Wim Jan 2012

Bank of China (Suisse) S.A.
Weekly Investment Meeting
For 30 Jan 2012

Marshall Gittler
Chief Investment Officer
marshall.gittler@bocsuisse.ch
+41 22 888 8816

Weekly investment meeting for 30 Jan. 2012
Agenda

1 Calendar of events for the week

2 Advisory: allocation model review

3 Advisory: theme commodities

4 US equity strategy

5 US equities: recommended stocks

6 RMB Monitor

7 Eurozone crisis monitor

2

Calendar of events for this week
Last week: better-than-expected data plus Fed easing improves risk sentiment

Economic indicators surprising on the upside Risk aversion diminishing on all counts
3.0
Global Financial Stress Index
2.5

2.0

1.5

1.0

0.5

0.0

-0.5
GFSI Risk
-1.0
Flow Skew
2010 2011 2012
Source: Bloomberg Financial L.P. Source: Bloomberg Financial L.P., Bank of America/Merrill Lynch

 Recent economic indicators have generally surprised on the upside, particularly in the US. Last week’s data included higher-than-
expected Q4 GDP (albeit with much of the growth coming from inventories), lower initial jobless claims, better business surveys for
January, rising consumer sentiment and a rebound in core capital goods.
 Even data in the Eurozone has exceeded expectations. The business and consumer surveys for January firmed up, with the flash
PMIs reaching a level that suggests no recession. Only the record plunge in bank lending in December was worrisome.
 With the data improving and the Fed announcing it would hold rates at zero until 2014, risk aversion has fallen across the board. As
long as the debt talks with Greece make progress, we think investors could continue to reduce their short positions and thereby
boost markets further.

3

This week’s global indicators: Purchasing Managers’ Indices
 The main indicators out globally this week are the PMIs:
manufacturing on Wednesday, non-manufacturing Friday.
Manufacturing PMI and 3m change  Last week’s preliminary PMIs from Europe were a big
Expanding at accelerating pace
54
Expanding, but pace of
surprise: the composite output index rose 2.1 pts to 50.4,
US
expansion is slowing which would suggest modest growth and not the recession
53
that many forecasters are assuming. The details were
52
optimistic as well: new orders and the orders-to-inventory
balance both improved significantly in manufacturing.
Current level

51 Germany
 The Chinese economy has been slowing gradually, with
China Japan most demand-side indicators dropping during the past
50
several months. The fall in exports is one example. As the
UK
49
slowdown in overseas markets and the correction in
Eurozone
France Contracting, but trend is
domestic property markets continues, output is likely to
48
Contracting at an accelerating pace improving
slow further for the next several months.
-4 -3 -2 -1 0 1 2 3
Change over 3m  In the US by contrast we look for both of the Institute of
PMIs: Forecast for January and Previous
Supply Management (ISM) indicators to accelerate. Last
Manufacturing Services month’s survey pointed to increased activity ahead, with
Forecast Previous Forecast Previous the new orders index increasing and the gap between
China 49.6 50.3 n.a. 56.0 orders and inventories widening. The regional
US 54.5 53.9 53.2 52.6 manufacturing surveys released so far in January also have
EU 48.7 48.7 50.5 50.5
Japan n.a. 50.2 -- --
shown improvement.
UK 50.0 49.6 53.3 54.0  The stronger PMIs should be bullish for risky assets, in
Source: Bloomberg Finance L.P. particular cyclical stocks and commodities.

4

This week’s main US indicator: nonfarm payrolls
 The main indicator for the US this week is Friday’s non-farm
payrolls figure. While this has always been a key number,
Change in NFP vs unemployment rate the market was once again reminded of its importance last
400K % 4
week when the Fed pledged to keep rates low until at least
2014 because of the need to concern itself with both sides
5
200K of its “dual mandate,” that is, the requirement that it work
6
towards full employment. Thus any change in Fed policy is
K likely to require a substantial improvement in employment.
7  Payrolls are likely to show less of a gain than in December,
-200K
w hen they were boosted by an unusual round of hiring by
Change in non-farm 8
payrolls (L) package delivery services. Nonetheless, the trend should
-400K
Unemployment rate (R. 9
be upwards. The market expects +150k; anything over
inverted) +127k would show an increase over the previous six-month
-600K
10 rate of growth.
 Earnings should pick up as the unemployment rate
-800K 11
2005 2006 2007 2008 2009 2010 2011
declines, but not by much. Still, even modestly higher
earnings may help to underpin consumption. The average
US payrolls data
workweek returned to its cyclical peak in December; the
Forecast Dec actual
Change in NFP 150k 200k higher ISM numbers suggest that the workweek remains at
Change in pvt payrolls 168k 212k those levels.
Unemployment rate 8.50% 8.50%  A better employment picture in the US is good for
Average earnings mom 0.20% 0.20%
confidence and for consumption. A figure at or above
Average workweek (hours) 34.4 34.4
Source: Bloomberg Finance L.P.
expectations should help to keep the rally going.

5

Other US indicators likely to show rise in incomes, confidence, but not house prices

Personal income Consumer confidence Case/Shiller house prices
20 % yoy '000 annual 1400
pace
15
1200
10
1000
5

0 800

-5
600
Case/Shiller 20-city
-10 house price index (L)
400
-15 New home sales (R)

-20 200
01 02 03 04 05 06 07 08 09 10 11

 The market is looking for a decent rise  Consumer confidence continues to
in personal income. However, the rise rise recently as the private sector  Many housing market indicators have
in spending probably did not keep started to improve, such as homebuilder
employment picture picks up.
pace as consumers continue to pay sentiment, and mortgage purchase
 Most measures of consumer applications. But prices remain weak.
down debt.
sentiment have been improving  Other price surveys showed a rise in Nov,
 The experience of 2008/09 suggests recently, such as the U of M survey. but since the C/S survey is a 3m moving
that Chinese exports can rise even average, we do not think it will turn
 US consumer confidence can be a
before US consumer spending does. upwards yet.
Source: Bloomberg Financial L.P.
leading indicator of Chinese exports.

6

Eurozone indicators: ECB bank lending survey, European Commission survey

ECB Bank Lending Survey European business sentiment
40 2.5
Tighter lending conditions, 2.0
30 more demand 1.5
1.0
20 0.5
0.0
10
-0.5
-1.0
0
-1.5 Ifo expectations
-10 -2.0 BNB manufacturing Deviation from
-2.5 ISAE headline mean, 3m
-20 -3.0 INSEE headline moving avg
Looser lending conditions, -3.5
-30 less demand
2005 2006 2007 2008 2009 2010 2011 2012
2003 2004 2005 2006 2007 2008 2009 2010 2011

Businesses - lending Businesses - demand
Households - lending Households - demand

 Last week’s Dec money supply report showed the
largest monthly fall in bank lending on record. But
the question remains whether this was due to  Confidence continues to rise in the Eurozone
lower supply or lower demand for loans? as the ECB’s massive liquidity injection calms
 This week’s ECB bank lending survey will go some fears of an implosion in the periphery.
way to clearing up that point as it will show if banks  Another focus this month will be the
are tightening their lending criteria. quarterly question about manufacturing
Source: ECB capacity utilization.
Source: Bloomberg Financial L.P. 7

Other Eurozone points to watch: EU summit, Greek talks
 Monday: Informal EU summit
 This may be even more pointless than most summits. On the one hand, the leaders want to conclude their “fiscal compact” so
that they can sign it at their next formal meeting on March 1st. On the other hand, they want this to be a “growth summit” that
will discuss plans to “enhance economic growth and stimulate job creation.” How to implement austerity while stimulating
growth? A draft of the communique apparently calls for “growth-friendly consolidation and job-friendly growth.’’
 Apparently there will not be any mention of fiscal stimulus from Germany, the one thing that might fix these contradictions.
 Greece might not be a major issue, as the Troika update on its progress towards adjustment goals will not be available in time.
 Greek debt negotiations
 It looks as if this round of negotiations over private sector involvement (PSI) in rescheduling Greece’s debt will finish this week as
the private sector seems willing to accept a lower coupon of around 3.6%. PASOK party leader Papandreou will meet Thursday
with the parliamentary party to discuss PSI and second loan program.
 If either the private sector fails to go along with the agreement, or the govt rejects it, we could expect a nearly violent negative
reaction in markets.
 The government seems to be under increasing pressure to surrender its budgetary sovereignty in exchange for further rescue
funding from the EU/IMF. The UK press over the weekend reported on a German proposal to create a European Union “budget
commissioner” with the power to veto Greek tax and spending decisions. Several Greek officials angrily rejected the idea.
German magazine Der Spiegel also reported that because of the fiscal and economic slippage, Greece now needs €145bn under
its second loan program, €15bn more than what was originally agreed in October last year. Several countries have said that
€130bn was the absolute maximum, so it remains to be seen how that news will be received.
 An article on an obscure web site, www.examiner.com, quoted two unnamed sources close to PM Papademos as saying that
Greece plans an orderly exit out of the Eurozone by early March. No confirmation was possible.
 Bond auctions
 Some EUR 22bn of Eurozone govt bond auctions this week, including Italy (Monday), Belgium (Tuesday), Germany (Wednesday),
Spain and France (Thursday). It will be a good test of whether investors are willing to buy bonds at the current lower levels.
 An Italian EUR 26bn bond maturing Wed and EUR 16bn in coupon payments by Italy and Spain should help.

8

Agenda






6 RMB Monitor


9

Advisory Allocation Model – USD – Global
Template for each client profile

10

Advisory Allocation Model – USD - Global
Template for each client profile

11

Discretionary Model Portfolio – Preservation Global USD
 Preservation MP Performance from 15.12.11 – 20.01.12
 MP Pres +2.25% VS BM +1.73%

 Investment Strategy
 OW Cash 15/0 because of uncertainty and to leave room
for opportunistic investments
 UW Bonds 60/80 in general & Sovereign in particular since
safe area yields are very low
 UW Equity 15/20 in general, with OW EM
 OW HF 5/0 with credit arbitrage
 OW Commodities 5/0 Gold as a tail risk insurance

 Preservation MP Top contributors from 15.12.11 to
20.01.12

12

Discretionary Model Portfolio – Balanced Global USD
 Balanced MP Performance from 15.12.11 – 20.01.12
 MP Bal +3.78% VS BM +3.05%

 UW Bonds 43/65 in general & Sovereign in particular
since safe area yields are very low

 Balanced MP top contributors from 15.12.11 to 20.01.12

13

Discretionary Model Portfolio – Dynamic Global USD
 Dynamic MP Performance from 15.12.11 – 20.01.12
 MP Dyn +4.66% VS BM +5.13%

 UW Bonds 40/54 in general & Sovereign in particular since
safe area yields are very low

 Dynamic MP top contributors from 15.12.11 to 20.01.12

14

Discr. Model Port. Global USD – Close - I Share US Oil & Gas Exploration

 Trade Type CIO view:
 Asset Class - Equity We are closing our active bet in the energy sector
because we think it is likely to be another year of
 Thesis – Oil & Gas high volatility for energy prices. The increasing
 Strategy – Active Bet tensions with Iran, the concerns about global
 Risk – Moderate growth, strife in Nigeria, elections in Russia…
 Model Port – YES Pres 1%, Bal 2%, Dyn 2.5% There is quite a long list of potential problems.
 Underlying – US4642888519

 Open / Close
 Open on 14.12.2011 @ 58.74$
 Closed on 20.01.2012 @ 63.14$

 GAIN / LOSS
 Close & Take Profit

+ 7.49%

Source: Bloomberg 16.01.2012
15

Discr. Model Port. Global USD – Increase -I Share S&P 500 Index
CIO view:
 Trade Type Market is expecting higher profits again this year,
 Asset Class - Equity although much of that comes from financials – we
 Thesis – S&P500 have a hard time seeing that
 Strategy – Maintain our Equity Exposure On the other hand, continued growth in the US (no
 Risk – Moderate recession) and low inflation should support the
market in general, while any recovery in sales should
 Model Port – YES Pres 1%, Bal 2%, Dyn 2.5%
significantly boost some companies’ profits as margins
 Underlying – US4642872000 are high

 Open & Increase
 Increase on 20.01.2012 @
131.91$
 Open 14.12.2011@122.13$

16

Agenda






6 RMB Monitor


17

Advisory - Theme Commodities – HKD Up & Out XAU – 2y CPN

 Trade Type
 Asset Class – Gold
 Currency - HKD
 Thesis – up to 30% XAU ie 2236$
 Risk – Capital Protected 100%
 Tenor – 2 Years
 Strategy – Satellite
 Model Port – Not Implemented

 Scenarios
 Gold trades above 130% you
receive 100% + 6%
 Gold trades below 130% you
receive 100% + appreciation
 Gold trades at the end below
100% you get 100%

 Condition
 Re-offer 99% ie 1% margin
 Issuer, choice HSBC, UBS, BOA

18

Theme commodities – buy industrial metals vs gold
Gold has been keeping pace with nickel, but hopes for reflation are changing that

Gold/Nickel ratio vs US manufacturing ISM
 People invest in gold during times of
65 1 uncertainty or fear. Nickel on the other
60 2 hand is one of the key industrial
3 metals, as it is essential in making
55
4 steel.
50 5
 Gold has been keeping pace or even
45 6
outpacing nickel recently as fears
7
40 about the fiat money system outweigh
8
35
hopes about the economic recovery.
9
 Recently though nickel has started to
30 10
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
pull ahead as fears of a US recession
receded and central banks globally
Peri ods when ISM i s a bove 50 US Ma nufa cturi ng ISM i ndex (L) loosen monetary policy.
Gol d/Ni ckel ra tio (R, revers ed)
 Nickel and other industrial metals
could continue to outpace gold if
investors believe reflation is here to
stay.


19

Agenda






6 RMB Monitor


20

US Equities: keep defensive

 US profits rose last year, but the effect on stock prices was muted as
stocks de-rated
 Market is expecting higher profits again this year, although much of that
comes from financials – we have a hard time seeing that
 The strong dollar is also likely to hurt profits
 On the other hand, continued growth in the US (no recession) and low
inflation should support the market in general, while any recovery in
sales should significantly boost some companies’ profits as margins are
high
 We recommend keeping a defensive stance: overweight healthcare and
staples
 We also favor tech stocks
 Underweight: financials, energy, consumer discretionary

21

Equities performed poorly last year, with defensive stocks the best performers

 The two worst performing sectors of the S&P 500 last year were Financials (down 17.1%) and Basic Materials
(down 9.8%).
 Cyclicals, after gaining 43% in 2009 and 22% in 2010, were essentially flat in 2011.
 The consistency of the Defensives in 2009, 2010, and 2011 is notable. They returned a steady 10%-14% a year.
This is probably due to investors’ lingering concerns about the outlook for the economy and the market.

22

Why did the market do poorly? Derating = rising risk premium

P/E ratios continued to decline “E” held up but “P” fell
MSCI All World Index and
450 12m forward EPS 31
29
400
27
350 25
23
300
21
250 19
MSCI All World Index 17
200 price (L)
12m forward EPS (R) 15
150 13
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Factset, Morgan Stanley Research
Source: Bloomberg Financial L.P, BOC (Suisse) S.A.

 P/E ratios declined last year. The US market is now  This was not because of lower earnings or earnings
slightly cheap on this basis – it’s at the 39th forecasts, which held up fairly well.
percentile vs its long-term history and particularly  Rather, the amount that people were willing to pay
cheap compared to the last ten years. for those earnings declined.

23

Stocks are cheap relative to bonds, or bonds are expensive relative to stocks

 Another way of looking at the de-rating of stocks is as a rise in the equity risk
premium. The equity risk premium compares the discount rate that investors are
implicitly using to value future earnings on stocks to the real interest rate available on
risk-free government bonds. (The idea is that investors could be getting a risk-free
return from Treasuries, so what kind of return over Treasuries – what risk premium –
do they need to get them to invest in stocks.)
 JP Morgan calculates that the equity risk premium is now at the highest level for some
60 years, even higher than it was during the Asia crisis or the subprime crisis. That is
to say, stocks are at their cheapest relative to bonds – or bonds are at their most
expensive relative to stocks – in 60 years.
 The question is whether equities will continue to de-rate this year or whether they will
hold steady.
 We think that equities could de-rate further, at least in the first half, as fears of the
Eurozone crisis and the slowdown in China continue to make investors nervous. We
therefore prefer to keep a defensive stance.

24

Market is expecting higher profits in 2012, especially from financials

Market expecting rise in profits in 2012 Much of it coming from financials


Source: Factset, Morgan Stanley Research

 A surprising 14% of the forecast increase in profits is
 The market is expecting a further rise in supposed to come from Bank of America, which is
profits in the US this year. predicted to turn from a loss into a profit.
 In total about one quarter of the increase is supposed
to come just from the top six financial companies.

25

Companies are being cautious; so are analysts

Corporate guidance is mostly negative Profit growth expected to slow in Q1&Q2

Source: S&P Compustat, Deutsche Bank Global Markets Research

Source: Factset, Deutsche Bank Global Markets
 Consensus expectations for earnings growth in Q1 and Q2
 Recent corporate guidance has been very cautious; the proportion of are low, but still positive yoy.
negative announcements is near 2008 levels and positive guidance is
falling off  On a qoq basis, the consensus now looks for a 5% fall in EPS,
 The ratio of negative to positive pre-announcements for Q4 S&P500 is the first sequential fall since Q4’08.
3.6x, well above the long-term average of 2.4x. However, this indicator  Expectations are higher for Q3 and much higher for Q4
has sometimes been a contrarian one.

26

Stronger dollar likely to hurt profits

Foreign profits have been rising steadily USD appreciation to hurt profits

Source: Haver, Deutsche Bank Global Markets Research
Source: US BEA, Deutsche Bank Global Markets

 The share of foreign profits for US corporates has  The dollar appreciated close to 4% in Q4,
been rising steadily and is about 30% presently. similar to the increases in Q1 and Q2 of 2010.
 The rule of thumb is that every 1% rise in the trade- That will hurt foreign profits
weighted USD reduces S&P 500 profits by 1%.

27

Continued growth in US should allow some companies to flourish

Market expects higher US growth Profit margins are already near the peak
5 US GDP 35 S&P 500 P/E vs profit margins 16
% yoy
4 15
30
3 14
25
2 13
20
1
12
0 15
11
-1 10
Actual P/E (L) 10
-2 Forecasts
5 Profit margin (R ) 9
-3
0 8
-4 1998 2000 2002 2004 2006 2008 2010 2012
2000 2002 2004 2006 2008 2010 2012

Source: Bloomberg Financial L.P., BOC (Suisse) Source: Bloomberg Financial L.P., BOC (Suisse)

 The market consensus from Bloomberg is that  Profit margins are already near peak levels.
US GDP grew 1.8% yoy in 2011 but that this Any further increase in sales should provide a
will rise to 2.1% in 2012 and 2.5% in 2013. strong boost to the bottom line.

28

But buybacks, low inflation should support the market

Buybacks should support market Low inflation should help stocks

Source: Bloomberg Financial L.P., Deutsche Bank Global Markets Research

Source: JP Morgan, Schiller data since 1872

 Buybacks have been very strong in the last  Equities tend to perform best in low but
few quarters and should continue to boost positive inflation conditions, which is what we
EPS growth expect to have this year.

29

Agenda






6 RMB Monitor


30

US Equity Model Portfolio
Recommended asset allocation
Asset Class Recommendation Sub-asset class Recommendation
Preserv Balanced Dynamic Presv Balanced Dynamic

Cash 15 15 10 15 15 10
Sovereign FI 15 10 5 US 12 8 3
Europe 0 0 0
Other 3 2 2
Corp bonds 30 23 20 IG 25 18 10
HY 5 5 10
EM bonds 15 10 15 External 12 8 10
Local currency 3 2 5
FI Total 60 43 40 60 43 40
DM Equities 10 20 25 US 8 15 20
Europe ex UK 0 2 2
UK 2 2 2
Japan 0 1 1
EM equities 5 12 15 China 3 5 6
Other AxJ 2 5 6
Latam 0 2 3
EMEA 0 0 0
Equities Total 15 32 40 15 32 40
Hedge funds 5 5 5 0 5 5 5
Commodities 5 5 5 Gold 3 3 3
Other 2 2 2

 We are generally underweight equities relative to our benchmark.
 Within global equities, our largest exposure is to the US. We expect the US economy to avoid recession this year
and for US stocks to be among the best-performing stock markets this year (relative to other markets).

31

 Our recommended portfolio in US stocks
emphasizes the defensive sectors of health care
and staples.
Our recommended sector weighting
 We deviate somewhat from the usual defensive
Health Care pattern by putting technology above utilities. We
Info. Tech see many exciting developments this year in
Consumer staples consumer technology, while industrial tech
Telecoms
investment should continue to be driven by record
high levels of corporate cash and the desire to hold
Industrials
down personnel costs. Meanwhile, Utilities were
Materials
the best performing sector last year, and with
Utilities
energy costs possibly rising further this year, may
Energy not outperform again. We also have a small
Consumer Discretionary overweight in telecoms, simply for the yield.
Financials  Our underweights are financials, which we think
-5 -4 -3 -2 -1 0 1 2 3 4 5 are likely to have a difficult time once again this
year as deleveraging continues and financial
markets remain volatile; energy, which could suffer
from further turmoil in the Middle East and a
slowdown in global growth; and consumer
discretionary, which is likely to suffer if the US
economy slows further, as we think possible.

32

Summary of our stock recommendations
Sector Weighting Stock Rationale
Consumer Staples +3% --> 15% Costco (COST) Benefit from people economizing. Income from
membership fees is rising.
Colgate-Palmolive (CL) High EPS growth; better pricing ability as commodities
stabilize; continued strength in EM
Info Tech +3% --> 22% Microsoft (MSFT) Windows 8, other new prodiucts should boost earnings,
yet P/E is at a discount to the sector.
Accenture (ACN) Demand for company's services should grow as
computers become ever more dominant.
Health Care +4% --> 15.7% AmerisourceBergen (ABC) Growth of generics and biosimilar drugs should increase
volume & need for specialized services
Pfizer (PFE) Pfizer has several drugs that could have important
regulatory events this year
Telecoms +1% --> 3.8% CenturyLink (CTL) One of the highest dividend yields in the S&P 500 (7.6%)

Industrials 10.90% SPX (SPW) Pricing for transmission & distribution of electricity
should improve. Late-cycle stock.
Materials 3.70% Air Products & Chemicals (APD) 21% of revenues from Asia. Also supplies the electronic
industry, which we expect to do well.
Utilities 3.60% NextEra Energy (NEE) Likely to win rate increase in Florida; demand for
renewable energy should continue to rise
Consumer Discretionary -4% --> 6.8% Yum! Brands (YUM) Restaurants at the low end of the market winning
market share; we also like Yum!'s China business
Energy -4% --> 8.1% Schlumberger Higher oil prices should spur exploration; firm beat
estimates and raised its dividend
Financials -3% --> 11.2% PNC Financial Services (PNC) High degree of analyst confidence, low exposure to
Europe

33

Consumer Staples: Overweight (+3  15.0)
 We are overweight the consumer staples sector, as
Top Pick #1: Costco Wholesale Corp. (COST) we believe markets are likely to become nervous
about the European problems again and defensive
Costco: Share price and relative performance
stocks should benefit.
90 Jan 2007 140  Within consumer staples, food staples & retailing
= 100 135 should benefit from falling prices of agricultural
80
130 commodities, in our view.
125
70  Costco operates wholesale membership
120
warehouses selling food, household products, auto
60 115 equipment, hardware, and other goods. The
110 company enjoys rising income from its membership
50
105 fees, which supply 80% of earnings. These were
40
100 recently raised by 10%, while the number of
95 members is also growing.
30 90  The company benefits from the high average
2007 2008 2009 2010 2011 2012
Share price (L) Share price relative to index (R) income of its customers ($96,000).
 Yet sales have been rising as more people even in
Company valuation vs its sub-industry average
P/E P/E EPS 1yr P/FCF Div Yld
this income bracket try to economize. The
next FY growth company has gained market share in food – its
Costco 24.45 18.67 12.70 19.57 1.18 sales are rising by double digits, while most grocery
Average 24.00 18.29 16.67 36.30 1.49 firms are anywhere from -2% to +5%.
Source: Bloomberg Financial L.P., BOC (Suisse) SA

34

Consumer Staples: Overweight (+3  15.0)  We are overweight consumer staples, as we fear
Top Pick #2: Colgate-Palmolive Co. (CL) markets may become nervous about Europe again,
in which case defensive stocks should benefit.
Colgate-Palmolive: Share price and relative performance  Within consumer staples, EPS estimates for
Household & Personal Care stocks are already fairly
100 130
Jan 2007 high. Nonetheless we expect the defensive nature
= 100
of the sector should support share prices.
90
120  Colgate-Palmolive, a maker of consumer products
such as soap and toothpaste, outperformed its
80
major competitor, Proctor & Gamble, by 1,126 bps
110
in 2011. It could underperform early in 2012 on
70
mean reversion, but longer term we expect it will
100
continue to outperform.
60
 The market view is that the stock is likely to post
one of if not the highest EPS growth among its
50 90
2007 2008 2009 2010 2011 2012
peers. Easing yoy comparisons, better pricing
Share price (L) Share price relative to index (R) ability as commodity prices stabilize, robust
innovation and the continued strength in EM,
where CP has a relatively high exposure, should
next FY growth keep the stock as one of the top defensive picks.
CL 17.91 15.17 -1.77 17.56 2.61
 While CP trades at a premium to P&G, we believe
Average 19.14 16.23 -5.74 82.82* 1.64
*distorted by one company w 802 P/FCF
the premium may even be too low, given CP’s
Source: Bloomberg Financial L.P., BOC (Suisse) SA better fundamentals.
35

Information technology: Overweight (+3  22.3)
Top Pick #1: Microsoft Corp. (MSFT)  With corporate cash at record levels and companies
reluctant to hire, we expect robust investment in
Microsoft : Share price and relative performance labor-saving technology. New, shiny gizmos for
40 120
consumers should also keep these companies busy.
Jan 2007
= 100  Microsoft has been hurt recently because of fears
110 about the impact of the Thai floods on PC sales.
However we believe these fears are now fully
30
100 discounted in the price.
 Meanwhile, Windows 8 may be launched in the fall,
90 which would probably boost PC sales and Microsoft
20 with it. It may also help Microsoft to boost its
80 presence on tablets.
 There are also other product launches coming as
10 70 well, such as SQL Server 2012 and Windows Server 8,
2007 2008 2009
Share price (L)
2010 2011
Share price relative to index (R)
2012 which have the potential to drive revenue and
margins higher. Sales of the game unit Xbox 360 have
Company valuation vs its sub-industry average also been stronger than expected. The company is
next FY growth
also expanding its presence in the search market,
Microsoft 10.96 9.90 28.17 9.35 2.69 mobile computing and cloud computing.
Average 62.03* 36.82 -51.19 72.95 0.19  Despite these new businesses to boost growth, the
*distorted by one company with a P/E of 721
company’s P/E is at a discount to the overall market.

36

Information technology: Overweight (+3  22.3)
Top Pick #2: Accenture PLC (ACN)  We prefer computer services and IT consulting to the
hardware firms. The pace of technological change is
Accenture : Share price and relative performance accelerating so much that it can be hard to make a
70 Jan 2007 150 profit on hardware. The same blinding speed of
65 = 100 change increases the need for specialist consulting
140
60 services, however.
55 130  Accenture provides management and technology
50
120
consulting services and outsourcing worldwide.
45  The company beat revenue, EPS and bookings
110
40 estimates in fiscal 1Q. Even after the two highest-
35 100 ever bookings quarters, FY12 contracted refenues are
30 up 13% yoy and the book-to-bill ratio is 1.1x, which
90
25 shows that it can still grow. It also has an active share
20 80 buyback program to support the stock.
2007 2008 2009 2010 2011 2012
Share price (L) Share price relative to index (R)  Despite the problems in Europe, ACN’s EMEA
revenues grew 10% in F1Q, up from 8% in the
Company valuation vs its sub-industry average* previous quarter. The firm is well positioned to
P/E P/E EPS 1yr P/FCF Div Yld benefit as its European clients need to cut costs in a
next FY growth
Accenture 15.72 13.28 26.52 11.32 2.42
deflationary environment.
Average 16.72 12.92 8.91 23.02 1.09  The forward EPS is in line with its recent average and
*compared to global competitors, not just US hence not fully reflecting the opportunities.

37

Health care: Overweight (+4  15.7)
Top Pick #1: AmerisourceBergen Corp. (ABC)
ABC: Share price and relative performance  Economic growth may be slow for several years, but
there will be no change in the demographic trends.
50 200
Jan 2007 We believe health care is likely to be one of the more
= 100
180
stable and dependable sectors.
40  ABC distributes pharmaceutical products and services
160 and healthcare supplies to healthcare providers.
 The company benefits from the growth of generic
30 140
drugs, which may increase volumes, and specialty
120 drugs such as biosimilars, which require more
20 services than generics. It is upgrading its computer
100 systems to improve system efficiencies and customer
service.
10 80
2007 2008 2009 2010 2011 2012  Drug prices continue to rise, which means higher fees
Share price (L) Share price relative to index (R) for ABC.
next FY growth
ABC 15.48 14.23 14.60 10.88 1.30
Average 15.65 19.17 23.54 20.77 0.50


38

Health care: Overweight (+4  15.7)
Top Pick #2: Pfizer Inc. (PFE)
PFE: Share price and relative performance  Economic growth may be slow for several years, but
there will be no change in the demographic trends.
30 100
Jan 2007 We believe health care is likely to be one of the more
= 100
stable and dependable sectors.
90  For the drug industry, much of the bad news about
generics and patent expiries is already in the market.
Going forward, share prices are likely to be driven
20 80
mostly by news about drug trials, in our view.
 Pfizer, a global biopharmaceutical company, has
70 several new drugs that could have important events
this year. Prevnar-13, a vaccine against pneumonia
that was approved for adults at the end of last year,
10 60
could win a recommendation for routine vaccination
2007 2008 2009 2010 2011 2012
Share price (L) Share price relative to index (R) in older adults this year. Tofacitinib, a drug under
development for rheumatoid arthiritis, may get an
Company valuation vs its sub-industry average FDA decision in August; and two studies on
next FY growth
bapineuzumab, a drug under development for
Pfizer 9.56 9.51 -16.26 8.83 4.02 Alzheimer’s, are likely to finish this year.
Average 35.89 16.85 -37.52 35.90 0.51


39

Telecoms: Overweight (+1  3.8)  The telecoms sector often underperforms the
Top Pick: CenturyLink Inc. (CTL) market in Q1. There are a variety of reasons for this
seasonal event to happen again this year: pension
CenturyLink: Share price and relative performance contributions, regulatory uncertainty, and FX
headwinds, to name a few. But the sector still has
50 Jan 2007 130 some of the highest dividend yields in the S&P 500,
= 100
and investors are likely to remain keen to avoid
120
cyclicals and anything connected to Europe.
40 110  CenturyLink is an integrated communications
company that provides communications services,
100 including voice, internet, data and video
throughout the US (and only the US).
30 90
 The company’s main attraction is a dividend yield
80 of 7.6%, one of the highest in the S&P 500. Some
investors apparently question whether the
20 70 dividend is sustainable, because of the integration
2007 2008 2009 2010 2011 2012
Share price (L) Share price relative to index (R) of acquisitions (Qwest), mounting regulatory
pressures and possible capital spending. But with
cash flow covering the dividend 2x, strong liquidity
next FY growth and low leverage (~2.6x), we do not think a cut in
CenturyLink 16.50 14.62 22.75 7.61 7.64 the dividend is likely any time soon.
Average 45.14* 22.70 -14.06 19.72 2.72
Distorted by one company with a P/E of 105 and another at 435

40

Industrials: Neutral (10.9)
Top Pick: SPX Corp. (SPW)  Industrials were the third worst performing sector in
the S&P 500 during 2011 (after materials and
SPX : Share price and relative performance financials). But expectations have come down and
140 240
the sector is valued more conservatively.
Jan 2007
= 100
220
 With government austerity a world-wide trend, we
120 would avoid companies that depend on defense or
200
public works contracts.
100
180  SPX Corp. is a global manufacturer of highly
80 160 specialized engineering goods and services. Its major
140
products are power generating equipment, diagnostic
60 tools and process equipment.
120
40
 Pricing for transmission & distribution of electricity is
100 forecast to improve, increasing the company’s
20 80 leverage. The firm is also likely to get a larger
2007 2008 2009
Share price (L)
2010 2011
Share price relative to index (R)
2012 contribution this year from previous acquisitions.
 SPX tends to perform best late in the economic cycle
Company valuation vs its sub-industry average and so should outperform over the next several
years, assuming that the global expansion continues
next FY growth
SPX 13.26 13.06 307.29 15.52 1.49 but at a more modest pace.
Average 20.34 15.63 102.64 43.43 1.10

Source: Bloomberg Financial L.P., BOC (Suisse) SAm

41

Materials: Neutral (3.7)
 Materials were the worst performing sector last
Top Pick: Air Products & Chemicals Inc. (APD) year. We are neutral on the sector this year as
we expect some mean reversion, but the outlook
APD: Share price and relative performance
is not terribly exciting.
100 Jan 2007 115
= 100
 Our pick in materials is Air Products & Chemicals,
which produces industrial gasses and related
90 110 industrial process equipment.
 Although 30% of the firm’s revenue came from
Europe last year, the firm recently sold its
80 105
continental European homecare business, which
will reduce its European exposure slightly.
70 100 Meanwhile, 21% of revenues come from Asia,
which we expect to do well. APD is involved in
supplying oxygen for coal gasification in China, a
60 95
growing business.
2010 2011
Share price (L) Share price relative to index (R)  Demand for hydrogen is also rising world-wide.
 APD is also linked to the electronics industry, as it
Company valuation vs its sub-industry average supplies materials for semiconductor chips,
P/E P/E next EPS 1yr P/FCF Div Yld
FY growth
displays, solar, etc. We are bullish on this
Air Products 15.82 13.35 17.73 47.82 2.56 industry as new products are developed and
Average 19.28 16.20 29.35 66.89 1.20 Windows 8 is to be released this year.

42

Utilities: Neutral (3.6)  Utilities remain in demand for their steady earnings
Top Pick: NextEra Energy Inc. (NEE) and dividends. This year there could be some
differentiation among stocks based on falling
NextEra: Share price and relative performance natural gas prices and the impact of rulings from
the Environmental Protection Agency (EPA), which
75 150
Jan 2007
= 100
could cause problems for coal-based utilities.
140  We favor NextEra, one of the largest US electric
65 companies and the leading producer of renewable
130 energy. Its business is comprised largely of Florida
Power & Light (FPL) and NextEra Energy Resources.
55 120
 FPL is hostage to the Florida economy, where it
110 serves nearly 5mn customers. Although the
45 economy may be weak, the company is likely to file
100 a request to raise rates this year.
 Energy Resources gets about 75% of its value and
35 90
2007 2008 2009 2010 2011 2012 profitability from assets under long-term contracts,
Share price (L) Share price relative to index (R)
including wind, solar and nuclear projects, so is
little affected by the decline in forward gas prices.
P/E P/E EPS 1yr P/FCF Div Yld  Renewable energy accounted for some 4%~5% of
next FY growth US power generation in 2011, vs a target of over
NEE 14.02 13.03 19.55 36.30 3.71
10% by 2025, which means there is still
Average 17.89 14.78 20.46 n.a. 3.75
considerable upside to NEE’s business.

43

Consumer Discretionary: Underweight (-4  6.8)
Top Pick: Yum! Brands Inc. (YUM)  We are negative on consumer discretionary, as we
expect US consumers to continue to pay down debt
Yum! Brands: Share price and relative performance and for unemployment to fall only gradually.
65 Jan 2007 220  Within the sector, we prefer fast-food restaurants.
60
= 100 Restaurant sales are likely to rise further, in our view,
200
55
while the lower end of the sector should continue to
180 win market share. Also food costs have fallen.
50
160
 Yum Brands, which owns a wide variety of fast-food
45
franchises around the world, is our preferred choices
40 140 as a way to play not only a modest revival of the US
35
120
consumer but also the growing middle class in EM.
30  In the US, Yum! is planning initiatives to fuel growth in
25
100 their Taco Bell and Pizza Hut franchises (new menu
items, more delivery/carry-out only stores).
20 80
2007 2008 2009 2010 2011 2012  Abroad, Yum! Restaurants International (YRI) has
Share price (L) Share price relative to index (R) nearly 14,500 restaurants in 117 countries, not
including China. The company should be nearly 70%
Company valuation vs its sub-industry average EM in about 3 years. Yum! added 600 stores in China
last year and plans on adding a similar number this
next FY growth
Yum 22.64 19.33 7.02 22.38 1.83
year, which should benefit from lower food inflation.
Average 22.47 20.78 -1.22 47.74 0.80  By 2020, Yum! envisions nearly 9,000 stores in China,
2,000 in India and 4,000 in the remaining top 10 EM
countries.
44

Wim Jan 2012

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