examining em exposure
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8/3/2019 Examining EM Exposure
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European Strategy WeeklyEUROPEAN STRATEGY
EQUITY RESEARCH
Examining EM exposure (again) October 9, 2011
Despite recent underperformance, we do not think it is a good idea
for European portfolio managers to systematically seek out
companies with exposure to emerging Economies.
Since the end of August, European companies with large exposure toemerging economies have underperformed the wider European market.
This is the first time since 2008 that investor concerns about emerging
markets (EM) have permeated through the European market.
Despite this underperformance, the EM-exposed companies still trade atan 11% premium to the wider European market.
Perhaps more interestingly, EM-exposed stocks have been re-ratedrelative to other European growth stocks.
In the past, these valuation premiums have been justified by betterearnings trends among the EM-exposed companies, but that is not the
case at the moment.
So although we would caution against a blanket sale of EM exposure,we are not persuaded to seek it out.
Research analysts
European Strategy
Ian Scott - NIplc
ian.scott@nomura.com
+44 20 7102 2959
Inigo Fraser-Jenkins - NIplc
inigo.fraser-jenkins@nomura.com+44 20 7102 4658
Shanthi Nair - NIplc
shanthi.nair@nomura.com+44 20 7102 4518
Mark Diver - NIplc
mark.diver@nomura.com+44 20 7102 2987
Saurabh Katiyar
skatiyar@nomura.com+44 20 7102 9135
Rohit Thombre
rohit.thombre@nomura.com+44 20 710 25461
Robertas Stancikas - NIplc
Robertas.stancikas@nomura.com+44 20 7102 3127
Maureen Hughes - NIplc
m.hughes@nomura.com+44 20 7102 4659
See Appendix A-1 for analystcertification, importantdisclosures and the status ofnon-US analysts.
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We do not think it is a good idea to systematically seek out European companies with
exposure to emerging Economies1. We see nothing wrong with these companies per se,
but as a group they continue to command a sizeable premium over the overall European
market, as well as other growth stocks, while this premium does not appear to be
justified at the moment by a superior earnings trend.
Fig. 1: Relative performance of European stocks with significant exposure to emergingeconomies and the relative performance of EM equity markets
Source: FTSE, Nomura Strategy rresearch
Our EM exposure basket2detailed in the Appendix has underperformed the wider
European market by 3% since 31 August. Although there have been periods since 2008
when local emerging market stocks have underperformed their global peers, this is the
first time concerns about EM have permeated through the European market. This
suggests that investors are more concerned about the fundamental outlook for emerging
economies rather than the deleveraging of capital from local EM markets.
Fig. 2: Relative valuation* of Europes EM exposed companies** compared with thewider European market
*Median forward P/E of stocks in the EM basket divided by European market 12-month forward P/E.
** See appendix for details
Source: FTSE, IBES, Nomura Strategy research
1In last weeks Global Strategy Weekly, we reiterated our preference for developed
market equities within our Global Regional allocation: Still too soon to up Emerging
Markets, Global Strategy Weekly, 2 October 2011.2First published in European Strategy weekly, Not all emerging market exposure is the
same, 20February 2009.
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Relative Performance of EM exposed European stocks
Emerging Markets performance relative to World
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Ratio
Ian Scott
+44 20 7102 2959
Ian.scott@nomura.com
EM-exposed companies havestarted to underperform the
wider European market
They continue to trade at apremium valuation comparedwith the rest of the Europeanmarket
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Nomura | European Strategy Weekly October 9, 2011
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The EM-exposed stocks currently trade on an 11% premium to the wider European
market. This is 4% above the premium that has existed since 2003. So, although they
have underperformed recently, they have not been through anything like to the
deleveraging experienced during 2008.
Fig. 3: Relative valuation of Europes EM-exposed companies compared with othergrowth stocks*
*Ratio of median forward P/E of EM exposed basket divided by median P/E of Nomuras European Composite Growthbasket (see appendix for details).
Source: IBES, FTSE, Nomura Strategy research
The EM-exposed companies trade on a similar multiple to other growth stocks in Europe.
Again, there is a marked contrast to the 2008/09 period when the deleveraging of
exposure to emerging market and emerging economy exposed companies brought a
substantial de-rating relative to other growth stocks.
Fig. 4: Earnings revisions for Europes EM-exposed stocks
Source: IBES, Nomura Strategy research
Moreover, earnings estimates are coming down for the group. Some 10% more
estimates have been cut than raised in the past month, broadly in line with the wider
European market.
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Net earnings revisions %,(up -down) / total, 3MMA
EM-exposed companies seemfully valued relative to othersources of growth unlike 2008when EM exposure becamevery cheaply priced
Earnings estimates are beingcut for EM-exposed companies
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Fig. 5: Gap in earnings revisions between EM-exposed stocks and the wider Europeanmarket* and the valuation premium for EM-exposed stocks
Footnote: chart describes the gap in earnings revisions between stocks exposed to Emerging Markets and the rest of theEuropean market (red line) and the ratio of the forward PE multiples for the EM exposed stocks compared with the widerEuropean market (grey line).
Source: IBES, FTSE, Nomura Strategy research
As Figure 5 shows, the premiums attached to the EM-exposed companies have been
associated with their superior earnings revisions, with revisions now in line with the wider
European market, the 11% premium is no longer as justifiable as it was, in our view.
In summary, European companies with large exposure to emerging economies look
expensive, but no longer have a sufficient differentiated earnings trend to command such
a premium, in our view. So in line with our overall cautious stance toward the relative
performance potential for emerging equity markets, we would not be seeking to
systematically overweight European companies with significant exposure to emerging
economies.
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Ratio of forward PEsGap in revisions balance
Relative Earnings Revisions (LHS)
Relative Valuation (RHS)
The premium valuation attachedto EM-exposed stocks is notsupported by superior EPSrevisions
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AppendixFig. 6: Constituent stocks in Nomuras European Emerging Markets Exposure Basket (see NMRAEQEM onBloomberg
Source: Worldscope, Nomura Strategy research
Fig. 7: Current constituent stocks in Nomuras European High Composite Growth basket* (see NMRAGRWL on
Bloomberg
*Selected on three criteria: IBES mean consensus forecast long term earnings growth, IBES mean consensus growth between FY0 and FY3 and internal growth measured byROE * (1-payment ratio).
Source: IBES, Nomura Strategy research
Company Sector Company Sector
ANGLO AMERICAN PLC Basic Industries BG GROUP PLC Energy
BAYER AG Basic Industries SAIPEM SPA Energy
HOLCIM LIMITED Basic Industries TECHNIP Energy
LAFARGE Basic Industries BANCO BILBAO VIZCAYA ARGENTARIA SA Financials
XSTRATA PLC Basic Industries BANCO SANTANDER SA FinancialsABB LIMITED Capital Goods HSBC HOLDINGS PLC Financials
ATLAS COPCO AB Capital Goods OLD MUTUAL PLC Financials
COMPAGNIE FINANCIERE RICHEMONT S.A, Consumer Cyclicals PRUDENTIAL PLC Financials
LVMH Consumer Cyclicals RAIFFEISEN INTERNATIONAL BANK Financials
RENAULT (REGIE NATIONALE DES USINES) SA Consumer Cyclicals STANDARD CHARTERED PLC Financials
SWATCH GROUP OF SWITZERLAND (THE) Consumer Cyclicals UNICREDITO ITALIANO SPA Financials
BRITISH AMERICAN TOBACCO P.L.C. Consumer Stables TELEFONAKTIEBOLAGET LM ERICSSON Technology
COCA-COLA HELLENIC BOTTLING COMPANY S.A. Consumer Stables PORTUGAL TELECOM SGPS SA Telecoms
ANHEUSER-BUSCH INBEV Consumer Stables TELEFONICA SA Telecoms
SABMILLER PLC Consumer Stables TELENOR GROUP ASA Telecoms
Company Sector Company Sector
ANTOFAGASTA PLC Basic Industries RENAULT S.A. Consumer Cyclicals
ANGLO AMERICAN PLC Basic Industries SWATCH GROUP AG Consumer Cyclicals
WOLSELEY PLC Basic Industries VOLKSWAGEN AG (PFD NON-VTG) Consumer Cyclicals
XSTRATA PLC Basic Industries RANDSTAD HOLDING N.V. Consumer Cyclicals
SYNGENTA AG Basic Industries HERMES INTERNATIONAL S.C.A. Consumer Cyclicals
K+S AG Basic Industries COMPAGNIE FINANCIERE RICHEMONT S.A. Consumer Cyclicals
NOVOZYMES A/S Basic Industries BUREAU VERITAS S.A. Consumer Cyclicals
COMPAGNIE DE SAINT-GOBAIN S.A. Basic Industries AMADEUS IT HOLDING S.A. Consumer Cyclicals
EURASIAN NATURAL RESOURCES CORP. PLC Basic Industries BG GROUP PLC Energy
ROLLS-ROYCE HOLDINGS PLC Capital Goods NORSK HYDRO ASA Energy
EUROPEAN AERONAUTIC DEFENCE & SPACE CO. EADS Capital Goods REPSOL YPF S.A. Energy
ATLAS COPCO AB Capital Goods PETROFAC LTD. Energy
ABB LTD. Capital Goods ROYAL BANK OF SCOTLAND GROUP PLC Financials
MAN SE Capital Goods UNICREDIT S.P.A. Financials
SKF AB Capital Goods DANSKE BANK A/S Financials
SAFRAN S.A. Capital Goods SWEDBANK AB Financials
SANDVIK AB Capital Goods ERSTE GROUP BANK AG Financials
THYSSENKRUPP AG Capital Goods ADMIRAL GROUP PLC Financials
VOLVO AB Capital Goods SHIRE PLC Healthcare
SIEMENS AG Capital Goods COLOPLAST A/S Healthcare
ALFA LAVAL AB Capital Goods FRESENIUS SE Healthcare
EXPERIAN PLC Consumer Cyclicals NOVO NORDISK A/S Healthcare
NEXT PLC Consumer Cyclicals BRITISH SKY BROADCASTING GROUP PLC Media
BURBERRY GROUP PLC Consumer Cyclicals JCDECAUX S.A. Media
ADECCO S.A. Consumer Cyclicals EUTELSAT COMMUNICATIONS Media
ADIDAS AG Consumer Cyclicals ASML HOLDING N.V. Technology
BMW AG Consumer Cyclicals INFINEON TECHNOLOGIES AG Technology
FIAT SPA Consumer Cyclicals TELENOR ASA Telecoms
CONTINENTAL AG Consumer Cyclicals
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European recommended portfolio
Price (LC) Mkt Cap
Calendarised EPS y/e
Dec1
Price/
earnings Date
Rel Perf.
since
Rel Perf.
Over Analyst
Sector Stock Currency 6 Oct 11 US$m 2010a/e 2011e 2012e Dec 11 (x) Added Added week Rating2
Basic Industries CRH PLC EUR 12.75 12,090 0.8 0.9 1.0 14.9 9 Sep 11 13 8 Not Rated
RIO TINTO PLC GBP 31.27 70,819 7.2 10.8 12.3 2.9 11 Dec 09 8 5 Not Rated
Capital Goods GAMESA CORP TECNO EUR 3.52 1,167 0.3 0.3 0.5 11.7 13 Nov 09 -72 5 Not Rated
KLOECKNER EUR 9.52 1,273 1.2 0.3 0.7 27.5 9 Sep 11 -6 -6 Buy
MEGGITT PLC GBP 3.36 4,011 0.3 0.3 0.3 10.8 3 Dec 10 5 0 Buy
THALES SA EUR 24.31 2,594 -0.2 2.6 3.0 9.4 8 Oct 10 -2 -1 Buy
Consumer Cyclicals DEUTSCHE LUFTHANSA EUR 9.54 2,927 2.5 1.3 1.7 7.5 9 Sep 11 -12 -6 Neutral
DEUTSCHE POST EUR 9.84 11,904 2.1 1.0 1.3 9.6 9 Sep 11 -1 -1 BuyEnergy AMEC PLC GBP 8.18 4,171 0.6 0.7 0.8 11.9 3 Dec 10 -15 -5 Not Rated
BP PLC GBP 3.93 113,848 1.1 1.2 1.2 3.4 22 May 09 -34 -1 Not Rated
REPSOL EUR 21.05 34,428 1.9 1.9 2.3 11.0 4 Oct 10 18 5 Not Rated
TULLOW GBP 13.50 18,769 0.1 0.8 1.1 16.1 4 Oct 10 12 2 Not Rated
Financials - Banks BNP PARIBAS EUR 32.03 44,746 6.3 8.0 9.0 4.0 16 Apr 10 -28 2 Buy
CREDIT AGRICOLE EUR 5.44 7,003 0.5 1.7 2.2 3.2 12 Jun 11 -32 0 Neutral
LLOYDS GBP 0.36 22,157 0.0 0.0 0.1 NM 2 Jul 10 -38 -2 Neutral
NATIONAL BANK OF GREECE EUR 2.14 2,740 0.5 0.6 1.0 3.5 11 Dec 09 -85 -23 Neutral
UBS AG CHF 10.97 45,231 2.0 2.0 2.5 5.6 17 Sep 10 -25 -5 Buy
UNICREDITO ITALIANO EUR 0.83 16,057 0.1 0.2 0.2 5.1 16 Apr 10 -51 0 Buy
Financials - Insurance AEGON NV EUR 3.25 8,306 0.8 0.7 0.7 5.0 9 Jan 09 -60 2 Buy
AVIVA PLC GBP 3.19 14,052 0.6 0.6 0.7 5.3 31 Jul 09 -5 1 Buy
AXA EUR 10.50 32,637 1.8 2.1 2.3 5.1 9 Jan 09 -44 1 Buy
LEGAL & GENERAL GROUP PLC GBP 1.03 9,278 0.1 0.1 0.2 7.2 11 Dec 09 54 3 Buy
ZURICH FINANCIAL SERVICES AG CHF 194.30 31,141 24.6 21.3 24.2 9.1 11 Dec 09 24 -2 Buy
Financials - Other 3I GROUP PLC GBP 1.92 2,846 0.2 -0.2 0.3 NM 8 Jul 11 -17 -1 Not Rated
GT PORTLAND ESTATES GBP 3.46 1,665 0.2 0.1 0.1 44.6 3 Dec 10 10 -1 Not Rated
ICAP PLC GBP 4.21 4,239 0.4 0.4 0.5 10.4 3 Dec 10 -5 -2 Not Rated
LAND SECURITIES PLC GBP 6.87 8,228 0.4 0.4 0.4 18.5 3 Dec 10 19 5 Not RatedHealthcare MERCK KGAA EUR 59.61 5,161 2.9 4.3 4.6 13.7 4 Sep 09 -6 -4 Buy
NOBEL BIOCARE HLDG CHF 9.01 1,217 0.4 0.7 0.8 13.8 3 Dec 10 -31 -6 Buy
NOVARTIS AG CHF 51.55 139,156 4.3 4.7 4.9 11.0 9 Jan 09 9 0 Buy
Media REED ELSEVIER GBP 5.12 9,567 0.4 0.5 0.5 11.2 4 Sep 09 21 1 Buy
WPP PLC GBP 6.14 11,876 0.6 0.6 0.6 9.9 3 Dec 10 -7 -3 Buy
Technology CAPGEMINI SA EUR 26.11 5,421 2.5 2.4 2.7 10.8 22 Jul 11 -18 0 Not Rated
ILIAD S.A. EUR 83.56 2,452 5.9 5.4 5.2 15.5 23 Oct 09 12 -4 Buy
SAP AG EUR 38.98 48,032 2.3 2.6 3.0 14.9 23 Oct 09 17 1 Buy
STMICROELECTRONICS EUR 5.15 4,711 0.7 0.9 1.2 5.8 9 Jan 09 -8 3 Buy
Telecoms DEUTSCHE TELECOM EUR 9.24 40,527 1.0 1.0 1.0 9.2 4 Sep 09 9 4 Buy
TELENOR ASA NOK 89.55 12,666 8.7 7.4 7.8 12.1 8 May 09 106 -3 Buy
Utilities NATIONAL GRID PLC GBP 6.41 35,093 0.5 0.5 0.5 12.4 4 Sep 09 33 -1 Neutral
Portfolio perf. (Euro Return, %)3 1 WK 1 MTH YTD 12 MTH 2010 2009 2008 4 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
Nomura Strategy Recommend Portfolio 0.3 4.5 -19.8 -17.7 5.3 49.4 -20.7 -4.5 20.9 21.7 7.7 22.5 -34.0 -21.2 14.7 67.4 26.4 43.2 35.7 17.8
FTSE-World Europe Index 0.7 3.7 -14.2 -9.6 11.7 33.2 -20.4 3.6 17.2 23.0 9.4 12.6 -31.7 -17.3 -2.9 25.4 18.6 40.5 24.7 11.2
1 EPS estimates are based on Nomura estimates (for stocks under coverage), IBES (for stocks not under coverage).2
Analyst rating refers to Nomura research department rating.3 Return history presented as price return in euro terms from before 2006. Returns from 2007 to present are on a total return basis.4 Ending 12 September 2008.
Please turn to the back cover for an explanation of Nomura's rating system.
Past performance should not and cannot be viewed as an indicator of future performance. Complete record available upon request.
Source: IBES, IDC/Exshare, Factset, Nomura Strategy estimates
European recommended sector allocation
BenchmarkRecommended
WeightingRecommendation
Basic Industries 11 8 Underweight -Capital Goods 7 8 Neutral
Consumer Cyclicals1
9 4 Underweight
Consumer Staples 14 0 Underweight -Energy 11 20 Overweight
Financials 20 33 Overweight
of which: Banks 12 15 Overweight -Insurance 5 11 Overweight
Other 2 7 Overweight
Healthcare 11 5 Underweight
Media 2 6 Overweight
Technology 3 9 Overweight
Telecoms 7 5 Underweight -
Utilities 5 3 Underweight
- We have an underweight recommendation on Telecoms.
- We underweight Utilities and Healthcare.1
Combination of Cyclical Consumer Goods and Cyclical Services excluding Media.
Source: Nomura Strategy research
We recommend overweighting Oils and underweighting Basic Industries; demand for
non-oil commodities has become more sensitive to prices, while Mining is also
expensive relative to Oils.
We underweight sectors that are vulnerable to a rise in bond yields and prefer sectors
that should benefit from a reduction in the equity risk premium. We also overweight
sectors that should benefit from increased capital spending.
We overweight Financials as asset price reflation should provide support. W e believe
that valuations discount further capital raising; we think these concerns will be
mitigated by rising asset values.
We also overweight Tech and Media, which should benefit from increased business
spending.
We recently increased our exposure selectively to areas within the cyclicals, which are
valued at trough levels, like Building & Construction, Steel and Transport. However, we
remain underweight the sector in aggregate.
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European Index
Pan-European equity market forecasts for 2011
End 2011
Current Level* End 2011
Price Return
(%)**
FTSE Europe 129 162 25 -
FTSE Europe ex UK 114 145 27EURO STOXX 50 2179 2850 31 -
FTSE 100 (UK) 5102 6200 22
Dax 30 5473 7500 37
CAC 40 2974 3950 33 -
SMI 5505 6200 13
AEX 278 355 28 -IBEX 8477 10300 22
OMX 900 1100 22
MIB 14805 19250 30
**Eur terms
* As of 05-Oct-2011
We use the FTSE All World Developed index for Europe and Europe ex UK.
Source: Nomura Strategy research
We think 2011 will see companies reinvest in their businesses, either through
organic investment or through M&A.
We expect the European market to recover from current lows.
Equity valuations appear attractive to us, with embedded risk premiums at high
levels and we expect the earnings recovery to continue, though at a slower
pace.
We think the market has overreacted to concerns of slowing growth and
sentiment has moved to depressed levels.
European earnings growth forecasts
2010 2011 2012
Europe ex UK1 11% 11% 14%
UK2
17% 10% 13%
Europe 13% 11% 14%
* EPS growth1
FTSE Europe ex UK2
FTSE 100
Source: Nomura Strategy research
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Investible themes
Source: Bloomberg
For details of the investible products based on these themes and how to trade them please contact the Quantitative Solutions Group on +44 (0) 20
7103 9988 or quant-eu@nomura.com. Our investible themes and style portfolios are listed on Bloomberg at NMRA. Bloomberg codes are listed,
where applicable, with each theme below.
Our investible themes and style portfolios are listed on Bloomberg at NMRA. We show live tradable prices for these themes. Option 1 shows the
long/short return of our key style portfolios, option 2 shows the returns of the top and bottom quartiles of the full range of styles and allows access to
the constituents.
Investible themes are available under option 3 as shown below.
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Source: FTSE All World, Exshare, Nomura Strategy research
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Source: FTSE All World, Worldscope, Exshare, Nomura Strategy research
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Source: Nomura research, Bloomberg, FTSE All World, Exshare
Divestiture Basket
Within overall M&A activity, we think divestitures deserve special attention.
We believe we could see divestitures and spin-offs increase during the rest of
the year as companies seek to increase value for their shareholders.
The basket consists of 19 European stocks that Nomura sector analysts
consider potential candidates for spin-offs and divestitures.
See European Strategy Weekly, Unlocking the value in divestitures, 10 April
2011
Chart shows the performance of a basket of European stocks that are considered potential candidates for spin-offs and divestitures. The performance is shown on an equal-weighted USD total
return basis relative to the market.
Chart shows the performance of a basket of European stocks that we consider could be potential takeover targets based on a screening that takes into account valuation and the
attractiveness of the companies as a strategic asset for potential buyers. The performance of the basket is shown relative to the FTSE ALL World Europe Index. The performance is shown on
an equal-weighted USD total return basis.
M&A Basket
We expect M&A activity to pick up in 2011. It has been at a low ebb until
recently, yet corporates have large amounts of available cash.
We identify companies that we think are potential targets to be bid for. For
more details of the basket please see Can Companies Provide the Catalyst?
(III) 30 January 2011
Organic Growth Basket II
Chart shows the performance of a basket of European stocks that we consider could be potential takeover targets based on a screening that takes into account valuation and theattractiveness of the companies as a strategic asset for potential buyers. The performance of the basket is shown relative to the FTSE ALL World Europe (ex financials) Index. The
performance is shown on an equal-weighted USD total return basis.
We expect the market to reward companies that can invest in
profitable internal growth opportunities.
We have refreshed the constituents of our original Organic Growth
basket, which we closed on 09/06/2011.
To derive the basket, we look for European companies with ROCE
>10%, where capex / depreciation (2010) ratio is greater than 1.5 and
where capex is expected to grow in the next few years. We also
looked for expected EPS growth in the next three years in excess of
10% pa, giving a total of 51 constituents.
76.0
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104.0
Jan -10 May-10 Sep -10 Jan -11 May-11 Sep -11
Index
93.0
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103.0
108.0
113.0118.0
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128.0
133.0
Jan -10 May-10 Sep -10 Jan -11 May-11 Sep -11
Index
97.0
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Dec-10 Feb-11 Apr-11 Jun-11 Aug-11
Index
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Source: FTSE, Worldscope, IBES, Exshare, Nomura Strategy research
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Source: FTSE World, Worldscope, IDC/Exshare, Nomura Strategy research
Trade On Trade Off Return
Emerging Market Exposed Basket NMRAEQEM 20/02/2009 31/07/2009 27.60% Return relative to FTSE World European index in USD
Government Spending basket NMRAFISC 23/01/2009 15/01/2010 37.80% Return relative to FTSE World European index in USD
Organic Growth Basket I 06/12/2010 09/06/2011 -0.30% Return relative to FTSE World European ex Financials index in USD
European Q-GAARP Basket 08/01/2010 03/12/2010 -5.33% Long/Short
Capital Structure Arbitrage Basket 09/10/2009 03/12/2010 -6.24%
Dividend Theme Basket 19/02/2010 03/12/2010 -6.63% Return relative to FTSE World European index in USD
Source: Nomura Strategy research
Closed trades
European Multifactor Model
Chart shows the relative performance of attractive relative to unattractive styles according to our style selector model with s tyles rebalanced each month.
A quant-driven model that selects attractive and unattractive stocks each
quarter.
Uses a broad range of factors with regressions used to assign coefficients to
factors based on the efficacy of factors in each sector.
Incorporates a non-linear interaction term that captures the level of
agreement between value and momentum.
European Style Selector
Chart shows the performance of our long-short European multifactor stock selection model. The performance is on a USD total return basis with a five-day implementation lag at each quarter
end. Sectors are equally weighted and stocks equally weighted within sectors. The Portfolios have been rebalanced quarterly.
A quant-driven model that selects attractive and unattractive styles eachquarter.
Uses the valuation of style factors and the recent momentum of style factors
to rank styles each month.
See European Multifactor Model, 3 November 2008.
See European Style Selector, 5 June 2009.
92.0
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Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11
Index
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Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11
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European valuation and profitability
12 month Forward P/E1
Current Values Post 1990 Average
Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5
Basic Industries 8.8 5.4 7.1 7.8 Basic Industries 12.9 12.0 12.5 11.1
Capital Goods 9.0 8.7 9.0 8.0 Capital Goods 15.7 11.7 14.3 7.8
Consumer Cyclicals 9.2 10.7 9.5 10.0 Consumer Cyclicals 15.4 12.6 14.0 9.0
Consumer Staples 13.4 12.3 12.9 15.1 Consumer Staples 16.9 12.8 14.7 10.9
Energy 7.0 7.0 7.0 4.1 Energy 13.9 14.3 14.1 7.6
Financials2
5.9 7.2 6.3 7.7 Financials2 13.1 12.3 12.8 9.0
of which: Banks 5.6 6.8 6.0 7.3 of which: Banks 11.7 11.5 11.5 9.2
Insurance 5.8 7.1 6.1 9.6 Insurance 16.5 15.1 15.7 8.6
Healthcare 10.7 9.6 10.4 7.6 Healthcare 18.2 17.2 17.8 18.9
Technology 11.9 18.0 12.7 13.6 Technology 21.7 18.6 20.8 13.9
Media 8.1 10.7 9.1 15.3 Media 18.0 18.8 18.2 41.6
Telecoms 9.2 9.6 9.4 8.9 Telecoms 19.8 16.1 17.0 14.2
Utilities 9.4 11.6 9.9 6.7 Utilities 14.5 10.2 11.8 11.6
Market 8.6 8.4 8.5 6.6 Market 14.3 12.7 13.6 9.7
Enterprise Value / Sales
Current Values Post 1990 Average
Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5
Basic Industries 1.0 1.5 1.1 2.0 Basic Industries 1.0 1.5 1.2 2.1
Capital Goods 0.8 0.9 0.8 0.7 Capital Goods 0.8 0.9 0.8 0.8
Consumer Cyclicals 0.9 0.9 0.9 0.8 Consumer Cyclicals 0.8 1.1 0.9 0.7
Consumer Staples 1.2 1.5 1.3 0.9 Consumer Staples 1.1 1.3 1.2 0.6
Energy 0.7 0.6 0.6 0.8 Energy 1.0 1.1 1.1 1.2
Financials2
NA NA NA NA Financials2 NA NA NA NA
of which: Banks NA NA NA NA of which: Banks NA NA NA NA
Insurance NA NA NA NA Insurance NA NA NA NA
Healthcare 2.6 2.7 2.6 2.2 Healthcare 3.1 3.6 3.3 4.1
Technology 0.9 2.3 1.0 2.2 Technology 1.9 1.7 1.9 1.9
Media 1.3 1.5 1.4 3.8 Media 1.7 2.2 1.9 1.8
Telecoms 1.8 2.1 1.9 1.7 Telecoms 2.5 2.6 2.4 2.8
Utilities 1.0 1.5 1.1 1.2 Utilities 1.8 1.7 1.7 1.8
Market ex Financials 1.1 1.1 1.1 1.1 Market ex Financials 1.1 1.4 1.2 1.3
Enterprise Value / EBITDA
Current Values Post 1990 Average
Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5
Basic Industries 6.2 4.3 5.4 6.6 Basic Industries 6.1 7.5 6.5 7.5
Capital Goods 5.9 4.0 5.7 6.1 Capital Goods 6.8 7.1 6.8 5.7
Consumer Cyclicals 5.5 7.8 5.8 8.3 Consumer Cyclicals 6.7 8.5 7.1 6.3
Consumer Staples 8.5 9.6 8.9 10.1 Consumer Staples 8.7 8.6 8.6 6.6
Energy 2.9 4.4 3.6 3.3 Energy 5.3 7.1 6.0 5.1
Financials2
NA NA NA NA Financials2 NA NA NA NA
of which: Banks NA NA NA NA of which: Banks NA NA NA NA
Insurance NA NA NA NA Insurance NA NA NA NA
Healthcare 8.8 5.8 7.7 7.7 Healthcare 11.4 12.0 11.6 16.2Technology 5.6 13.9 6.4 12.0 Technology 12.0 11.5 11.7 11.1
Media 5.7 8.6 6.5 13.5 Media 8.1 10.6 8.9 8.7
Telecoms 5.0 5.5 5.2 4.5 Telecoms 5.5 6.9 5.9 7.6
Utilities 5.1 7.9 5.6 4.3 Utilities 7.0 6.5 6.7 6.5
Market ex Financials 5.7 5.7 5.7 5.0 Market ex Financials 6.9 7.7 7.1 6.3
1Ratios reflect earnings before goodwill amortisation
2Financials excluding Real Estate
5Post 2000 average for EEM EA region
Source: FTSE, Worldscope, IBES, Nomura Strategy research
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European valuation and profitability
Return on Capital Employed4 (ROE4 Financials)
Current Values Post 1990 Average
Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5
Basic Industries 7.3 15.7 9.9 13.1 Basic Industries 9.1 11.7 9.8 14.7
Capital Goods 9.0 15.2 9.7 7.8 Capital Goods 8.2 10.4 8.6 8.6
Consumer Cyclicals 6.8 13.2 7.8 13.8 Consumer Cyclicals 6.5 9.3 7.1 15.8
Consumer Staples 10.5 13.4 11.6 19.1 Consumer Staples 11.8 12.4 12.0 19.4Energy 12.1 7.1 9.4 12.6 Energy 12.6 12.5 12.6 17.7
Financials1,2
9.3 8.5 9.1 17.1 Financials1,2 9.7 11.9 10.2 15.6
of which: Banks2
8.4 7.1 8.1 17.1 of which: Banks2 9.3 14.6 10.4 15.9
Insurance2
11.9 13.2 12.1 21.1 Insurance2 11.4 11.4 11.4 19.9
Healthcare 14.9 25.7 17.7 15.1 Healthcare 13.4 26.7 17.0 14.0
Technology 13.0 13.7 13.2 8.8 Technology 10.6 12.8 11.1 9.0
Media 14.8 13.4 13.9 14.4 Media 12.1 16.1 13.8 13.4
Telecoms 10.2 13.4 11.7 13.9 Telecoms 8.8 9.4 9.3 13.4
Utilities 7.4 10.2 7.9 4.6 Utilities 7.8 9.0 8.1 5.9
Market ex Financials 9.5 12.6 10.5 12.5 Market ex Financials 9.0 11.4 9.6 13.8
Enterprise Value / Capital Employed (P/BV Financials)
Current Values Post 1990 Average
Eur ex UK UK Europe EEMEA Eur ex UK UK Europe EEMEA5
Basic Industries 1.1 1.2 1.1 1.7 Basic Industries 1.3 1.6 1.4 1.9
Capital Goods 1.1 1.7 1.2 0.9 Capital Goods 1.3 1.5 1.3 1.0
Consumer Cyclicals 1.0 1.6 1.1 1.6 Consumer Cyclicals 1.2 1.6 1.2 1.7
Consumer Staples 1.8 2.1 1.9 3.2 Consumer Staples 2.1 2.0 2.0 2.2
Energy 1.0 1.2 1.1 0.8 Energy 1.6 2.0 1.8 1.3
Financials1,3
0.6 0.7 0.6 1.3 Financials1,3 1.8 1.8 1.8 1.9
of which: Banks3
0.5 0.7 0.5 1.3 of which: Banks3 1.6 2.0 1.7 2.1
Insurance3
0.7 0.9 0.8 1.4 Insurance3 2.7 2.0 2.5 1.5
Healthcare 1.9 2.9 2.1 1.4 Healthcare 2.6 5.5 3.4 2.9
Technology 1.3 2.6 1.4 1.4 Technology 3.0 14.4 2.9 1.7
Media 1.2 1.5 1.3 2.2 Media 2.1 2.8 2.4 1.8
Telecoms 1.2 1.0 1.2 1.5 Telecoms 1.4 1.5 1.4 2.3
Utilities 0.8 1.4 0.9 0.7 Utilities 1.3 1.2 1.2 0.9
Market ex Financials 1.2 1.5 1.3 1.1 Market ex Financials 1.5 1.8 1.6 1.5
1 Financials excluding Real Estate
2Return on equity used for Financials.
3 Price to book value used for Financials.
4 RO E and RoC E calculated pre goodwill and pre exceptionals.
5Post 2000 average for EEM EA region
Source: FTSE, Worldscope, IBES, Nomura Strategy research
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Appendix A-1
Analyst Certification
I, Ian Scott, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or
all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.
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Important DisclosuresOnline availability of research and additional conflict-of-interest disclosuresNomura Equity Research is available on nomuranow.com, Bloomberg, Capital IQ, Factset, Reuters and ThomsonOne.Important disclosures may be accessed through the left hand side of the Nomura Disclosure webpage http://go.nomuranow.com/research/globalresearchportal or requested from Nomura Securities International, Inc., on 1-877-865-5752. Ifyou have any difficulties with the website, please emailgrpsupport-eu@nomura.com for technical assistance.The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, aportion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report arenot registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject toFINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities heldby a research analyst account.Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for thesales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content ofresearch reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employedby Nomura International plc who are primarily responsible for marketing Nomuras Equity Research product in the sector for which they havecoverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector. Distribution of ratings (US)The distribution of all ratings published by Nomura US Equity Research is as follows: 39% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 8% of companies with thisrating are investment banking clients of the Nomura Group*.54% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 3% of companies with thisrating are investment banking clients of the Nomura Group*.7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with thisrating are investment banking clients of the Nomura Group*.As at 30 September 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.Distribution of ratings (Global)The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with thisrating are investment banking clients of the Nomura Group*.41% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 50% of companies withthis rating are investment banking clients of the Nomura Group*.10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 20% of companies withthis rating are investment banking clients of the Nomura Group*.As at 30 September 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for
ratings published from 27 October 2008
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited managementdiscretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriatevaluation methodology such as discounted cash flow or multiple analysis, etc.STOCKSA rating of 'Buy',indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ' Reduce', indicates thatthe analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, targetprice and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstancesincluding, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company.Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks(accessible through the left hand side of the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal);GlobalEmerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORSA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates thatthe analyst expects the sector to underperform the Benchmark during the next 12 months.Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI EmergingMarkets ex-Asia.Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from30 October 2008 and in Japan from 6 January 2009STOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended'indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certaincircumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company.
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Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entityidentified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/orcompanies.SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocksunder coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted averagerecommendation of the stocks under coverage is) a negative absolute recommendation.Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings inEurope, Middle East and Africa, US and Latin America published prior to 27 October 2008)STOCKSA rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next sixmonths. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% overthe next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmarkby less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform theBenchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock tounderperform the Benchmark by 15% or more over the next six months.Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additionalresearch reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or otherinformation contained herein.SECTORSA 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance,indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A ' Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next six months.
Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector -Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe;
Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: BloombergWorld Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published priorto 30 October 2008STOCKSStock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value ofthe stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn'tthink the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from theintrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and ourestimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within thishorizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside
implied by the recommendation.A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside isbetween 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%.SECTORSA 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positiveabsolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocksunder coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted averagerecommendation of the stocks under coverage is) a negative absolute recommendation.Target PriceA Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may beimpeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if thecompany's earnings differ from estimates.
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