0.9        -0.2%      10
              Food Producers                4.3%       0.4        -0.4%      11
              Tobacco                       3.9%       -0.1       -0.2%      12
              Food & Drug Retailing         2.4%       0.2        -0.3%      13
              Paper                         -1.2%      -0.4       3.3%       14
              Auto producers                0.6%       0.0        -0.2%      15
              Retailing                     0.8%       0.1        -0.8%      16
              Metals&Mining                 -0.7%      -0.6       0.4%       17
              Consumer durables             2.3%       -0.4       -1.5%      18
              Tech Hardw are                -6.9%      1.2        -0.9%      19
              HH Prod.                      1.0%       -0.8       -0.2%      20
              Banks                         -1.9%      -1.2       3.0%       21
              Lux ury goods                 4.0%       -0.9       -3.0%      22
              Insurance                     1.7%       -0.6       -0.9%      23
              Capital Goods                 0.7%       -0.8       -0.3%      24
              Chemicals                     0.4%       -0.8       -2.4%      25
              Telecom                       -5.6%      -3.4       -2.2%      26
              Energy                        -5.5%      -0.9      -16.4%      27
Source: Thomson Reuters, Credit Suisse research




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Appendix 5: European sector recommendations
Figure 180: European sector recommendations
                                           Over/underweighting   Benchmark     Recommended      Difference from        Change from
                                                  score           weight (a)     weight (b)   benchmark (bps) (b-a)   previous (score)
Software & Services                                1.55             1.5            2.3                 82
Health Care Equipment & Services                   1.17             1.2            1.4                 20
Media                                              1.16             1.8            2.1                 29                    1
Real Estate                                        1.15             1.1            1.2                 16
Beverages                                          1.12             3.6            4.1                 44
Transportation                                     1.12             1.1            1.3                 13                    2
Hotels & Leisure                                   1.12             0.8            0.9                 10                    2
Insurance                                          1.10              6              6                  56                   10
Automobiles & Components                           1.10             2.7            2.9                 27
Consumer Durables & Apparel                        1.10             2.3            2.5                 23
Semiconductors & Semiconductor Equipment           1.10             0.8            0.9                  8
Pharmaceuticals & Biotechnology                    1.08            11.7           12.7                 94
Food & Staples Retailing                           1.05             1.7            1.8                  8
Banks                                              1.00            10.6           10.6
Telecoms                                           1.00             5.6            5.6
Utilities                                          1.00             4.1            4.1
Chemicals                                          1.00             4.0            4.0
Household & Personal Products                      1.00             1.9            1.9
Commercial Services & Supplies                     1.00             1.4            1.4
Technology Hardware & Equipment                    1.00             0.9            0.9
Construction Materials                             1.00             0.8            0.8
Pulp & paper                                       1.00             0.1            0.1
Food Products                                      0.95             5.9            5.6                 -30                   -5
Diversified Financials                             0.92             3.7            3.4                 -30
Tobacco                                            0.88             2.0            1.8                 -24                   -2
Energy                                             0.87             9.8            8.5                -128
Capital Goods                                      0.85             8.6            7.3                -129
Metals & Mining                                    0.84             3.4            2.8                 -54
Retailing                                          0.75             1.5            1.1                 -37
Total                                                              100.0          100.0
Source: Thomson Reuters, Credit Suisse estimates




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Companies Mentioned (Price as of 15-May-2013)
Advanced Digital Broadcast (ADBN.S, SFr14.75)
Accenture Plc (ACN.N, $80.76)
Air France-KLM (AIRF.PA, €7.43)
Alcatel-Lucent (ALUA.PA, €1.18)
Altria Group, Inc. (MO.N, $37.46)
Antena 3 (A3TV.MC, €4.77)
ArcelorMittal (MT.N, $12.61)
Aryzta (ARYN.S, SFr59.9)
Assa Abloy (ASSAb.ST, Skr271.8)
Associated British Foods (ABF.L, 2031.0p)
Autogrill (AGL.MI, €10.28)
BMW (BMWG.F, €71.8)
Barratt Developments (BDEV.L, 329.1p)
Bed Bath & Beyond (BBBY.OQ, $69.21)
British American Tobacco (BATS.L, 3757.0p)
Charm Communication (CHRM.OQ, $4.9)
Check Point Software Technologies Ltd. (CHKP.OQ, $49.08)
Countrywide (CWD.L, 510.0p)
Cummins Inc. (CMI.N, $114.68)
DR Horton (DHI.N, $27.43)
Daily Mail & General Trust (DMGOa.L, 763.5p)
Dairy Crest (DCG.L, 477.6p)
Danone (DANO.PA, €58.88)
Dassault Systemes (DAST.PA, €93.3)
Deutsche Lufthansa (LHAG.DE, €15.74)
EMC Corp (EMC.N, $23.02)
EasyJet (EZJ.L, 1224.0p)
Electrolux (ELUXb.ST, Skr179.7)
Emerson (EMR.N, $58.5)
Ericsson (ERICb.ST, Skr83.05)
Experian (EXPN.L, 1267.0p)
Ferrexpo Plc (FXPO.L, 183.5p)
Fiat Industrial (FI.MI, €8.8)
Flowserve Corp. (FLS.N, $166.27)
Gardner Denver, Inc. (GDI.N, $75.18)
General Electric (GE.N, $23.24)
Google, Inc. (GOOG.OQ, $915.89)
Hindustan Unilever Ltd (HLL.BO, Rs586.1)
Home Depot (HD.N, $77.88)
Imperial Tobacco (IMT.L, 2290.0p)
Inditex (ITX.MC, €105.5)
Informa Group (INF.L, 504.5p)
Ingersoll-Rand Plc (IR.N, $56.9)
Intercontinental Hotels (IHG.L, 1954.0p)
International Airlines Group (ICAG.L, 269.0p)
JCDecaux S.A. (JCDX.PA, €20.9)
Jacobs Engineering (JEC.N, $52.36)
Kennametal Inc. (KMT.N, $42.28)
Kingfisher (KGF.L, 326.7p)
Kraton Perform (KRA.N, $21.25)
Kudelski (KUD.S, SFr12.05)
Lennar (LEN.N, $43.7)
Lindt & Sprungli (LISP.S, SFr3578.0)
Lorillard Inc. (LO.N, $44.06)
Lowe's (LOW.N, $43.23)
MEMC Electronic Materials Inc. (WFR.N, $6.33)
Mail.Ru (MAILRq.L, $29.14)
Marriott International (MAR.N, $43.97)
Mediaset (MS.MI, €2.36)
Mediaset Espana Comunicacion (TL5.MC, €6.42)
Meggitt (MGGT.L, 519.0p)
Micro Focus (MCRO.L, 676.5p)
Microsoft Corporation (MSFT.OQ, $33.85)
Millennium & Copthorne (MLC.L, 551.5p)
National CineMedia (NCMI.OQ, $16.69)
Nestle (NESN.VX, SFr67.95)
NetEase.com (NTES.OQ, $60.42)
NetSuite Inc. (N.N, $94.4)
Oracle Corporation (ORCL.OQ, $33.97)
Orior (ORON.S, SFr50.8)
Paddy Power (PAP.I, €65.75)
Parker Hannifin Corporation (PH.N, $97.83)
Pearson (PSON.L, 1206.0p)
Persimmon (PSN.L, 1147.0p)
Philip Morris International (PM.N, $96.3)
Porsche (PSHG_p.F, €62.12)
Premier Foods (PFD.L, 73.25p)
Prysmian (PRY.MI, €15.74)
Publicis (PUBP.PA, €55.24)
Rio Tinto (RIO.L, 2914.0p)
Ros Agro (AGRORq.L, $4.5)
Ryanair (RYA.I, €6.37)




Global Equity Strategy                                             74
                                                                                                                                                           17 May 2013


SAP (SAPG.F, €63.84)
Safe Bulkers Inc (SB.N, $5.03)
Salesforce.com Inc. (CRM.N, $44.79)
Salzgitter (SZGG.DE, €31.24)
Smiths Group (SMIN.L, 1315.0p)
Smurfit Kappa (SKG.I, €12.82)
Software AG (SOWG.DE, €26.65)
Standard Pacific Corp. (SPF.N, $9.49)
Stanley Black & Decker, Inc. (SWK.N, $80.95)
Staples (SPLS.OQ, $14.46)
Stora Enso (STERV.HE, €5.77)
Swedish Match (SWMA.ST, Skr243.0)
Symantec Corporation (SYMC.OQ, $24.66)
TAL Education Group (XRS.N, $9.32)
Tate & Lyle (TATE.L, 874.0p)
Taylor Wimpey Plc (TW.L, 96.95p)
Teradata Corp (TDC.N, $54.27)
Terex Corporation (TEX.N, $31.85)
Ternium (TX.N, $23.81)
Textron (TXT.N, $27.61)
Tieto (TIE1V.HE, €16.74)
Toll Brothers (TOL.N, $36.56)
Toyota Boshoku (3116.T, ¥1,638)
Toyota Industries (6201.T, ¥4,475)
Toyota Motor (7203.T, ¥6,440)
Travis Perkins (TPK.L, 1483.0p)
Tsakos Energy Navigation Ltd (TNP.N, $3.69)
UBM plc (UBM.L, 733.0p)
UPM-Kymmene (UPM1V.HE, €8.45)
US Airways Group (LCC.N, $18.81)
Unilever (UNc.AS, €32.89)
Unilever (ULVR.L, 2852.0p)
United States Steel Group (X.N, $18.07)
VMware Inc. (VMW.N, $77.14)
Vallourec (VLLP.PA, €41.04)
Vedanta Resources PLC (VED.L, 1253.0p)
Volkswagen (VOWG_p.F, €162.3)
WPP (WPP.L, 1156.0p)
Wells Fargo & Company (WFC.N, $39.3)
Wolseley (WOS.L, 3379.0p)
Zon Multimedia Services (ZON.LS, €3.49)




                                                                  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 attractive, Neu trals 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 relevant sector, with Outperforms representing the
most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American 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 ratings 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.




Global Equity Strategy                                                                                                                                               75
                                                                                                                                                            17 May 2013



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*                                                                                              42%                                     (53% banking clients)
Neutral/Hold*                                                                                                39%                                     (47% banking clients)
Underperform/Sell*                                                                                           15%                                     (39% banking clients)
Restricted                                                                                                    3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d 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 investmen t objectives, current holdings, and other individual factors.

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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to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and
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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 (MAILRq.L, RYA.I, EXPN.L, WFC.N, ASSAb.ST, MLC.L, ERICb.ST, BDEV.L, EZJ.L, PSHG_p.F, TDC.N, TOL.N, DMGOa.L,
TX.N, GOOG.OQ, NESN.VX, XRS.N, TNP.N, KMT.N, FI.MI, UBM.L, KGF.L, SAPG.F, IMT.L, MS.MI, GE.N, ORCL.OQ, HD.N, MAR.N, ULVR.L,
ABF.L, PSON.L, JEC.N, TPK.L, SWK.N, SYMC.OQ, ARYN.S, ORON.S, VOWG_p.F, JCDX.PA, X.N, KRA.N, EMR.N, AGRORq.L, WFR.N, IR.N,
MSFT.OQ, DANO.PA, TATE.L, FXPO.L, 7203.T, PM.N, LOW.N, BATS.L, FLS.N, CHKP.OQ, BBBY.OQ, SPF.N, TW.L, TEX.N, AGL.MI, LEN.N,
LISP.S, LHAG.DE, NCMI.OQ, UPM1V.HE, SB.N, TXT.N, SKG.I, KUD.S, EMC.N, SMIN.L, BMWG.F, ADBN.S, ALUA.PA, AIRF.PA, GDI.N,
CHRM.OQ, 6201.T, HLL.BO, VED.L, STERV.HE, RIO.L, CWD.L) 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 (MAILRq.L, EXPN.L, WFC.N, ASSAb.ST, PSHG_p.F, DMGOa.L,
GOOG.OQ, NESN.VX, TNP.N, FI.MI, UBM.L, IMT.L, GE.N, ORCL.OQ, HD.N, MAR.N, ABF.L, PSON.L, SWK.N, SYMC.OQ, ARYN.S, VOWG_p.F,
X.N, KRA.N, AGRORq.L, MSFT.OQ, 7203.T, PM.N, SPF.N, TW.L, TEX.N, LISP.S, NCMI.OQ, SB.N, SKG.I, EMC.N, BMWG.F, ALUA.PA, AIRF.PA,
CHRM.OQ, 6201.T, HLL.BO, RIO.L, CWD.L) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (RYA.I, WFC.N, ERICb.ST, EZJ.L, PSHG_p.F, TOL.N, NESN.VX,
TNP.N, IMT.L, MS.MI, GE.N, HD.N, MAR.N, ULVR.L, PSON.L, SWK.N, VOWG_p.F, X.N, EMR.N, IR.N, MSFT.OQ, DANO.PA, TATE.L, 7203.T,
PM.N, BATS.L, CHKP.OQ, SPF.N, TEX.N, LHAG.DE, NCMI.OQ, TXT.N, KUD.S, EMC.N, SMIN.L, BMWG.F, ADBN.S, AIRF.PA, VED.L, STERV.HE,
RIO.L) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (MAILRq.L, WFC.N, PSHG_p.F, NESN.VX, FI.MI,
GE.N, ORCL.OQ, HD.N, MAR.N, SWK.N, SYMC.OQ, ARYN.S, VOWG_p.F, KRA.N, MSFT.OQ, 7203.T, PM.N, SPF.N, TW.L, TEX.N, SKG.I,
BMWG.F, CWD.L) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (MAILRq.L, EXPN.L, WFC.N, ASSAb.ST,
PSHG_p.F, DMGOa.L, GOOG.OQ, NESN.VX, TNP.N, FI.MI, UBM.L, IMT.L, GE.N, ORCL.OQ, HD.N, MAR.N, ABF.L, PSON.L, SWK.N, SYMC.OQ,
ARYN.S, VOWG_p.F, X.N, KRA.N, AGRORq.L, MSFT.OQ, 7203.T, PM.N, SPF.N, TW.L, TEX.N, LISP.S, NCMI.OQ, SB.N, SKG.I, EMC.N,
BMWG.F, ALUA.PA, AIRF.PA, CHRM.OQ, 6201.T, HLL.BO, RIO.L, CWD.L) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (MAILRq.L, EXPN.L,
WFC.N, ASSAb.ST, MLC.L, ERICb.ST, BDEV.L, PUBP.PA, PSHG_p.F, TDC.N, TOL.N, DMGOa.L, GOOG.OQ, NESN.VX, XRS.N, TNP.N, KMT.N,




Global Equity Strategy                                                                                                                                                76
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FI.MI, PH.N, UBM.L, KGF.L, SAPG.F, IMT.L, MS.MI, GE.N, ORCL.OQ, CMI.N, HD.N, MAR.N, ABF.L, DHI.N, SWMA.ST, PSON.L, JEC.N, TPK.L,
SWK.N, SYMC.OQ, ARYN.S, ORON.S, VOWG_p.F, JCDX.PA, CRM.N, X.N, KRA.N, EMR.N, AGRORq.L, WFR.N, SPLS.OQ, MSFT.OQ, MGGT.L,
TATE.L, FXPO.L, 7203.T, PM.N, LOW.N, BATS.L, FLS.N, CHKP.OQ, BBBY.OQ, SPF.N, TW.L, TEX.N, AGL.MI, LEN.N, LISP.S, LHAG.DE,
NCMI.OQ, UPM1V.HE, SB.N, SKG.I, KUD.S, EMC.N, BMWG.F, ALUA.PA, AIRF.PA, GDI.N, CHRM.OQ, 6201.T, HLL.BO, RIO.L, CWD.L) within the
next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (RYA.I,
WFC.N, ERICb.ST, EZJ.L, PSHG_p.F, TOL.N, NESN.VX, TNP.N, IMT.L, MS.MI, GE.N, HD.N, MAR.N, ULVR.L, PSON.L, SWK.N, VOWG_p.F, X.N,
EMR.N, IR.N, MSFT.OQ, DANO.PA, TATE.L, 7203.T, PM.N, BATS.L, CHKP.OQ, SPF.N, TEX.N, LHAG.DE, NCMI.OQ, TXT.N, KUD.S, EMC.N,
SMIN.L, BMWG.F, ADBN.S, AIRF.PA, VED.L, STERV.HE, RIO.L) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (WFC.N, VMW.N, TDC.N, TOL.N, TX.N, GOOG.OQ,
N.N, XRS.N, TNP.N, KMT.N, NTES.OQ, PH.N, GE.N, ORCL.OQ, CMI.N, HD.N, MAR.N, DHI.N, JEC.N, SWK.N, SYMC.OQ, CRM.N, X.N, KRA.N,
EMR.N, WFR.N, IR.N, SPLS.OQ, MSFT.OQ, 7203.T, PM.N, LOW.N, FLS.N, CHKP.OQ, BBBY.OQ, SPF.N, TEX.N, LEN.N, NCMI.OQ, SB.N, TXT.N,
EMC.N, GDI.N, CHRM.OQ, ACN.N, MT.N).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (PRY.MI, MAILRq.L,
RYA.I, BDEV.L, WOS.L, NESN.VX, UBM.L, SAPG.F, IMT.L, MS.MI, TPK.L, ARYN.S, ORON.S, X.N, MGGT.L, TATE.L, TW.L, LISP.S, LHAG.DE,
SKG.I, KUD.S, ADBN.S, PSN.L, A3TV.MC, PAP.I, ICAG.L, AIRF.PA).
Credit Suisse has a material conflict of interest with the subject company (TX.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
Credit Suisse has a material conflict of interest with the subject company (UBM.L). Credit Suisse is acting as sole Financial Advisor to UBM in the
proposed sale of UBM’s Data Services business to Electra Partners LLP
Credit Suisse has a material conflict of interest with the subject company (VOWG_p.F). Credit Suisse is co-advisor to Volkswagen AG in the
announced DOMINATION and profit and loss transfer agreement between Volkswagen AG and MAN SE

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 (PRY.MI, MAILRq.L, RYA.I,
EXPN.L, WFC.N, ASSAb.ST, MLC.L, ERICb.ST, PFD.L, BDEV.L, VMW.N, PUBP.PA, INF.L, EZJ.L, DAST.PA, PSHG_p.F, TDC.N, DMGOa.L,
WOS.L, TX.N, GOOG.OQ, NESN.VX, UNc.AS, ELUXb.ST, N.N, MCRO.L, XRS.N, TNP.N, KMT.N, FI.MI, NTES.OQ, PH.N, UBM.L, KGF.L, SAPG.F,
IMT.L, MS.MI, ZON.LS, GE.N, ORCL.OQ, CMI.N, HD.N, MAR.N, ULVR.L, ABF.L, SWMA.ST, PSON.L, IHG.L, JEC.N, TPK.L, SYMC.OQ, DCG.L,
ARYN.S, ORON.S, VOWG_p.F, JCDX.PA, CRM.N, ITX.MC, X.N, KRA.N, EMR.N, AGRORq.L, SOWG.DE, WFR.N, IR.N, 3116.T, SPLS.OQ,
MSFT.OQ, MGGT.L, DANO.PA, TATE.L, FXPO.L, TL5.MC, 7203.T, PM.N, WPP.L, LOW.N, BATS.L, FLS.N, CHKP.OQ, BBBY.OQ, TW.L, TEX.N,
AGL.MI, LISP.S, LHAG.DE, NCMI.OQ, UPM1V.HE, SB.N, TXT.N, SKG.I, TIE1V.HE, KUD.S, EMC.N, SMIN.L, BMWG.F, ADBN.S, PSN.L, A3TV.MC,
PAP.I, ICAG.L, ALUA.PA, AIRF.PA, GDI.N, CHRM.OQ, 6201.T, ACN.N, HLL.BO, VED.L, STERV.HE, MT.N, RIO.L, SZGG.DE, VLLP.PA, CWD.L)
within the past 12 months
An analyst involved in the preparation of this report has visited certain material operations of the subject company (TOL.N, DHI.N, SWK.N, SPF.N,
LEN.N) within the past 12 months
The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local
travel expenses.
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares;
SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not
contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit
http://www.csfb.com/legal_terms/canada_research_policy.shtml.
Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (MLC.L, PFD.L, BDEV.L, EZJ.L, DMGOa.L, UBM.L, KGF.L, IMT.L, ABF.L,
TPK.L, SKG.I, SMIN.L, PAP.I, RIO.L).
The following disclosed European company/ies have estimates that comply with IFRS: (RYA.I, EXPN.L, ASSAb.ST, MLC.L, ERICb.ST, PFD.L,
BDEV.L, PUBP.PA, EZJ.L, DAST.PA, PSHG_p.F, WOS.L, NESN.VX, UNc.AS, ELUXb.ST, UBM.L, KGF.L, SAPG.F, IMT.L, MS.MI, ABF.L,
SWMA.ST, PSON.L, IHG.L, TPK.L, DCG.L, VOWG_p.F, JCDX.PA, ITX.MC, MGGT.L, DANO.PA, TATE.L, TL5.MC, WPP.L, BATS.L, TW.L, LISP.S,
LHAG.DE, UPM1V.HE, TIE1V.HE, KUD.S, SMIN.L, BMWG.F, ADBN.S, PSN.L, A3TV.MC, ALUA.PA, AIRF.PA, VED.L, STERV.HE, MT.N, RIO.L,
SZGG.DE, VLLP.PA).
As of the end of the preceding month, the subject company (SWK.N) beneficially owned 5% or more of the total issued share capital of Credit Suisse
Group.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.




Global Equity Strategy                                                                                                                                      77
                                                                                                                                                17 May 2013


Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important
disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research
analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the
NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a
research analyst account.
Credit Suisse Securities (Europe) Limited. Andrew Garthwaite ; Marina Pronina ; Mark Richards ; Sebastian Raedler ; Robert Griffiths ; Nicolas
Wylenzek

Important MSCI Disclosures
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Important Credit Suisse HOLT Disclosures
With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this
report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the
specific views disclosed in this report.
The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary
quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to
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The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national
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user then may adjust the default variables to produce alternative scenarios, any of which could occur.
Additional information about the Credit Suisse HOLT methodology is available on request.
The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT
valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The
default variable may also be adjusted to produce alternative warranted prices, any of which could occur.
CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered
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For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-
suisse.com/researchdisclosures or call +1 (877) 291-2683.




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                                                                                                                                                                                        Equity Research




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