vanity capital: the global bull market in narcissism watches, jewelry, haute ... buy ratings that we...

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The GEMs Inquirer Equity Strategy

Vanity Capital: The global bull market in narcissism

Equity Strategy | Global Emerging Markets 21 April 2015 (corrected)

Ajay Singh Kapur, CFA >> +852 3508 7753 Equity Strategist Merrill Lynch (Hong Kong) [email protected] Ritesh Samadhiya, CFA >> +852 3508 7907 Equity Strategist Merrill Lynch (Hong Kong) [email protected] Umesha de Silva >> +852 3508 7306 Equity Strategist Merrill Lynch (Hong Kong) [email protected] Lucas Lu >> +852 3508 3964 Research Analyst Merrill Lynch (Hong Kong) [email protected]

Click the image above to watch the video.

What is Vanity Capital? ”Vanity Capital” is the pursuit of, and the

accumulation of, attributes and accessories to augment self-confidence by enhancing one’s appearance and prestige. It is self-actualization through self-improvement and self-focus. Along with Vanity Capital, emerging markets are likely to see strong growth in human capital, financial capital, social capital and psychic capital. We focus here on Vanity Capital for its unique growth and return potential for investors. Vanity Capital ties in with the enterprise-wide investment themes of “People” and “Innovation” highlighted in our report, A Transforming World.

Epidermal/wearable or augmented; cheap to expensive. Buying luxury watches, jewelry, haute couture and expensive accessories would qualify as building Vanity Capital. But these “wearables/epidermal” products do not have to be expensive – in the mid-market range, cosmetics, smartphones, fitness wear, health supplements also qualify. You could also resort to “augmented” Vanity Capital, esp. if it is of the expensive sort: luxury property, art, autos, fine wines, Ivy league educations etc.

How big is Vanity Capital? We believe spending on Vanity Capital is approximately US$4.5tn, larger than the US$3.7tn German economy, the 4th largest in the world. The size of the non-luxury Vanity Capital Market is US$3.3tn, the personal luxury component is US$300bn, the global luxury car market is about US$351bn, luxury hospitality US$150bn, luxury residential property US$150bn, art US$66bn, private jets US$19bn and yachts/cruises US$8bn.

Global Vanity Capital stocks: Up 20% annually since 1995 versus 5% for global equities. Asia ex-Japan Vanity Capital stocks up 15% annually, versus 3% for benchmark since 1995. Global Vanity Capital stocks trade at 17.3x on 12m forward PE, projected two-year EPS growth 25%. Global equities trade at 16.1x, projected two-year EPS growth is 17%. Stocks with BofAML Buy ratings that we believe may benefit from this theme include Titan (TTAN IN), Intime (1833 HK), Marui Group (8252 JP), Tiffany & Co (TIF US) and Kering (KER FP). For the complete stock screens, refer to Table 2 and Table 3.

Ten reasons why Vanity Capital is a great growth story: 1. Women are holding up more than half the sky. 2. Delayed age of marriage, staying with parents, starting vanity earlier. 3. Social media makes narcissism and envy ubiquitous. 4. Internet-driven ease of purchase and price comparison 5. Signaling via “rebellious consumption” of Vanity Capital a substitute for traditional class, caste, plutonomist hierarchies; and the decline of religious capital. 6. The rise of male Vanity Capital accumulation. 7. Global aging: “Rage, rage against the dying of the light” - use Vanity Capital. 8. Technological advances and product customization. 9. Is central bank balance sheet expansion boosting the luxury Vanity Capital? Yes.10. An explosive rise in affordability in emerging markets for vanity products.

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This is an extracted copy of the report with the same name published on 21 April 2015

The GEMs Inqu i re r 21 Apr i l 2015

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Vanity Capital: The global bull market in narcissism In a room at the Neues Museum in Berlin stands a bust of Queen Nefertiti, solitary and proud – a paragon of beauty from 1340 B.C. Indeed, her name means “the beautiful one has come” and it is our favorite work of art in the world, almost perfectly preserved. It is also a perfect example of the timelessness of “Vanity Capital” over the ages. What was once the province of queens and over-adorned kings, has now gone mainstream. What is Vanity Capital? And why should you care? Because it is one of the most durable growth stories in emerging (and developed markets): money has been made, and, in our view, a lot more is likely to be made. There is a global bull market in narcissism, and investors should take note. But first, some definitions.

Vanity Capital is the pursuit of, and the accumulation of, attributes and accessories to augment self-confidence by enhancing one’s appearance and prestige. It is self-actualization through self-improvement and self-focus. We have highlighted this theme earlier (see 2015: Older Turks, oil slicks and competitive easing, 07-Dec-2014 and Old, indebted and financially repressed, 12-Jan-2015). Along with Vanity Capital, emerging markets are likely to see super normal growth in human capital (let’s get smarter), financial capital (who is going to manage our rising wealth?), social capital (let’s get connected) and psychic capital (let’s leave a better environment for our kids). Growth investors should continue to focus on these areas. Given the recent popularity of French intellectuals in the English-speaking world, (see Piketty and Plutonomy: The revenge of inequality, 29-May-2014), we acknowledge our intellectual debt to the work of Pierre Bourdieu1 who did pioneering work on the different kinds of capital. Warning – it is heavy reading.

Table 1 is a useful way to think about Vanity Capital. On the one hand, products and services could range from cheap to expensive; on the other, they could be “wearables/epidermal” or “augmented. Buying luxury watches, jewelry, haute couture and expensive accessories would qualify as building Vanity Capital. But these “wearables/epidermal” products do not have to be expensive – in the mid-market range, cosmetics, smartphones, fitness wear, health food etc also qualify. But the really low-end stuff probably does not qualify – cheap T-shirts, sneakers, watches etc. But you don’t have to wear or ingest stuff for it to boost your Vanity Capital. You could also resort to “augmented” Vanity Capital, especially if it is of the expensive sort: luxury property, art, autos, private clubs, fine wines, Ivy league educations etc all boost Vanity Capital. So to some extent do the mid-market, augmented goodies: acoustic systems, golf, New World wines. The lower end of “augmented” products and services have no Vanity Capital aspects – they are merely utilitarian.

1http://eppl751su2012.wmwikis.net/file/view/Bourdieu.ch6.Forms.of.Capital.pdf/350871874/Bourdieu.ch6.Forms.of.Capital.pdf

A Transforming World

Figure 1: Bust of Nefertiti from the Ägyptisches Museum Berlin collection, presently in the Neues Museum. Ancient Vanity Capital example.

Source: http://en.wikipedia.org/wiki/Nefertiti

http://research1.ml.com/C?q=GPQSaFIuPl8


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Table 1: Vanity Capital - From cheap to expensive; from epidermal to augmented Vanity Capital map

Usage Epidermal/Wearables Augmented

Affordability

Luxury beauty and personal care products Luxury cars, private jets, yachts, cruises Haute couture, bespoke wear Luxury hotels and residential units High-end accessories (footwear, bags, scarves, pens, etc.) Art Plutonomy High-end jewelry Fine wines/spirits (Luxury) Top-end watches Private schools/Ivy league Private banking, exclusive credit cards Private clubs / Upscale dining Mid-market cosmetics Smartphones Mid-market apparel and footwear Mid-market wines Mid-market personal accessories (jewelry, bags, watches, etc) Fitness centers, Golf facilities Health supplements Private hospitals Organic food Low-end apparel Low-medium end real estate Low-end watches low end autos Cheap Low-end Sneakers

Source: BofA Merrill Lynch Global Research

Before we dive into the details, Figures 2, 3, 4 and 5 show four Vanity Capital themes – from botox (Allergan), Korean cosmetics (AmorePacific), Indian jewelry/watches (Titan), and luxury accessories (Hermes). The market is beginning to pay up for what is a powerful growth opportunity in an earnings-challenged world. Later in the report, we highlight a list of Vanity Capital stock stocks, where we still see long-term opportunities.

Figure 2: Vanity Capital at work I: Global botox

Source: BofA Merrill Lynch Global Research, Bloomberg Acquired by Actavis plc in March-2015

Figure 3: Vanity Capital at work II: Korean cosmetics

Source: BofA Merrill Lynch Global Research, Bloomberg

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Figure 4: Vanity Capital at work III: Indian jewelry and watches


Figure 5: Vanity Capital at work IV: Global luxury accessories


Figure 6 and 7 shows the performance of Vanity Capital stocks in Asia ex-Japan and the world. Since 1995, Asian Vanity Capital stocks have returned 14.6%, outperforming the MSCI Asia ex-Japan Index by 11.7% annually. Globally, Vanity Capital stocks have also produced superior performance, compounding at 20% since 1995. The MSCI World index gained 5.3% annually in the same period. Figure 8 shows the performance of global luxury and non-luxury Vanity Capital baskets. Non-luxury Vanity Capital has done better.

Figure 6: The Vanity Capital theme has significantly outperformed the benchmark in Asia ex-Japan

Source: BofA Merrill Lynch Global Research, Factset

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Titan Company

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6/93 6/96 6/99 6/02 6/05 6/08 6/11 6/14

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AxJ vanity capital MSCI AxJ

USD price performance (log scale)


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Figure 7: Globally, investing in the Vanity Capital theme has paid-off well, compounding at 19% annually versus 5% for global equities

Source: BofA Merrill Lynch Global Research, Factset Vanity Capital stocks include those falling under the following GICS sub-industry groups: aerospace & defense, apparel retail, apparel, accessories & luxury goods, automobile manufacturers, communications equipment, consumer electronics, department stores, distillers & vintners, footwear, hotels, resorts & cruise lines, household products, leisure facilities, leisure products, motorcycle manufacturers, personal products, specialty stores, technology hardware, storage & peripherals, with market cap greater than USD500mn.

Figure 8: Globally, non-luxury Vanity Capital stocks have outperformed luxury Vanity Capital stocks by about 4% annually in the past two decades


Global Vanity Capital earnings have compounded 11% annually (4% for MSCI World) in last 15 years. Based on consensus estimates, world Vanity Capital stocks earnings are expected to grow 37% in the next 2 years while the MSCI world earnings are expected to growth at less than half that pace, 17%. See Figure 9.

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Figure 9: Global Vanity Capital earnings have compounded 11% annually (4% for MSCI World) in last 15 years. Analysts on the street expect world Vanity Capital stocks earnings to grow 25% in the next 2 years and MSCI AC World stocks’ earnings to grow 17%.

Source: BofA Merrill Lynch Global Research, Factset, IBES Vanity Capital stocks include those falling under the following GICS sub-industry groups: aerospace & defense, apparel retail, apparel, accessories & luxury goods, automobile manufacturers, communications equipment, consumer electronics, department stores, distillers & vintners, footwear, hotels, resorts & cruise lines, household products, leisure facilities, leisure products, motorcycle manufacturers, personal products, specialty stores, technology hardware, storage & peripherals, with market cap greater than USD500mn.

Figure 10 shows the trailing PE for global luxury and non-luxury Vanity Capital stocks. Though Vanity Capital stocks have rerated since 2013, they are trading marginally below their long term average.

Figure 10: World Vanity Capital stocks: at reasonable multiples


For a screen of Asian and global Vanity Capital names see Table 2 and 3. Appendix A is a comprehensive screen of global Vanity Capital names.

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1/95 1/98 1/01 1/04 1/07 1/10 1/13World luxury vanity capital PE (x) World non-luxury vanity capital PE (x)


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The size of global Vanity Capital, where it is growing, in which categories Think of Vanity Capital along two axes: on one axis, wearable/epidermal versus augmented; on the other, luxury versus non-luxury (see Table 1). In 2014, the size of this total Vanity Capital market was US$3.7tn, according to Euromonitor International, about the size of Germany’s economy – the fourth largest in the world. As Table 4 details, “wearable/epidermal” Vanity Capital includes beauty & personal care, apparel & footwear, and personal accessories. Augmented Vanity Capital is seriously underestimated in Table 4 since we do not include numbers on luxury property, art, luxury autos, private jets, yachts etc. Including these categories would easily make overall Vanity Capital a US$4.5tn market (the size of the global luxury car market is about US$351bn, luxury hospitality US$150bn, luxury residential property* US$150bn, art US$66bn, private jets US$19bn and yachts and cruises US$8bn, for a total of US$744bn). See Figure 11.

Figure 12 shows the size of Vanity Capital by region and country. The non-luxury part is significant – about US$3.3tn, while the personal luxury Vanity Capital market is around US$340bn (or, 10% of total Vanity Capital). Western Europe (US$750bn), the USA (US$663bn) and Greater China (US$660bn) are the obvious large ones, while Latin America (they spend a surprising large amount on non-luxury “personal care” – more than the USA), Eastern Europe (US$265bn) and Japan (US$165bn) are next. See Table 4 for details.

How about growth rates in the past five years? Figure 13 shows that in every geography (except Australia), growth in Vanity Capital has exceeded non-Vanity Capital consumption. Figure 14 shows that it is the luxury Vanity Capital growth where the action has been globally: The Indians (off a low base), the Koreans, and the Chinese have been particular fans of luxury Vanity Capital in the past five years. Indeed, in all regions (except Latin America), the luxury end of Vanity Capital has seen stronger growth than the non-luxury end. The exception: In India and China, non-luxury jewelry purchases have been exceptionally strong, based on traditional and cultural demand for jewelry/gold as a store of value. Interestingly, in the USA, Australia, Korea and India, luxury alcoholic drinks have been massive growers versus their respective overall consumption growth rates. It is only in Latin America, hurt by five years of lower commodity prices and weaker economies that luxury Vanity Capital growth has been outpaced by the non-luxury end. Frugality is the word in Latin American vanity. (Of course, some of their luxury purchases are done in Miami, so will not figure in the Latin America data, but this theme has been in place for a while). Figure 15 is a heat map that summarizes growth rates in various categories – vanity and non-Vanity Capital – for different regions. The green areas show growth rates much stronger than the specific country’s overall consumption growth, red the opposite. The overall story is clear to us: Luxury Vanity Capital growth is one of the few areas in global consumption that is seeing above average growth.


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Table 4: Vanity Capital size: USD3.7tn, about Germany’s economic size – The world’s fourth largest economy. 10% is luxury, 90% non-luxury

Size, US$ bn (2014) USA Western Europe Australia Japan

China (incl Hong

Kong and Taiwan)

South Korea India ASEAN Asia

Pacific Latin

America EM World

Vanity Capital 663.2 747.7 52.7 165.4 660.6 53.4 130.0 86.3 1,229.7 422.8 1,618.2 3,660.9 Wearable/epidermal 458.1 442.1 27.2 127.3 366.3 46.2 74.3 56.9 707.8 214.8 878.8 2,110.2

Personal luxury 71.8 99.9 4.4 26.9 33.0 10.2 2.0 7.2 82.7 13.0 77.6 304.3 Beauty and personal care 8.4 13.9 0.5 3.8 2.6 0.8 0.2 0.6 8.3 1.4 7.7 37.8 Apparel and footwear 47.4 64.6 2.6 15.4 19.3 7.5 1.1 3.8 49.3 9.0 49.1 193.0 Personal accessories 15.9 21.4 1.2 7.8 11.1 1.9 0.8 2.7 25.1 2.6 20.9 73.6

Jewellery & timepieces 15.2 18.9 1.1 7.1 10.3 1.8 0.7 2.6 23.1 2.4 19.4 67.2 Travel goods 0.6 1.7 0.1 0.6 0.6 0.1 0.1 0.1 1.5 0.1 1.0 4.7 Writing stationary 0.1 0.8 0.0 0.1 0.2 0.1 0.0 0.0 0.5 0.1 0.5 1.8

Non-luxury 386.2 342.2 22.8 100.4 333.3 36.0 72.2 49.7 625.1 201.8 801.2 1,806.0 Beauty and personal care 64.3 87.3 5.2 33.8 48.2 10.1 8.6 13.3 118.9 69.8 172.8 399.1 Footwear and sportswear 179.1 158.7 8.2 30.1 98.0 11.5 16.8 14.1 184.9 84.5 276.4 722.4 Consumer health * 59.4 38.8 5.0 18.9 29.7 5.2 2.7 8.3 66.5 20.1 80.3 216.2 Personal accessories 83.5 57.3 4.5 17.5 157.4 9.2 44.2 13.9 254.8 27.4 271.8 468.3


Augmented 205.1 305.7 25.5 38.0 294.3 7.2 55.7 29.4 521.9 208.1 739.4 1,550.6 Personal luxury 6.9 12.0 0.5 3.8 2.6 0.4 0.1 0.4 7.7 1.6 8.3 33.3

Electronic gadgets 0.1 0.4 0.0 - 0.2 - 0.0 0.0 0.3 0.0 0.3 1.4 Alcoholic drinks 6.7 11.6 0.5 3.8 2.4 0.4 0.1 0.3 7.4 1.6 8.0 31.9

Non-luxury 198.2 293.7 25.0 34.3 291.7 6.8 55.6 29.0 514.3 206.4 731.1 1,517.3 Electronic gadgets 103.7 148.8 9.5 - 187.2 - 34.6 16.6 326.9 129.4 407.7 843.4 Alcoholic drinks 94.6 144.8 15.5 34.3 104.4 6.8 21.0 12.4 187.3 77.0 323.3 673.9

Personal luxury Vanity Capital 78.7 111.9 4.9 30.7 35.6 10.6 2.2 7.5 90.4 14.6 86.0 337.6 Non-luxury Vanity Capital 584.5 635.9 47.8 134.6 625.0 42.8 127.8 78.8 1,139.4 408.2 1,532.3 3,323.2

Non Vanity Capital 1,285.3 1,856.3 108.8 465.5 1,205.7 94.2 134.1 186.3 2,218.5 759.1 2,895.9 7,299.3 Apparel 260.1 346.0 16.2 71.0 282.4 24.4 45.3 29.6 478.1 104.2 565.1 1,388.6 Consumer appliances 60.8 79.2 7.7 25.8 108.4 8.2 8.1 13.3 170.0 43.8 204.1 407.5 Home and garden 236.8 318.0 17.2 44.4 171.8 8.3 18.6 22.7 277.6 61.1 342.3 1,031.6 Home care 25.4 36.0 2.2 8.9 16.0 1.6 4.2 5.5 41.1 24.6 62.8 155.3 Hot drinks 15.6 34.2 1.6 8.4 17.0 1.9 3.4 5.7 42.3 19.9 64.8 145.8 Packaged food 368.2 645.6 35.4 186.3 242.7 26.3 36.4 56.6 596.4 312.0 872.4 2,353.6 Pet care 30.4 31.7 3.1 5.2 2.4 0.8 0.1 1.1 9.8 12.7 23.4 98.3 Soft drinks 98.4 89.4 8.3 56.4 77.6 5.2 5.6 17.1 170.3 103.1 239.9 552.3 Tissue and hygiene 32.6 33.9 2.4 9.0 35.3 2.6 0.8 3.7 54.5 25.5 77.8 174.0 Tobacco 115.4 198.6 11.0 38.0 238.0 10.5 10.8 29.1 342.5 33.9 395.9 827.0 Toys and games 41.6 43.8 3.8 12.0 14.1 4.3 0.7 2.0 35.9 18.4 47.5 165.2

Consumer Expenditure 11,700 10,622 815 2,710 4,290 667 1,186 1,240 11,005 4,004 13,395 43,938 Source: BofA Merrill Lynch Global Research, Euromonitor International * Consumer health is the aggregation of the OTC, vitamins sports nutrition and weight management products. ASEAN includes Singapore, Malaysia, Indonesia, Thailand and the Philippines. Note: Consumer expenditure data is sourced from Euromonitor International and not from national accounts.

According to Euromonitor International growth forecasts (see Figure 16 heat map), this is projected to continue, especially at the luxury end. Table 5 gives their estimates for the size of this market in 2018 – the Vanity Capital market is projected to be around US$4.5tn, up from US$3.7tn in 2014. Of course, there are risks to a bullish view on Vanity Capital, especially at the luxury end. Continued anti-corruption moves in China and other EMs could intensify; higher taxes on the wealthy in DMs could be imposed to tackle plutonomy (income inequality); asset markets could fall, diminishing the wealth effect; the eventual withdrawal of US QE could generate volatility and unintended consequences; and while no one sees it now, the world economy could tip into a recession/debt deflation.


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Figure 11: Global personal Vanity Capital market size plus augmented Vanity Capital (art, luxury property, luxury cars, private jets, yachts) is more than US$4.5tr. That is bigger than the fourth largest economy in the world (Germany)

Source: BofA Merrill Lynch Global Research, Euromonitor International

Figure 12: Vanity Capital market size breakdown by region and country: Europe is the biggest, with a significant tourism component for the luxury end. LatAm is surprisingly large


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Personal luxury vanity capital Non-luxury vanity capital

Total size of global vanity capital market: US$3.7tr


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Figure 13: In all regions/countries (except Australia), Vanity Capital growth exceeded non-Vanity Capital consumption spending growth (2009-14)


Figure 14: Luxury Vanity Capital growth exceeds non-luxury Vanity Capital (except LatAm) between 2009-14

Source: BofA Merrill Lynch Global Research, Euromonitor International. Note: Consumer expenditure data is sourced from Euromonitor International and not from national accounts.

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Figure 15: Vanity Capital, an oasis of consumer spending growth (2009-14) – Luxury beauty/personal care, apparel/footwear, jewelry, watches, travel goods, alcohol and electronic gadgets

Source: BofA Merrill Lynch Global Research, Euromonitor International * Consumer health is the aggregation of the OTC, vitamins sports nutrition and weight management products. ASEAN includes Singapore, Malaysia, Indonesia, Thailand and the Philippines. Color shading in the above heat map is across consumer items within a country (and not across countries/regions). Green represents items growing at a faster rate and red represents items growing at a slower rate compared to the overall consumer expenditure. Consumer expenditure data is sourced from Euromonitor International and not from national accounts.


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Figure 16: Vanity Capital – a projected oasis of growth in the next few years: Luxury beauty/personal care, apparel/footwear, jewelry, watches, travel goods, alcohol and electronic gadgets

Source: BofA Merrill Lynch Global Research, Euromonitor International * Consumer health is the aggregation of the OTC, vitamins sports nutrition and weight management products. ASEAN includes Singapore, Malaysia, Indonesia, Thailand and the Philippines. Color shading in the above heat map is across consumer items within a country (and not across countries/regions). Green represents items growing at a faster rate and red represents items growing at a slower rate.


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Table 5: Projected Vanity Capital size (2018) – US$4.5tn. Almost as large as the US$4.9tn Japanese economy today ( third largest globally)

Size, US$ bn (2018 forecast) USA Western Europe Australia Japan HK & CN &

TW South Korea India ASEAN Asia Pacific Latin

America EM World

Vanity Capital 768.9 824.7 55.2 173.9 906.5 68.6 175.8 113.9 1,626.8 531.3 2,119.8 4,502.5 Wearable/epidermal 555.0 490.6 29.9 133.2 529.2 60.1 110.1 76.8 968.2 268.6 1,184.0 2,638.7

Personal luxury 91.6 116.9 5.1 30.7 46.6 14.7 3.9 10.2 112.0 18.7 110.1 389.9 Beauty and personal care 10.3 16.1 0.6 4.2 3.9 1.1 0.4 0.8 10.9 1.7 10.5 46.9 Apparel and footwear 60.5 75.6 3.2 17.3 28.2 11.0 2.0 5.5 68.2 13.3 71.0 247.5 Personal accessories 20.8 25.1 1.4 9.2 14.4 2.7 1.4 3.9 32.8 3.7 28.6 95.6

Jewellery and timepieces

20.0 22.2 1.3 8.4 13.3 2.5 1.2 3.7 30.1 3.5 26.5 87.2

Travel goods 0.8 2.0 0.1 0.7 0.9 0.1 0.2 0.1 2.0 0.2 1.5 6.2 Writing instruments and

stationary 0.1 0.9 0.0 0.1 0.3 0.1 0.0 0.0 0.6 0.1 0.7 2.2

Non-luxury 463.4 373.7 24.8 102.6 482.6 45.4 106.2 66.6 856.2 249.9 1,073.9 2,248.8 Beauty and personal care 73.1 93.4 5.5 32.5 69.6 12.8 12.3 17.8 152.3 84.8 220.9 473.0 Apparel and footwear 213.0 171.7 8.9 31.1 138.1 13.8 25.6 18.3 249.2 103.4 354.9 877.0 Consumer health * 72.8 43.8 5.5 20.7 39.2 6.3 3.6 12.0 84.2 25.9 104.3 265.2 Personal accessories 104.4 64.7 4.9 18.2 235.7 12.4 64.8 18.6 370.5 35.7 393.8 633.7


Augmented 213.8 334.1 25.3 40.7 377.3 8.5 65.7 37.2 658.6 262.7 935.8 1,863.8 Personal luxury 9.1 14.1 0.6 4.3 3.5 0.6 0.2 0.5 9.7 2.8 12.0 43.3

Electronic gadgets 0.2 0.5 0.0 - 0.3 - 0.0 0.0 0.4 0.0 0.4 2.2 Alcoholic drinks 9.0 13.6 0.6 4.3 3.2 0.6 0.2 0.4 9.3 2.8 11.6 41.1

Non-luxury 204.7 320.0 24.7 36.4 373.8 7.9 65.5 36.7 648.9 259.9 923.8 1,820.5 Electronic gadgets 94.0 155.0 8.3 - 220.5 - 39.5 20.3 396.6 159.9 485.9 969.5 Alcoholic drinks 110.7 165.0 16.5 36.4 153.3 7.9 26.0 16.4 252.3 100.0 437.9 851.0

Personal luxury Vanity Capital 100.8 131.0 5.7 34.9 50.1 15.3 4.1 10.6 121.7 21.5 122.1 433.2 Non-luxury Vanity Capital 668.1 693.7 49.5 139.0 856.4 53.3 171.7 103.3 1,505.1 509.7 1,997.7 4,069.3

Non Vanity Capital 1,472.4 2,064.7 115.5 498.1 1,695.1 109.9 193.6 251.1 2,942.4 934.4 3,793.8 8,873.8 Apparel 290.4 356.9 17.0 68.0 370.4 27.7 64.1 38.0 604.0 124.2 704.2 1,616.6 Consumer appliances 77.7 92.9 8.8 28.1 138.8 9.8 10.9 18.9 217.4 53.0 259.1 507.2 Home and garden 277.1 354.7 17.6 49.0 255.1 9.6 25.9 28.6 386.1 77.3 472.9 1,263.7 Home care 28.0 37.4 2.3 9.2 22.3 1.9 5.4 7.2 53.1 31.9 79.4 183.2 Hot drinks 18.3 41.1 1.8 9.8 21.3 2.4 5.0 7.7 54.4 25.3 81.3 181.1 Packaged food 417.9 735.7 39.3 204.3 350.1 31.3 54.7 76.6 785.7 373.1 1,118.2 2,846.1 Pet care 35.5 37.0 3.1 5.7 3.6 1.1 0.2 1.6 12.5 16.8 32.0 118.9 Soft drinks 110.6 100.0 8.6 62.2 114.2 6.3 11.0 22.8 230.0 127.1 319.4 687.7 Tissue and hygiene 37.5 36.7 2.5 9.5 52.9 3.1 1.3 5.3 76.7 33.5 106.2 217.2 Tobacco 129.1 221.0 10.2 39.2 343.2 11.2 13.6 41.5 471.2 40.1 545.5 1,030.8 Toys and games 50.3 51.4 4.2 12.9 23.2 5.6 1.4 2.8 51.2 32.3 75.5 221.2

Source: BofA Merrill Lynch Global Research, Euromonitor International * Consumer health is the aggregation of the OTC, vitamins sports nutrition and weight management products. ASEAN includes Singapore, Malaysia, Indonesia, Thailand and the Philippines.

We have demonstrated that across markets, two areas of super-charged relative growth stand out: 1) wearable/epidermal Vanity Capital - beauty and personal care, apparel/footwear, and personal accessories - especially the upper end and 2) augmented Vanity Capital – electronics/alcohol, also at the luxury end. As highlighted earlier, projections from Euromonitor International suggest that this super-charged relative growth is expected to continue in the next five years. We highlight 10 reasons why we believe Vanity Capital growth will exceed even these ebullient projections, and provide a rare area of earnings growth in a “small pizza” growth-challenged world. (The uncomfortable math of sharing a small pizza, 11-Mar-2015). This rare pocket of earnings growth requires premium valuations, in our view.

http://research1.ml.com/C?q=NlHSdSTzcQ2dtponYk7KKQ

http://research1.ml.com/C?q=NlHSdSTzcQ2dtponYk7KKQ


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The 10 drivers of Vanity Capital growth…

1. Women are holding up more than half the sky. Wearable/epidermal Vanity Capital is generally the province of women, although this is changing as “man-bags” are actually a thing now. Men generally tend to build Vanity Capital through augmented means – luxury autos, properties, trophy art, private jets etc. A pyramid here, a castle there. Across various markets, the participation rates of women in the labor force are rising – a combination of rising education levels, economic necessity, and the ubiquity of time-saving devices and services to execute chores, provide food and childcare. Figure 17 shows the rise in female labor force participation rates for key regions. While there is still a lot of ground to cover in wage equality for women, progress is being made. More importantly, the relative decline in routinized, manual jobs (say auto assembly) and the rise of non-routinized, cognitive work (public relations, teaching, medical research), and routinized, cognitive jobs (home health aides, manicurists, retail assistants, ervice) tends to favor more female employment.2 The decline of muscle power, and the rise of cognitive, collaborative work in the labor market favors women - and the accumulation of more Vanity Capital.

Figure 17: Except in China and India, female labor force participation has risen in most Asian economies in the past two decades

Source: BofA Merrill Lynch Global Research, International Labour Organization

2 http://blogs.wsj.com/economics/2015/04/08/is-your-job-routine-if-so-its-probably-disappearing/ for a discussion of this trend by Henry Siu at the University of British Columbia and Nir Jaimovich from Duke University.

25 45 65 85

India

Malaysia

Philippines

Indonesia

Korea

Hong Kong

Europe

Japan

Singapore

US

China

Thailand

1995 2013

Female labor force participation (% of female population ages 15-64)


17

Figure 18: According to Euromonitor, spending on male grooming products is expected to rise. US bearded men, 18-24 years in 2013: 35%. In 2009: 31%.

Source: BofA Merrill Lynch Global Research, Euromonitor International, Experian Marketing Services

2. Delayed age of marriage, staying with mom and dad, starting vanity earlier. Widespread higher education, falling infant mortality rates, rising life expectancy, medical advances in fertility, changing social mores and high youth under-employment have all raised the age of marriage globally. Young people are single for longer. This, coupled with QE-induced property market inflation, has delayed purchases of first homes. Staying with parents for longer is a consequence. A combination of longer single-hood and higher disposable income (no rent to mom and dad) provides the impetus, and releases funds for Vanity Capital purchases. We expect this to continue. As our US cosmetics/personal care analyst Olivia Tong’s survey of female millennials (18-29 years) in the US shows (Cosmetics, Household & Personal Care, 06-Apr-2015), using vanity products is starting early – more than 40% use or expect to use anti-aging products between 25-35. 25 is the new 50.

Figure 19: Females getting married later – more time/resources/incentive for Vanity Capital spending

Source: BofA Merrill Lynch Global Research, United Nations, Department of Economic and Social Affairs, Population Division. World Marriage Data.

Figure 20: Females not getting married until later, especially in developed markets

Source: BofA Merrill Lynch Global Research, United Nations, Department of Economic and Social Affairs, Population Division, Fertility and Family Planning Section

-2

0

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World men's grooming spending, YoY (%)

Forecasts

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1970 1975 1980 1985 1990 1995 2000 2005 2010

China India US Korea

Average age at first marriage, female

0 10 20 30 40 50

IndiaChina

IndonesiaPhilippines

ThailandMalaysia

KoreaSingapore

USJapan

Hong KongGermany

% women aged 30-34 who havenever been married, % total

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3. Social media makes narcissism and envy ubiquitous. While older investors may be less aware, the proliferation of social media (Facebook, Pinterest, Twitter, Instagram, Renren) has made the world more visual and demonstrative. Keeping up with the Joneses’ latest accessory, bauble, vacation or photographed fusion sushi – every vanity-enhancing purchase - is now global, and always on. Envy and narcissism have scaled up, and provide the impetus for powerful growth. “Status Anxiety” is now absorbed through your smartphone, and you are likely going to do something about it - build some Vanity Capital in retaliation.

4. Internet-driven ease of purchase, price comparison, and faster fashion churn. Not only does the internet provoke global envy instantaneously, it also provides the solution. If you like the dress an actress is wearing in a movie or a TV show, you can use the Spylight app and instantly find out where it came from. Like what a runway model is wearing but don’t want to buy it? You could rent it from www.renttherunway.com. Not sure about the price competitiveness of that pair of shoes you tried on in the store? Step out, check out www.shopstyle.com – it aggregates all clothing/accessories on the web, and price compare. If you are looking for “red shoes”, it will tell you where you can find them, and at what prices. Perhaps it is cheaper online, including shipping? Or go on to www.shopittome.com, and find out when your favorite items go on sale, and order away. Or how about www.fitbay.com, which provides fashion inspiration from your global “body doubles” who can recommend what might look good on you, since it looked good on them. For the determined acquirer of Vanity Capital, the internet is a boon. Indeed, according to Bain Capital, the online personal luxury market accounted for €12bn in 2014, or 5% of total personal luxury sales (of €223bn), up 12x in the past eleven years. Additionally, inventory management is so much easier with real-time feedback on what the consumer wants (e.g., Zara). Higher fashion churn can create its own high-velocity demand for the fashion-forward.

5. Signaling via “rebellious consumption” of Vanity Capital a substitute for traditional class, caste, plutonomist hierarchies; and the decline of religious capital

Conspicuous consumption and pecuniary emulation3 were traditional means to assert one’s superior differentiation from the rest in the Gilded Age and the Roaring Twenties. In emerging markets, often caste and tribal hierarchies determined the social pecking order. Traditionally, an elite education, a cavalry officer’s uniform, a title like Count, Chief, Duke, etc also helped. In today’s atomistic and meritocratic democracies – often, unequal plutonomies with declining religious participation - Vanity Capital is a potential marker for personal differentiation.

It is also a possible substitute for much tougher access to the top 1% - if you can’t join them, “rebellious consumption” can mark your identity. Research by Annette Asp and Steven Quartz4 suggests that “The pursuit of “the cool,” in our view, fundamentally altered the psychological motivations underlying our consumer choices. In conspicuous consumption, our emulation of higher-ups means we compete directly for status because we want what they have. But rebellious consumption changed the game, by making a product’s worth depend on how it embodied values that rejected a dominant group’s status.” (NY Times, 11 April, 2015). Like the James Dean leather jacket, or the hoodie in tech-land. There is a

3 Thorstein Veblen, The Theory of the Leisure Class, Macmillan, 1899 4 “Cool: How the Brain’s Hidden Quest for Cool Drives Our Economy and Shapes Our World.”


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“long tail”5 of niche brand communities, united by their differentiated use of Vanity Capital to distinguish themselves – The Goths, the minimalists, the “lumbersexuals” (metrosexuals with a rugged edge), hipsters, preppies, etc.

6. The rise of male Vanity Capital accumulation

Men appear increasingly adopting Vanity Capital as a marker for professional and personal differentiation, affected by some of the drivers we highlighted above: delayed marriage, staying with parents for longer, the enabling power of the internet and “rebellious consumption”. More importantly, in India and China, the male-female imbalance is large – 118 boys per 100 girls in China at birth, and 109 boys per 100 girls are born in India. There is a “surplus” of 15m young men (20-34) in China, and 14m in India. So, the pressure to be presentable and find a spouse could support greater investment in male Vanity Capital. An important insight from behavioral ecology is that the key driver for economic and political striving for young males is to acquire resources to attract and retain mates. “The dangerous, confrontational, competitive behaviors of young males – especially the unmarried and unemployed – should be expected where low-risk alternative behaviors are likely to produce no reproductive pay-off”6. We think Vanity Capital accumulation is one of the “low risk alternative behaviors” by males to attract and retain mates. Other low-risk behaviors – like acquiring property – is another option. In China, there is some evidence that provinces with a heavy male skew, property prices have risen more compared to other provinces – as marriageable females highlight the importance of owning property for potential husbands7. Asian men account for USD2.1bn of the global male grooming market of USD3.3bn in 2013.

5 Chris Anderson, “The Long Tail”, Hachette Books, 2008 6 Christian G. Mesquida and Neil I. Weiner, “Male Age Composition and Severity of Conflicts, Politics and Life Sciences”, September 1999, pg 182, citing M.Daly and M.Wilson, “Evolutionary Psychology of Male Violence”, J. Archer, Male Violence, London, Routledge. 1994. 7 Wei, S.-J. and Zhang, X.-B. (2011) The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China. Journal of Political Economy. http://www2.econ.iastate.edu/classes/econ321/orazem/wei_china_savings.pdf, see page 584


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Figure 21: India has 109 boys per 100 girls (2011)

Source: Wikipedia

Figure 22: China’s child sex ratio is 118 boys per 100 girls (2010)

Source: National Bureau of Statistics, UNICEF

7. Global Aging: “Rage, rage against the dying of the light” - use Vanity Capital

Do not go gentle into that good night, Old age should burn and rave at close of day; Rage, rage against the dying of the light.

Dylan Thomas

It is well known that the developed world is aging – less well known is how rapidly large, emerging markets like China, Korea, Taiwan, and Latin America are also aging. See Figure 23. Most wealth is in the hands of older people. They have the means to “rage against the dying of the light”. Vanity Capital seems a significant beneficiary – be it botox, luxury personal care/cosmetics or luxury baubles to enjoy their golden years. As Michael Douglas said, “70 is the new 50”8. As Figure 24 shows, older women consume significantly more Vanity Capital than younger ones. But that might be changing - See Olivia Tong’s earlier-cited survey of female millennials, where young women are also increasing anti-aging product use. So, if both 25-year olds, and 70-year olds use anti-aging products, then Vanity Capital would have wide demographic support.

8 On Jimmy Fallon’s Tonight Show, April 6, 2015


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Figure 23: The silver dollar, ready to be spent on anti-aging, a healthy lifestyle, on Vanity Capital

Source: BofA Merrill Lynch Global Research, UN Population database

Figure 24: US - Older people are wealthy – can spend on Vanity Capital, esp. luxury

Source: BofA Merrill Lynch Global Research, Federal Reserve

Figure 25: Japan - Older people are wealthy – can spend on Vanity Capital, esp. luxury

Source: BofA Merrill Lynch Global Research, BoJ

Figure 26: Korea - Older people are wealthy – can spend on Vanity Capital, esp. luxury

Source: BofA Merrill Lynch Global Research, Statistics Korea

10

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1950 1960 1970 1980 1990 2000 2010 2020 2030 2040

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Net financial assets by age ofhousehold head 2013, JPYm

Japan

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50

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Korea


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Figure 27: Cosmetic maintenance for a woman in the US over a lifetime: USD449000! Or, two kids through college. More spending with age

Source: The Beauty Breakdown: The Total Price on Cosmetics, Newsweek Tweens spend about US$7,170 a year in their life time (not shown in the above chart).

8. Technological advances and product customization.

One does not have to believe in Ray Kurzweil’s vision that in the future, we could live forever. But the degree of innovation in the cosmetics component of Vanity Capital is impressive. As Nicole Tyrimou of DataMonitor asserts, customization by age, gender, ethnicity and function (eyes, or neck) is progressing fast, e.g., Clinique’s Smart Custom-Repair serum. She also highlights a bespoke innovation in 2014 – Geneu, created by an engineering professor – Christofer Toumazou and Nick Rhodes of music group Duran Duran! It involves taking a cheek swab, isolating strands of DNA and injecting them into a microchip. In 30 minutes, having examined the individual’s antioxidant level and how quickly they degrade collagen, a customized anti-aging skin cream is created with the optimal level of collagen and anti-oxidants. It allegedly reduces fine line and wrinkles by a third in 12 weeks. The rising supply of global aging boomers is likely to spur further innovation in this field.

9. Is central bank balance sheet expansion boosting the luxury end of Vanity Capital? Yes.

We have long argued (Piketty and Plutonomy: The revenge of inequality, 29-May-2014) that plutonomist balance sheets are a crucial part of the monetary transmission mechanism in quantitative easing. A cunning plan to get global growth going. In other words, central bank purchases of assets would increase asset prices, and lower the risk premium. This would create a wealth effect for asset owners, who would then lower savings rates and raise spending. Note that in the US, the top 0.1% of households control about 23% of total wealth, a similar share as the bottom 90%. The top 1% of households account for about 20% of national income, about the same as the bottom 60%. With this degree of inequality, moving the economy forward needed plutonomists to spend. As Figure 28 shows, the Fed’s balance sheet correlates well with a basket of plutonomy stocks. Other luxury assets – what we call augmented Vanity Capital – luxury property, art, private jets and luxury cars – have benefitted from the unprecedented rise in global central bank liquidity.

15,761 23,640 21,840 32,684

108,660

169,274

10,586

17,820

16,366

6,834

8,040

10,452

0

50,000

100,000

150,000

200,000

250,000

Teens / 20s 30s / 40s 50 plus

Hands / feetBodyFaceHair

How much cosmetic maintenance cost over a lifetime for a woman? US$

Total = US$65,865

Total = US$158,160

Total = US$217,932

https://research1.ml.com/C?q=rBboWIMBK9NGXLComNTvJw&e=ritesh.samadhiya%40baml.com&h=Tsaxfg

https://research1.ml.com/C?q=rBboWIMBK9NGXLComNTvJw&e=ritesh.samadhiya%40baml.com&h=Tsaxfg


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Figure 28: The Fed did it? Plutonomy (luxury) stocks benefit from an expanding Fed balance sheet

Source: BofA Merrill Lynch Global Research, Federal Reserve Board, Factset

10. The Aftalion acceleration principle – explosive rise in affordability in emerging markets

Louis-Vincent Gave of Gavekal Research has highlighted the explosive growth that comes with a rise in average per capita incomes in emerging markets. When, say, average per capita income goes up from US$3,404 (Indonesia in Figure 29), to say US$14,317 in Russia, a quadrupling, the per capita spending on Vanity Capital goes from US$111 to US$828, or 8 times. As Figure 29 shows, especially at lower/middle per capita incomes (below US$20,000), per capita spending on vanity rises disproportionately as incomes rise. Figure 30 also affirms this: emerging markets like Korea, India, Latin America, and Easter Europe have all seen Vanity Capital growth exceed overall consumption-spending growth in the past five years.

0.00.51.01.52.02.53.03.54.04.55.0

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US Fed total assets (USDtr), RS


24

Figure 29: Vanity Capital spending per capita rises disproportionately with higher per capita income – compare Indonesia and Russia

Source: BofA Merrill Lynch Global Research, IMF, Euromonitor International

Figure 30: Emerging market Vanity Capital growth exceeds their overall consumption spending growth

Source: BofA Merrill Lynch Global Research, Euromonitor International. Note: Consumer expenditure data is sourced from Euromonitor International and not from national accounts.

China

India Indonesia

Japan

Malaysia

Philippines

Singapore

Korea Taiwan

Thailand

Australia

Poland Russia

Brazil Mexico South Africa

UAE

Canada US

France

Germany Italy Netherlands

Spain

Sweden

Turkey

UK

R² = 0.8833

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2,500

3,000

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Vanity capital spending per capita

(USD)

GDP/capita (USD)

2014

India

South Korea

ASEAN

Australia

Eastern Europe

USA

Latin America

Western Europe

Japan -4

0

4

8

12

16

20

-4 -1 2 5 8 11 14 17 20

Vani

ty c

apita

l, la

st 5

-yr g

row

th ra

te %

Total consumer expenditure, last 5-yr growth rate %

2009-2014


29

Table 12: Market Intelligence by country

17-Apr-2015 Mkt cap* U$bn

US$ perf (%) PE (x) PB (x) Div yield (%) EPSg (%) ROE (%)

Region/Country (# Co) 2014 YTD CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E North America (727) 20,789 10.3 1.4 18.2 17.8 15.7 2.8 2.7 2.5 1.9 2.1 2.2 5.6 0.8 13.3 15.6 14.9 15.7

Canada (95) 1,319 -0.6 -0.2 16.9 18.2 15.5 2.0 1.9 1.8 2.7 2.8 2.9 10.5 -6.9 17.5 12.0 10.5 11.7 US (632) 19,470 11.1 1.5 18.3 17.8 15.8 2.9 2.7 2.5 1.9 2.0 2.2 5.3 1.4 13.0 15.9 15.4 16.1

Europe (440) 8,644 -8.6 4.8 17.3 16.9 15.0 1.9 1.9 1.8 3.2 3.3 3.5 3.6 4.6 13.0 11.1 11.1 11.9 Austria (7) 26.8 -30.9 8.1 26.7 14.9 11.5 1.0 1.0 0.9 2.0 2.7 3.3 -41.3 106.2 29.4 3.6 6.7 8.2 Belgium (11) 172 1.9 7.0 21.5 19.6 17.9 2.4 2.4 2.3 2.7 2.7 3.3 9.8 6.3 9.0 11.4 12.1 12.6 Denmark (14) 219 4.6 17.2 22.4 21.3 18.3 3.8 3.9 3.5 1.8 2.0 2.3 21.3 14.6 16.7 17.1 18.1 19.4 Finland (12) 115 -4.1 2.9 19.5 18.8 17.6 2.5 2.5 2.4 3.6 3.6 3.9 24.7 6.4 6.9 13.0 13.3 13.5 France (75) 1,298 -11.9 7.1 18.0 17.3 15.2 1.7 1.6 1.6 2.9 3.1 3.3 4.0 9.1 13.8 9.2 9.5 10.3 Germany (54) 1,214 -12.2 5.8 16.8 15.6 14.0 1.9 1.9 1.7 2.5 2.7 2.9 9.0 12.1 11.5 11.3 11.9 12.3 Ireland (4) 46.6 1.0 7.7 26.2 20.1 15.7 2.1 2.0 1.9 1.5 1.4 1.9 354.4 28.3 27.5 8.2 10.0 11.8 Italy (26) 304 -11.4 6.7 28.1 16.7 13.9 1.1 1.1 1.1 2.9 3.1 3.7 68.2 81.2 20.1 4.0 6.7 7.8 Netherlands (23) 359 -5.0 5.9 21.0 17.9 16.1 2.2 2.1 2.0 2.1 2.7 2.9 8.0 23.2 10.7 10.3 11.8 12.6 Norway (9) 90 -25.2 11.2 12.2 13.5 12.5 1.3 1.4 1.3 4.7 3.7 4.0 5.5 -6.1 7.7 11.1 10.2 10.4 Portugal (4) 20.2 -39.8 10.6 23.2 17.8 14.1 1.6 1.6 1.5 3.6 3.4 3.7 7.0 36.8 25.9 6.8 9.0 10.9 Spain (23) 459 -5.8 -1.6 18.0 15.8 13.5 1.4 1.4 1.3 5.2 3.7 3.9 12.5 22.1 17.0 8.0 9.0 10.0 Sweden (31) 397 -9.8 3.2 20.5 17.1 15.7 2.6 2.4 2.3 3.4 3.6 3.9 6.4 5.4 9.1 13.3 13.8 14.2 Switzerland (38) 1,242 -2.3 7.2 18.3 18.3 16.8 2.6 2.6 2.5 3.2 3.1 3.3 -1.0 1.8 8.8 14.3 14.3 14.8 UK (109) 2,680 -8.7 2.1 15.0 16.5 14.5 1.9 1.9 1.8 3.7 3.8 4.1 -3.8 -8.7 14.4 13.0 11.4 12.4

Israel (9) 81.9 20.1 14.1 10.9 12.0 11.7 1.7 1.9 1.7 2.6 2.4 2.7 3.1 8.0 2.3 15.4 15.4 14.9 Asia Pac (996) 7,505 -2.5 11.5 15.2 14.8 13.5 1.6 1.5 1.4 2.5 2.5 2.7 11.5 8.4 10.2 10.5 10.4 10.6

Japan (314) 3,002 -5.7 13.5 17.2 16.1 14.5 1.5 1.4 1.3 1.7 1.8 2.0 19.2 12.3 10.9 8.6 8.8 9.1 Australia (71) 968 -7.5 3.2 16.3 16.8 15.6 2.1 2.0 1.9 4.4 4.5 4.8 4.9 -3.4 8.0 13.1 12.1 12.5 New Zealand (7) 19.4 2.6 -1.6 21.2 19.5 18.0 1.9 1.8 1.8 4.2 4.7 4.9 4.4 3.9 8.5 9.1 9.4 10.0

Asia Pac ex-Japan (682) 4,503 -0.2 10.2 14.0 14.1 12.8 1.7 1.6 1.5 3.0 2.9 3.1 7.6 6.3 9.7 11.9 11.5 11.7 Asia ex-Japan (604) 3,515 2.2 12.4 13.4 13.4 12.2 1.6 1.5 1.4 2.6 2.5 2.7 8.3 8.8 10.1 11.6 11.4 11.6

China (140) 1,047 4.7 25.5 10.9 12.7 11.2 1.5 1.6 1.5 3.0 2.4 2.7 6.4 2.8 13.2 14.1 12.8 13.1 Hong Kong (40) 441 2.0 13.7 13.5 17.4 16.1 1.3 1.3 1.3 3.3 2.7 2.8 29.6 -16.6 7.9 9.7 7.7 8.0 India (64) 299 21.9 7.6 21.3 18.8 16.0 3.2 2.9 2.6 1.4 1.5 1.7 9.4 14.6 17.8 15.0 15.3 16.0 Indonesia (30) 106.9 24.1 1.0 17.3 16.1 14.2 3.5 3.1 2.7 2.2 2.4 2.6 11.2 9.7 13.4 20.2 19.1 19.0 Korea (106) 624 -12.6 10.9 12.3 10.5 9.8 1.1 1.0 1.0 1.4 1.4 1.5 -7.7 29.2 7.0 8.6 9.9 9.7 Malaysia (42) 143 -13.4 0.9 17.3 16.4 15.2 2.0 1.9 1.8 3.0 3.1 3.3 3.7 10.8 8.1 11.5 11.5 11.6 Philippines (20) 54.8 23.7 10.4 22.7 20.9 18.4 3.3 3.0 2.7 2.0 1.9 2.1 23.2 12.7 13.8 14.3 14.4 14.9 Singapore (29) 199 -0.6 2.8 13.9 14.4 13.2 1.4 1.4 1.3 3.5 3.5 3.8 14.5 1.3 8.9 10.0 9.6 9.9 Taiwan (101) 502 6.9 4.1 14.6 12.8 12.0 1.9 1.7 1.6 2.9 3.5 3.8 28.4 12.4 6.1 13.1 13.5 13.4 Thailand (32) 98.5 13.3 6.8 17.2 14.9 13.0 2.2 2.1 1.9 2.8 3.0 3.3 -18.6 26.9 14.2 12.8 14.1 14.6

EMEA (162) 700 -17.6 6.5 11.0 11.7 10.2 1.2 1.2 1.1 3.4 3.4 3.8 -9.1 14.0 14.1 10.8 10.1 10.8 Czech Republic (3) 8.0 -7.9 -1.3 13.1 14.1 15.3 1.4 1.5 1.4 5.8 5.2 5.3 -15.8 -4.3 -7.8 11.1 10.4 9.4 Egypt (4) 9.4 26.2 -0.6 19.2 12.8 9.8 2.6 1.9 1.7 2.1 2.6 3.2 36.6 111.5 31.4 13.8 14.9 17.4 Greece (10) 11.3 -40.3 -38.0 nm 10.7 6.6 0.8 0.6 0.5 1.7 3.0 3.7 nm na 60.2 -0.5 5.5 8.2 Hungary (3) 8.7 -29.6 23.9 15.8 15.4 10.6 0.9 1.1 1.0 3.0 2.7 3.3 -29.4 22.7 46.0 5.7 6.8 9.4 Poland (24) 61.3 -16.8 1.7 14.4 14.6 13.9 1.4 1.4 1.3 3.8 3.6 3.8 2.7 63.2 4.9 9.5 9.4 9.4 Qatar (10) 31.7 11.7 -6.2 15.4 13.8 12.8 2.4 2.1 2.0 3.9 4.4 4.6 54.3 5.4 8.5 15.6 15.2 15.3 Russia (22) 164.0 -48.5 34.8 4.7 6.2 5.5 0.5 0.5 0.5 5.4 4.5 5.1 -17.7 6.5 12.9 9.8 8.2 8.6 South Africa (51) 321.0 2.5 6.0 18.7 18.1 15.8 2.8 2.5 2.4 2.8 2.9 3.3 5.2 9.4 14.1 14.6 13.6 15.2 Turkey (25) 57.6 16.7 -18.0 11.8 10.2 8.9 1.5 1.3 1.2 2.2 2.8 3.2 0.8 14.3 15.1 12.7 13.0 13.5 UAE (9) 27.0 11.5 5.9 14.3 14.8 12.3 1.7 1.7 1.6 3.1 3.2 3.6 38.8 3.6 20.2 12.5 11.7 13.2

Latin America (137) 603 -14.8 -4.1 15.8 16.1 13.2 1.5 1.5 1.4 3.0 2.8 3.0 -4.2 3.4 21.8 9.7 9.6 10.9 Brazil (70) 313 -17.4 -7.3 11.9 13.9 11.0 1.2 1.2 1.1 4.3 3.6 3.9 -3.3 -10.5 26.9 9.8 8.6 10.1 Chile (20) 57.4 -14.5 3.8 19.5 16.3 14.1 1.6 1.6 1.5 2.7 2.6 3.0 5.1 24.8 15.7 8.2 10.0 10.9 Colombia (14) 26.8 -22.3 -12.6 15.4 19.5 15.1 1.3 1.2 1.2 3.8 2.5 2.5 6.5 -18.9 29.2 8.2 6.2 7.7 Mexico (30) 188 -10.2 0.3 25.8 19.9 17.6 2.7 2.6 2.4 1.3 1.8 1.9 -12.4 38.9 12.9 10.4 13.0 13.5 Peru (3) 17.0 9.2 -1.5 16.1 15.0 12.2 2.2 2.0 1.8 1.3 1.5 2.0 -1.0 23.2 23.4 13.4 13.3 14.7

Developed Markets (1637) 34,144 2.9 3.5 17.7 17.4 15.4 2.3 2.2 2.1 2.3 2.5 2.6 6.5 2.4 12.7 13.1 12.7 13.4 Emerging Markets (834) 4,177 -4.6 9.0 13.2 13.0 11.6 1.5 1.5 1.4 2.6 2.6 2.8 0.9 11.9 12.3 11.5 11.5 11.8 World (2471) 38,322 2.1 4.0 17.1 16.8 14.9 2.2 2.1 2.0 2.4 2.5 2.7 5.7 3.6 12.7 12.8 12.5 13.1 Source: BofA Merrill Lynch Global Research, MSCI, Factset estimates. * market caps shown are free float.


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Figure 31: Asia-Pacific country selection


Figure 32: Asia-Pacific selection


Figure 33: EM country selection


Figure 34: EM sector selection


Philippines

Malaysia

Hong Kong

Korea

Thailand

Indonesia

Australia

Singapore

China

India

Taiwan

Japan

U/W O/W

InsuranceCons Durables

SoftwareTransportation

Food/Staples RetReal Estate

Tech Hard/EquipFood BeverageCapital Goods

EnergyUtilities

Comm SvcMaterials

MediaDiv Financials

AutosHealth Care Eqpt

HH ProductsCons Svc

Pharma/BiotechSemisBanks

TelecomRetailing

U/W O/W

Philippines

Malaysia

Chile

Mexico

Turkey

Korea

Poland

Others

Russia

Thailand

Indonesia

China

Brazil

South Africa

Taiwan

India

U/W O/W

Cons SvcComm Svc

Pharma/BiotechCapital Goods

UtilitiesInsurance

TransportationSoftwareMaterials

Cons DurablesTech Hard/Equip

EnergyFood Beverage

MediaTelecom

Real EstateFood/Staples RetHealth Care Eqpt

RetailingDiv FinancialsHH Products

SemisAutosBanks

U/W O/W


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Analyst Certification I, Ajay Singh Kapur, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.


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Important Disclosures Investment Rating Distribution: Consumer Products Group (as of 31 Mar 2015) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 30 42.86% Buy 23 76.67% Neutral 22 31.43% Neutral 20 90.91% Sell 18 25.71% Sell 13 72.22% Investment Rating Distribution: Retailing Group (as of 31 Mar 2015) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 101 52.60% Buy 64 63.37% Neutral 37 19.27% Neutral 20 54.05% Sell 54 28.13% Sell 23 42.59% Investment Rating Distribution: Global Group (as of 31 Mar 2015) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 1696 50.89% Buy 1258 74.17% Neutral 805 24.15% Neutral 586 72.80% Sell 832 24.96% Sell 539 64.78% * Companies that were investment banking clients of BofA Merrill Lynch or one of its affiliates within the past 12 months. For purposes of this distribution, a stock rated Underperform is included as a Sell.

FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation). Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*

Buy ≥ 10% ≤ 70% Neutral ≥ 0% ≤ 30%

Underperform N/A ≥ 20% * Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.

INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent BofA Merrill Lynch Comment referencing the stock.


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