2005 Outlook Sectors and themes - Executive Summary

Equity Research

16 December 2004Global

Investment Strategy

Global equity strategy 2005 Outlook: Sectors and themes The changing of the year need not herald a change to our views. Our main thoughts are:

(1) Major macro themes: (a) Asian currencies should revalue sometime next year (revaluation would be positive for domestic non-Japan Asian stocks; companies such as Millennium & Copthorne, Danone, Standard Chartered, Caterpillar, GE, SKF and Atlas Copco who have Asian based revenue or competitors, but is negative for companies that source from Asia such as non-food retailers, Nokia and PC’s). In particular, this leads us to still be positive on the non-Japan Asian consumer; (b) Corporate FCF remains extremely high. Plays on this are late-cycle corporate spending (see below), and the investment banks as M&A recovers and (c) the US consumer should remain the slowest component of US growth (which is negative for US consumer cyclicals).

(2) Major micro themes: (a) focus on ‘quality’ (which currently trades abnormally cheaply and tends to only underperform as credit spreads narrow sharply). Companies that have top quintile CFROI® (against their global peer group), above average asset turns and revenue growth (five-years historical and two-years forward) and also trade on a valuation discount to their peer group include: Autoliv, Sanofi, WPP,Centex, Paccar, Best Buy, Colgate, Mediatek, Sage, Hon Hai and Atlas Copco. (b) Focus on companies with high FCF and low cash earnings volatility. The very low level of corporate bond yields effectively re-rates these plays. Such stocks include: Lennar, Reebok, BAT, Inbev, Anthem, Smithfield Food, Hunter Douglas, Itacementi, Travis Perkins. (c) Financial self-help (see page 3).

(3) Conventional investment styles: We prefer large over small-caps in the US. We prefer Growth over Value: Growth becomes scare, equity risk premiums should fall and P/E relatives are extreme.

(4) Our main sector changes: We increase our exposure to the GEM consumer by raising weightings in luxury goods (to overweight) and adding money to European food producers (where our preferred stocks are Nestle and Danone). We modestly add to our overweight of investment banks (in the anticipation of more M&A) but reduce our US consumer banking exposure further. We also add to our overweight in US medtech, continuing to prefer this space to big cap pharma.

(5) Our main sector overweights: (a) Late-cycle corporate spend (long-cycle capital goods, European advertising plus US content plays, applications software and again cement); (b) Deep-value cyclicals (European newsprint, US containerboard and cement); (c) Oil Field Services & E&P (we are neutral of the integrateds but closer to raising weightings than cutting), (d) Financials in under-leveraged regions (France, Spain, Italy, GEM, especially non-Japan Asia). Non-mortgage banks in the UK and investment banks and (e) select defensives that either offer deep-value (wireless telecoms or their PTT proxies, high FCF yielding pharmaceutical stocks, tobacco) or those that offer ‘growth at a reasonable price’ (spirits and medtech). We are 4% underweight cyclicals.

(6) Our main sector underweights: (a) US and UK consumer banks; (b) US and UK consumer cyclicals; (c) metals and mining (though tactically we would less negative on steel);(d) US utilities and (e) semis & PCs. We add NGT, BP, Inbev, Keppel, LVMH and Schlumberger to our focus list.

ANALYST CERTIFICATIONS ARE IN THE DISCLOSURE APPENDIX. FOR OTHER IMPORTANT DISCLOSURES, visit www.csfb.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: CSFB does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

research team

Andrew Garthwaite 44 20 7883 6477 [email protected]

Jonathan Morton 44 20 7883 8273 [email protected]

Richard Woolhouse 44 20 7883 6481 [email protected]

Jonathan White 44 20 7883 6484 [email protected]

Marina Pronina 44 20 7883 6476 [email protected]

Global equity strategy 16 December 2004

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Executive Summary There is a temptation to believe that just because the calendar changes, so too should portfolio recommendations. We don’t buy into this thinking. In our view, the only advantage of the bringing of a new year is that it allows investors perspective and a longer-term time horizon (after all there are 12 months to go until the end of 2005).

Below, we highlight five-key issues for 2005: (1) the likely major macro themes; (2) our micro themes; (3) investment styles, (4) our key sector overweights and (5) our key sector underweights. Finally we note what we think are the major risks for 2005.

Macro themes

(1) Non-Japan Asian currency revaluation, especially against the Euro

The non-Japan Asian currencies are the most undervalued globally (the aggregate current account surplus is 5% of GDP and aggregate net FDI is 2.3% of GDP, interest rates in some parts can hardly fall lower – they are already negative in real terms in six out of nine countries and China is under more political pressure to revalue with its purchases of US Treasuries falling by three-quarters the year-to-date). The potential winners from this are: domestic Asia (property, banks, utilities and telecoms); those European/US names that compete against the Asians (SKF, ABB, Electrolux, Caterpillar, GE, EPCOS, STM, DRAMs and autos) or who have high revenue exposure to Asia (Alfa Laval, LVMH, Danone, Millennium & Copthorne). The potential losers are those companies that source from Asia (for example, Teradyne, Amkor Technology, Kulicke & Soffa, Nokia, US PCs, the US non-food retailers, H&M, Puma and Adidas, (the latter for example, sources 67% of its sales from emerging Asia).

(2) Corporate FCF is at record levels. Hence we continue to overweight late-cycle corporate

spend

The return on capital is close to an all time high relative to the cost of capital and net-investment shares of GDP are still close to all time lows. We overweight the following late cycle corporate spend areas to exploit this: long-cycle capital goods (Atlas Copco, GE, ABB, Schneider, Tomkins), advertising/media content (WPP, Disney), applications software (SAP) and cement (Lafarge).

(3) The US consumer is likely to remain the slowest component of US growth

The weak dollar is telling investors that it is no longer acceptable to allow the US savings rate (which now stands at just 0.2%) to continue to fall. All told, there are plenty of other reasons why we underweight US retailing and US autos (see page 10).


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Micro themes

(1) Focus on high and stable FCF yielding companies

The fall in BBB rated corporate bond yields over the last year re-rates those companies that have stable FCF yields (CSFB’s 7-10 year BBB-rated US$ corporate bond index is now yielding 5.1% whilst the similarly rated € index is yielding 4.1%). We believe that the global macro and microeconomic environments (slowing growth and increasing competition/de-regulation respectively) will also favour these sorts of companies. We thus screen for companies that have a high FCF yield, low cash margin volatility and which also have an implied growth rate less than delivered: Lennar, Anthem, Sherwin-Williams, Reebok, Ingersoll-Rand, BAT, Inbev, Mohawk, CAT, Hunter Douglas, Travis Perkins, Glaxo, Erg and MAN (and apart from Glaxo and BAT, all have positive earnings momentum on consensus estimates).

A more extreme version of this screen is to look for companies that have a dividend yield above their corporate credit yield. Theoretically, such companies can issue debt to take themselves private. Thus we screen for companies where the 2005E dividend yield is above their corporate bond yield, dividend cover is above one times and their FCF yield is also above their 2005E dividend yield. We also avoid highly leveraged companies (as they cannot significantly re-leverage much further). This screen highlights: Valeo, PT, UPM, BAT, ENI, Scottish Power, Altria, Rank, Stora Enso, Bristol-Myers.

(2) ‘Quality’

The fall in corporate credit spreads has left ‘quality’ stocks trading at abnormally cheap levels (we find that 78% of the time credit spreads narrow sharply, ‘quality’ stocks underperform as, perhaps not surprisingly, poor quality companies tend to have higher financial leverage). We define ‘quality’ stocks as those with superior CFROI®, asset turns and revenue growth against their sector peer group. Quality outperformed between March and September when credit spreads stabilised but has underperformed as credit spreads fell again. Our index of quality stocks is trading at a 7% 12-month forward P/E valuation discount to inferior quality stocks (against a long-run average of a 11% premium). We screen for quality companies (with top quintile CFROI against their peer group) that trade at a discount to their global peer group. This would highlight: Lennar, Autoliv, Ingersoll-Rand, Best Buy, Total, Colgate, Parker-Hannifin, PPG Industrial , SEC, Hon Hai, WPP, Sanofi and Atlas Copco.

(3) Focus on financial self-helpers

We focus on those companies that have high FCF yields, have historically paid little to shareholders (i.e., have a sub-30% payout ratio) but have instead engaged in value-destroying acquisitions (resulting in their transactional CFROI® being at least 10% less than their actual CFROI®) and as a result, they trade attractively against their peer group. Among the stock highlighted on this screen are: Gannett, WPP, Travis Perkins, and Northrop Grumman.


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Conventional investment styles

(1) Large over small-cap, especially in the US

We prefer large-cap stocks to small-cap stocks. Large-caps have the advantage of (i) better valuations (the S&P 500 is trading on a 21% trailing P/E discount to the S&P 600 versus a normal discount since 1999 of 11% and the yield relative is close to a 6 year extreme), the stage of the economic cycle (slowing lead indicators), the high chance in our opinion of wider credit spreads (widening spreads tend to negatively hit small caps relatively more since they tend to have lower credit ratings) and a weak dollar (which favours international companies who tend to be larger cap). In Europe we also focus on big cap for similar reasons (we believe the euro trade-weighted exchange rate index may actually depreciate over 2005). Only in Japan and non-Japan Asia would we be more neutral (owing to potential currency strength. Also, small cap doesn’t have the legacy issues, can exploit new growth opportunities and tends to be more domestic and thus should outperform if the Yen strengths).

(2) Growth over value

Almost all of the indicators we look at favour growth: the yield curve (flattening), lead indicators (rolling over) and credit spreads (which should now stop falling – sharply narrowing spreads in the past have positively re-rated value which tends to be more leveraged). The only potential hiccup is the likely rise in bond yields (as growth is longer duration than value) but on our models much of the negative impact of the rise in bond yields can be offset by the fall in the equity risk premium. Growth, having underperformed value by 26% over the last four-years is at a nine-year price relative low and trades on P/B terms at a 19% discount to its historical average level relative to value (12% ex-tech bubble) on our analysis. On P/E and yield relatives valuations of growth versus value are at extremes.

Conceptually, we find the following areas as growth: luxury goods, niche long-cycle capital goods, medtech, TFT-LCD, platinum, Asian hotels, cruising, spirits, advertising in Europe & Japan, OFS, applications software, air freight, biotech, education services and content production for media.

(3) Be careful of high dividend yield

Tactically, we find that when bond yields have risen since 1998, high yield (as defined by top quintile) underperforms (with a correlation coefficient of 0.61 with the 10 year bond yield).


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Cyclicals versus Defensives From a top-down perspective, one of the greatest surprises to us has been that since mid-May this year, cyclicals have outperformed defensives by 8% in the US and 4% globally despite the roll-over in lead indicators, the fall in bond yields and the flattening yield curve (which normally would be consistent with 4% underperformance globally).

Indeed, the decoupling from fair-value on our cyclical model is one of the largest on record.

We believe that only part of this breakdown can be explained by one-off hits to defensives (principally to pharmaceuticals and food producers) as well as the under-recording of Chinese growth – both of which benefit cyclicals.

From here, most of the macro factors are less favourable for cyclicals (a flatter US yield curve, decelerating lead indicators as well as higher oil prices). The relative earnings momentum of cyclicals is now rolling over and has quite a way to fall on our models. Valuations, in aggregate, are particularly unappealing with the EV/Sales of global cyclicals now within 6% of its all time high (the implied growth rate of cyclicals is 1.1% above defensives – which again, is close to an all time high).

However, we would stress, as in 2004, that it is the detail that really matters.

Understanding the secular issues in the defensive areas of the market (which keeps us only 4% underweight of cyclicals overall) and differentiating between early-cycle (US consumer related) and late-cycle (long-cycle corporate spend cyclicals) areas of the market is critical.

The major changes are to increase sector weightings in the areas exposed to the GEM consumer and thus take food producers (principally in Europe) and luxury goods to overweight.

We marginally add to the over-weightings in paper, healthcare equipment and investment banks at the expense of US regional banks

Luxury goods

This sector is a three-way play on Asian currency revaluation – translational, transactional (since some of the manufacturing base is in Europe) and it boosts Asian consumer spending power for foreign goods both at home and when abroad. The Asian consumer is also very under-leveraged (look at the region’s current account surpluses) and is likely to see explosive growth in its middle classes which should see a boom for budget branded luxury products. LVMH derives 29% of its sales from Asia (13% directly from non-Japan Asia). Luxury goods to us are one of the ‘clear as blue-sky’ plays on China. The brand life of luxury products is over double to triple that of food producers yet their A&P costs (as a proportion of sales) are estimated to be a half to a third lower. This suggests that the brand value is more permanent. The 2005E FCF yields of LVMH and Swatch are above those of the US market (at 5% and 4.9% respectively versus 4.5% for the US market), and P/E relatives are mid-range.


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Emerging market consumer staples

We favour those developed market consumer staples companies that have high GEM exposure and offer a high FCF yield. This leads us towards Inbev (which has a 8.4% 2005 FCF yield according to our analyst, +5% organic volume growth and 45% of revenue from GEM), BAT (9.0% 2005E FCF yield and 43% sales revenue from GEM) and the European food producers (Nestle and Danone derive 27% and 30% of their respective revenues from GEM and have FCF yields of 5.6% (7.4% ex Alcon and L’Oreal) and 6.3% respectively. We find that for the first time since April 2003, food producers now have output price inflation above input price inflation and have seen the best improvement in margin pressure of any sector over the last three-months on our margin monitor which looks at input/output prices for all sectors.

Our main sector overweights

(a) Deep value cyclicals

We highlight paper. This sector ranks second on our capital discipline monitor, is attractively valued (on HOLT the sector is 24% cheap relative to the market even if CFROI® reverts back to their long-run average after five-years), has very conservative margin expectations, is late-cycle (with 60% of European advertising being paper based) and is showing some signs of pricing improvement. We favour newsprint in Europe and containerboard in the US. Our preferred stocks on our screens are: M-real, Stora-Enso, Carter Holt, Sappi and SSCC.

Elsewhere, we continue to focus on select areas of building materials (cement and some of the international plays on housing, Wolseley).

We are getting close to the stage when autos become a deep-value area.

(b) Late-cycle corporate spend

We highlighted the macro case earlier, namely FCF yields are at record levels and they have to go somewhere (see Macro theme 2 above). Specifically, we play this through the following areas:

(i) Long-cycle capital goods – Logically, we believe that corporations should be investing given the near record return on capital relative to the cost of capital and the still high cost of labour relative to the cost of capital; capital spending upswings in the past have lasted between five and seven-years (Navistar recently commented that the cycle was as long as 10-years); year on year long-cycle capital spending growth only turned meaningfully positive this summer; the pricing power of capital goods is the best of any cyclical sector (output prices are rising 1.1% above input prices on our monitor); forward earnings momentum is excellent and consensus revenue estimates for 2005 at 4.0% in 2005 look conservative to us.

The thorny issue is valuations. The EV/Sales relative of the US sector is nearly two standard deviations above its pre-bubble average but that in Europe is 0.9 standard deviations below its average. Revaluation of the Asian currencies potentially helps many European and US names. Our preferred plays focus on end-markets such as: non-residential construction, power generation, transmission, metals and mining and hence: Atlas Copco, Schneider, ABB, Tomkins, American Standard and GE. On our HOLT and


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implied growth rate screens, Ingersoll-Rand, SKF, Deere, Caterpillar and Parker Hannifin still look cheap and have positive earnings momentum.

Overall, we are only 5% overweight of capital goods because of US valuations (3M in particular) and we avoid many of the short-cycle areas.

(ii) Advertising in Europe – The advertising shares of GDP in the US and Europe are 6.2% and 3.6% below their respective trend (assuming conservative trend growth ex direct mail of 5.7% and 4.7% respectively). Advertising historically has been late-cycle (going above trend only at the end of the 1980’s and 1990’s). The advertising share of GDP and costs per unit in Europe are 41% and 65% below those of the US respectively. The food companies have reminded us that advertising is non-discretionary.

The valuation of media overall is now interesting (on EV/Sales relative to the market, it is now the cheapest of all sectors on our monitor and the overall implied growth rate is close to a 10-year low).

Our preferred plays are the Spanish broadcasters (Telecinco and Antenna) and the agencies (which are the least fragmented business model – we would highlight WPP). Globally, we focus on the cheap content plays (as opposed to the distribution plays) – this highlights Disney.

(iii) Applications software – Valuations are reasonable (on HOLT and EV/sales), software capex versus hardware capex has never been this far below trend at 21% (and with replacement cycles slowing down in PC’s and mobiles, a greater proportion of IT spending is likely to go into software). In the technology space, it is the intellectual property rights than one wants to buy. We recommend SAP and Sage.

Other late-cycle plays (that fit in with other themes) are Asian hotels, paper and cement (where 30% of US demand is from non-residential construction).

(c) Select financials (mainly concentrating on those in under-leveraged countries)

Much more of the world is over-leveraged than under-leveraged (in market cap terms). However, there are still two areas that interest us: non-Japan Asian and parts of Continental Europe.

(i) Non-Japan Asia – Highly undervalued currencies have resulted in real rates across most of non-Japan Asia now being negative (this is the case in six out of nine countries). This pushes investors into physical assets. Both private sector credit-to-GDP (outside of Korea) and loan-to-deposit ratios are at decadal lows. Affordability is attractive (excluding Korea, rental yields are above mortgage rates in all the countries with major property markets). This creates a still very positive backdrop for property stocks. More interestingly, banks still do not look expensive to us (their price-to-book ratio relatives to US banks is still 35% below its 15-year average) and loan growth estimates and provisioning assumptions both look too pessimistic. We would highlight Malayan Banking, Bank Mandiri, Krung Thai Bank, Cathay Financial Holdings, Shinhan Financial Group, Standard Chartered, Keppel Land, Kerry Properties, Henderson Land and New World Development

(ii) Under-leveraged parts of Continental Europe (France, Italy, Spain and Belgium) – In general, the P/E relative to the market of European banks is mid-range (compared to the US where the Banks P/E relative is close to all time highs); bank lending growth is


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currently running at 6.8% and accelerating (and above the consensus revenue growth estimate of 3.6%); relative earnings momentum is turning upwards; the macro environment is favourable (a strong Euro, an upward sloping yield curve and accelerating credit growth relative to nominal GDP growth) and finally there is still a strong self-help story (front and back-office and revenue synergies).

We favour France (favourable top-line growth; consolidation prospects) and note all the French banks have deep-value (on a price-to-book and implied growth rate basis) with a high cost/income ratio (implying self-help potential). French banks also have one of the lowest deposit-to-loan ratios in Europe. We favour Credit Agricole.

The structural story, for Italian banks is still positive (falling credit spreads imply a sharp fall in corporate default rates, Italy also has the lowest leverage ratio by far of any G15 country, Italian banks trade on a 19% price-to book discount to European banks against a long run average discount of 13%). The problem is that Italian banks typically do worse when short rate expectations fall and the Euro strengthens (as 70% of Italian corporate lending is to SMEs whose credit quality then deteriorates). We would recommend Verona.

We would still overweight the Spanish banks (real rates are –1.5%) and Latin America appears under-leveraged. Our preferred play here would be BBVA.

(iii) Non-mortgage banks in the UK – RBOS and Barclays would benefit from our theme of both falling UK rates in 2005 and a soft landing in the economy. Both look very cheap to us on sum of the parts basis (RBOS trading under seven times 2005E once its US operations are on a peer group multiple and a similar result for Barclays).

(iv) Select capital markets plays – We would overweight the Swiss private banks (on 13 times 2005E compared to asset managers on 16 to18 times) and investment banks ahead of a potential pick-up in M&A (which in our view is likely to follow the collapse we have seen in BBB rated corporate bond yields). M&A activity is running even now at just 57% and 60% of normal levels in the US and Europe. Vontobel, Goldman Sachs and UBS would be our preferred plays on this. We prefer these plays to life companies.

(d) Select Defensives

The big problem to us, and we stated as much at the beginning of 2004, is that in many ways, the secular problems being faced by many defensives have been greater than the cyclical problem in cyclicals. We continue to believe that a decent defensive story will be secularly re-rated. Our preferred plays are spirits, the GEM exposed consumer staples, wireless telecoms, MedTech and those pharmaceuticals stocks that have high FCF yields.

(i) Spirits – The spirits industry is experiencing its best top-line growth since the 1960’s. It is a play on the aspiring middle class of the emerging markets and the 21 to 29 year age cohort in developed markets, as well as low-carbohydrate diets. On our margin proxy/pricing power monitor spirits ranks as one of the best sectors. Product lives are also very long (72 years for an average brand). Our preferred plays are: Diageo (the stock trades on a 2005e 7.0% FCF yield ex General Mills and has a 25% market share of premium spirits) and Pernod Ricard (5.9% 2005e FCF yield and play on Asia – its Asian based sales experienced 17% organic sales growth in the first three-quarters of this year).


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(ii) The developed market consumer staples plays – Nestle, Danone and P&G. See page 6.

(iii) Telecoms – We find that since late summer, earnings momentum turned positive for the first time in nearly 18 months in the UK and the US. On top of this, we find that: valuations for the European sector against utilities are close to all time lows, the exceptionally high FCF yields are now finding their way through to the shareholder (dividends plus share buybacks in Europe equivalent to 5.5% of market cap for wireline and 3.6% for wireless) and finally, self-help is returning in the form of cost-cutting and consolidation (for example, in US wireless).

We do admit that there are still some huge secular question marks over this sector (VoIP for wireless and wireline, what is mid-cycle capex?, a still high CFROI® for wireless attracting the attention of both regulators and competitors and, finally, 3G adding more to capacity than demand), but in the near term, we believe there is a window of opportunity.

Specifically, 3G is being priced in Europe as a premium product; capex growth is slowing (helped by a weaker dollar. Interesting both Vodafone & O2 have targets of capex-to-sales of just 10% - some four percentage points below current levels); and much of the regulatory risk appears already been priced in.

We would focus on European wireless (and their incumbent proxies): Vodafone, O2, FT, Japanese wireless (high capex/sales of 18% could fall significantly) and emerging market wireless (CMHK, FarEastTone, PT Telkom and SK Telecom). We would also overweight US telecoms with wireless exposure (its a four player market and consolidation continues and still has quite low penetration rates (61%). We would steer clear of pure US wireline.

(iv) MedTech – ICD product penetration rates are low; there is little threat from generic products (given length of patents); R&D efficiency (or in other words) continues to improve and there is very high end-market concentration (especially in stents and ICD). The issue had been valuation but on HOLT and implied growth (6.6%), the sector still looks reasonable to cheap (P/E relatives on Medtronics are at 10-year lows). We would favour Boston Scientific and also (in a different vein) Fresenius.

(v) High FCF yielding pharmaceutical stocks – We are bears of the drugs industry on a secular basis but those companies which have an above market FCF yield also potentially have a strong self-help story (cost-cutting and under-leveraged). This would highlight: Glaxo, Takeda and Eisai. On pipeline, we would only favour the attractively valued generics.


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Our main sector underweights

(a) US and UK consumer cyclicals

(i) US consumer cyclicals (See also comments under Macro Theme 3 above.) – This year, and we suspect also in 2005, the US consumer should be the slowest component of US growth (a complete contrast to the period between 2000 and 2003). Consumption growth needs to decelerate modestly to be in line with real wage and employment growth. The US retail sector has performed much better than we would have expected given the slowdown over the summer in retail sales relative to industrial production. Thus, we would expect some element of ‘catch-up’. Retailing normally underperforms if the oil price rises, the dollar weakens or bond yields rise (all of which are likely next year in our view). The sector is relatively capital ill-disciplined and consensus margin expectations remain high. Conventional valuations (P/E and EV/Sales relatives) are middling (though on HOLT, the sector is priced more demandingly). We would be nervous of expensive discounters and the home furnishing plays.

(ii) UK consumer cyclicals – The UK retail sector has relatively little capital discipline and this combined with sharply slowing retail sales growth, suggests to us that pricing power (which is already negative) deteriorates further. Valuations are middling and a weaker sterling/Asian currency revaluation is potentially problematic. As in the US, this sector performed much better than our models suggested. Of the retailers we would only consider the very high FCF yielding plays (WHSmiths), the non-UK plays (Kesa) and growth (Tesco).

(b) US and UK consumer related banks

(i) US banks – The US sector suffers from: (a) a flattening yield curve and rising bond yields (they normally underperform 90% and 70% of the time when these events happen); (b) they are now more sensitive to the yield curve (with 31% of earnings based assets parked in mortgage backed securities compared to 10% in 1988) at a time when net interest margins are continuing to fall to new lows; (c) consumer lending intentions are close to three-year lows (consumer and real estate loans account for 65% of overall lending) while large-cap corporate lending has been dis-intermediated and (d) valuations are unattractive in our view (the forward P/E relative of the US banks sector is still close to its all time highs). If anything, our bias is more corporate (BoA) or investment banks. We take a little more money out of US banks.

(ii) UK mortgage banks – Australian banks decoupled from forward interest rate expectations once Australian rates peak. The same is likely to be true in the UK in our opinion. As in Australia, the flat yield curve and fully consolidated state of the banking system suggests a high risk of excess capital generation being re-invested into the banking system leading to a loan price war. Gross mortgage lending could easily fall 20% in 2005 in our view and this drives non-interest income which accounts for 45% of total profits. Valuations are mid-range on both a forward P/E and price-to-book relative basis against European banks. We would only favour the non-mortgage banks: Barclays and RBOS – both of which look attractive on our sum-of-the-parts valuations.


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(c) Metals and mining

Sales or asset valuations appear stretched now (for example, the EV/Sales ratio is close to its all time high relative to the market) 12-month forward earnings estimates look about 18% too high given where industrial metal prices are. This sector has ignored the slowdown in global growth owing to China but in 2005 we think Chinese investment growth will slow more meaningfully (from 26% year on year at present to sub-20%) and construction activity should slow (already land area purchased for development is down around 6% year on year) and the construction sector accounts for up to a third of China’s copper demand. There is an aggressive supply side response especially in iron ore which should get to the market given the increase in dry freight capacity (which we expect to grow 5% per annum in both 2005 and 2006). Fundamentally, we find ourselves most nervous of steel (the industry is caught between cartelised suppliers – iron ore and coking coal – and relatively concentrated buyers, namely the automakers, Chinese imports are already down 35% year on year and China is set to become a net-exporter) but some steel stocks are on very low multiples so the sell-off may be more Q2 than Q1. Our favoured commodities are copper and oil as well as the precious metals (platinum and gold), though in Q1 a dollar bear market rally would lead to some pullback in these areas.

(d) Semis / PC’s

(i) Semis – Up to October, semis had been our biggest underweight sector but we lifted our weightings when the price-to-book relative got close to its previous pre-bubble lows. We are negative but less so than we were. Our concerns are : (i) the sector looks expensive on P/E and EV/Sales relatives (semis 12-month forward P/E trades on 45% premium to the market whereas pre-bubble the sector traded on small discount), the sector does trade on a price-to-book discount to its historical average but this is primarily due to a 50% fall in asset turns since 1995; (ii) we expect earnings to fall further (consensus 2005 net-income margins estimates at over 15% look far too high – historically, margins have been over 15% for two consecutive years; and (iii) semi IC units are still 5% above trend (the major end-markets of PCs, US Autos and handsets are now practically flat). The move to 300mm increases semi capacity by some 20% and thus lowers unit demand, and finally, we believe that a secular de-rating (after all this sector has had just 4% revenue growth since 1995 with falling asset turns largely on account of rising Asian competition).

However, there are a number of positives that we have to acknowledge, namely that: relative earnings momentum is already close to its previous trough levels; this sector normally begins to outperform two-months ahead of a trough in lead indicators and this cycle has been much better managed (the industry’s capex-to-sales ratio peaked below its average of the previous cycle, inventory management has been better and there has been more outsourcing with the move to fabless companies). We would focus on the non-Japan Asian names (which have way under-performed their global peer group) and the TFT-LCD plays in particular which are now operating below their cash cost of production in some areas (this normally precludes enforced capital discipline and pricing). Recall that Hon Hai & Meditek rank on our best business models screen.

(ii) PCs – Our simple top-down replacement-demand driven PC unit growth model suggests near zero unit growth in 2005 versus a consensus estimate of 8% (if there is a


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five-year replacement cycle, then on our model, the consensus estimate is broadly right). The industry is subject to intensifying competition. In the true PC space, we would focus only on Acer. Dell is a play on tech as it expands into an addressable market of US$800bn (its current share of this market is 7%). Asian currency revaluation could be problematic for this area.

(e) US utilities

We find that the CFROI® of the US sector is close to an all time high (and is 20% above its average), 84% of the time bond yields rise, the sector underperforms and dividend yield relatives are close to historic lows.

What about pharmaceuticals?

We are benchmark pharmaceuticals. The positives initially seem quite compelling: In the US, the 2005E P/E relative is now back to its 1993 all time low (at a 11% discount to the US market) and there is a very strong self-help story (the sector is under-consolidated, grossly under-leveraged – a transition to optimal levels of leverage could boost earnings by 15% – and marketing arms are much larger than R&D divisions suggesting there is significant fat to cut). Added to all this, the sector looks oversold (its price relative is 2.3 standard deviations below its six-month moving average, which is more than any other sector) and relative earnings momentum is starting to stabilise (on our scorecard).

However, our worry still remains that in aggregate, this industry is not cheap (the 2005E FCF yield in the US is 5.6%) in an environment where the industry has undergone secular change. Why should the price of US drugs be 35% higher than global drug prices (72% for the top 15), at a time when the US government, via Medicare, becomes a bigger buyer of drugs. PBM rebates are accelerating. With drugs now 11% of healthcare costs in the US and a record fiscal deficit pricing pressure is all one-way – down. We see this on our pricing monitor. The US accounts for 80% of global profits. Up to 2007, according to our new US pharmaceuticals analyst, Catherine Arnold, patent losses will erode 3-6% of industry revenues – in line with the pipeline. Very high margins and ROE make this sector an easy political victim especially as marketing has overtaken R&D.

In our opinion, the time to buy this sector is when we get M&A. Thus we stick to names with high FCF (and thus have a potential self-help, not a ‘hope’ strategy). This would highlight: Glaxo, Takeda and Eisai. We would note that P/E and price relative of Europe against the US are both close to all time highs (although 60% of profits come from the US).

What could go wrong with our strategy?

The biggest risk to us remains in the capacity constrained resource industries, especially oil!


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Global sector recommendations

Figure 1: Global sectors: Recommended over/underweight versus benchmark (%) Benchmark

weight Recommended

weight % Over/underweight

'vs' benchmark Change Most preferred area Least preferred area

Pulp & paper 0.7 1.1 60 +20 Newsprint in Europe, coated paper US newsprint

Beverages 1.7 2.1 25 -10 Spirits, GEM exposed brewers Soft drinks & emerged market brewers

Construction Materials 0.5 0.6 20 Cement, building distributors Glass

Health Care Equip 2.7 3.3 20 +5 ICDs

Software 3.8 4.5 20 Applications, security

Telecoms 5.4 6.2 15 Wireless in Europe (or their PTT proxies) and Emerging Markets.

Legacy Wireline

Media 3.4 3.9 14 -6 Agencies, European advertising US distribution and cable

Diversified Financials 6.0 6.6 10 +5 Investment banks-M&A focused US bond sensitive plays

Consumer Durables 2.1 2.3 10 +20 Luxury goods

Tobacco 1.0 1.1 10 High GEM exposure (BAT)

Insurance 4.4 4.9 10

Energy 8.2 8.6 6 +1 OFS and E&P Low volume integrated oil

Capital Goods 7.4 7.8 5 Long cycle, trucks Short cycle, US consumer good related

Food Products 2.0 2.1 5 +5 Those with high GEM exposure (Nestle and Danone)

Pharmaceuticals 7.2 7.2 0 -3 Drugs companies with high FCF, generics

Companies heavily dependent on pipeline

Autos & Auto Comps 2.1 2.1 0 Non-US plays, niche plays (safety) US autos

Transportation 1.9 1.9 0 Air freight Budget airlines

Commercial Services 1.0 1.0 0 European employment agencies

Household Products 1.5 1.5 0

Chemicals 2.2 2.2 0 Chorine and industrial gas Speciality and ethylene

Hotels Rests & Leisure 1.3 1.3 0 Asia and US

Utilities 3.9 3.8 -3 European generators

Real Estate 1.6 1.4 -10 10 Asia

Food & Staples Retail 2.3 2.1 -10 15 Tesco

Banks 12.2 10.3 -15 -7 Non-Japan Asia, Europe US, UK consumer banks

Technology Hardware 5.8 4.6 -20 Telecom equipment PC, handsets

Metals & Mining 2.3 1.9 -20 Iron ore Steel, aluminum

Semi & Semi-Cap Equip 2.4 1.8 -25 Cheap Asian plays

Retailing 3.0 1.8 -40 US and UK retailing Japanese and European

100 100

Source: MSCI, CSFB estimates

Figure 2: Sector summary: Recommended over/underweight versus benchmark (%) Benchmark

weight (%) Recommended

weight (%) Over / underweight 'versus' benchmark

Cyclicals (inc Technology) 39.9 38.4 -3.6

Cyclicals (ex Technology) 28.0 27.6 -1.5

Energy 8.2 8.6 6.0

Defensives 22.4 23.3 4.1

growth defensives 11.7 12.6 8.4

ex-growth defensives 10.7 10.7 -0.5

Financials 24.1 23.2 -3.9

Technology 11.9 10.9 -8.4

Telecoms 5.4 6.2 15.0

Source: MSCI, CSFB estimates


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Global Top-30 stock list Inclusions— NGT, BP, Keppel Land, Inbev, LVMH and Schlumberger.

Deletions—Centrica, Total, Chinatrust, Generali, Pernod-Ricard and Haliburton.

Figure 3: Global Top-30 Stock Ticker CSFB rating Price

(l.c.) Market cap

(US$ bn)

Alfa Laval ALFA.ST Outperform 109.0 1.8

Bca.Ppo.Di Verona Novara BPVN.MI Outperform 14.1 7.0

Bhp Billiton BLT.L Outperform 576.0 27.3

BP BP.L Outperform 508.5 210.6

Carnival CCL Outperform 55.4 34.9

Caterpillar CAT Outperform 93.7 32.0

Chevrontexaco CVX Outperform 53.1 113.1

Credit Agricole CAGR.PA Outperform 22.8 44.7

Dbs Group DBSM.SI Outperform 15.8 14.3

Diageo DGE.L Outperform 746.0 43.3

France Telecom FTE.PA Outperform 24.7 80.9

Glaxosmithkline GSK.L Outperform 1171.0 132.2

Ictl.Htls.Gp. IHG.L Outperform 661.5 7.9

Inbev INTB.BR Outperform 27.6 21.1

Keppel Land KLAN.SI Outperform 2.0 0.9

LVMH LVMH.PA Outperform 54.6 35.5

National Grid Transco NGT.L Outperform 475.8 28.3

Nestle NESN.VX Neutral 299.3 104.5

Northrop Grumman NOC Outperform 57.0 20.2

Ryl.Bk.Of Sctl. RBS.L Outperform 1696.0 102.5

Samsung Electronics 05930.KS Outperform 412500.0 57.4

Sap SAPG.F Outperform 135.2 56.6

Schlumberger SLB Outperform 65.1 38.3

Scot. & Southern Energy SSE.L Outperform 830.5 13.7

Societe Generale SOGN.PA Neutral 75.2 44.4

Stora Enso R STERV.HE Outperform 11.5 10.1

Toppan Printing 7911 Restricted 1073.0 7.1

Volkswagen VOWG.F Outperform 33.7 14.3

West Japan Railway 9021 Outperform 414000.0 7.8

Wpp Group WPP.L Neutral 563.5 12.7

Source: Datastream, CSFB estimates

Companies Mentioned (Price as of 14 Dec 04) ABB (ABBN.VX, SFr6.45, OUTPERFORM [V], TP SFr7.70, MARKET WEIGHT) Analyst -Julian Mitchell Acer Inc. (2353.TW, NT$52.50, OUTPERFORM, TP NT$55.00) Analyst -Kevin Y Chang Adidas-Salomon (ADSG.F, Eu120.80, OUTPERFORM, TP Eu144.05, OVERWEIGHT) Alcon Inc (ACL, $78.49, OUTPERFORM, TP $84.00, OVERWEIGHT) Analyst -Kenneth Kulju Alfa Laval (ALFA.ST, SKr109.00, OUTPERFORM, TP SKr120.00, MARKET WEIGHT) Analyst -Patrick Marshall Altria Group, Inc. (MO, $60.77, OUTPERFORM, TP $67.00, MARKET WEIGHT) Analyst -Andrew Conway


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American Standard Company, Inc. (ASD, $41.57, OUTPERFORM, TP $42.00, OVERWEIGHT) Analyst -Nicole Parent Amkor Technology Inc. (AMKR, $6.18, NEUTRAL [V], TP $4.50, UNDERWEIGHT) Analyst -John Pitzer Antena 3 (A3TV.MC, Eu52.70, OUTPERFORM, TP Eu60.00, OVERWEIGHT) Analyst -Nick Bertolotti Atlas Copco (ATCOA.ST, SKr296.50, OUTPERFORM, TP SKr330.00, MARKET WEIGHT) Analyst -Patrick Marshall Autoliv (ALV.N, $47.15, OUTPERFORM, TP $55.00, UNDERWEIGHT) Analyst -Harald Hendrikse B. Pop. Verona e Novara (BPVN.MI, Eu14.14, OUTPERFORM, TP Eu18.50, OVERWEIGHT) Analyst -Tommaso Cascella Bank of America Corp. (BAC, $45.83, OUTPERFORM, TP $53.00, UNDERWEIGHT) Analyst -Christopher Mutascio Barclays (BARC.L, 561.50 p, OUTPERFORM, TP 719.00 p, OVERWEIGHT) Analyst -Michael Lever BBVA (BBVA.MC, Eu12.63, OUTPERFORM, TP Eu12.80, OVERWEIGHT) Analyst -Mariano Colmenar B. Pop. Verona e Novara (BPVN.MI, Eu14.14, OUTPERFORM, TP Eu18.50, OVERWEIGHT) Analyst -Tommaso Cascella Best Buy (BBY, $56.04, OUTPERFORM, TP $68.00, MARKET WEIGHT) Analyst -Jack Murphy BHP Billiton (BLT.L, 576.00 p, OUTPERFORM, TP 525.00 p, MARKET WEIGHT) Analyst -Peter O'Connor Boston Scientific Corp. (BSX, $35.88, OUTPERFORM, TP $53.00, OVERWEIGHT) Analyst -Adam Galeon BP (BP.L, 508.50 p, OUTPERFORM, TP 570.00 p, MARKET WEIGHT) Analyst -Colin Smith Bristol-Myers Squibb (BMY, $24.32, NEUTRAL, TP $22.00, MARKET WEIGHT) Analyst -Catherine Arnold British American Tobacco (BATS.L, 890.00 p, OUTPERFORM, TP 895.00 p, MARKET WEIGHT) Analyst -Pieter Vorster Carnival Corp. (CCL, $55.40, OUTPERFORM, TP $65.00, MARKET WEIGHT) Analyst -Scott Barry Caterpillar Inc. (CAT, $93.70, OUTPERFORM, TP $111.00, OVERWEIGHT) Analyst -John McGinty Cathay Financial Holding (2882.TW, NT$62.00, OUTPERFORM, TP NT$88.00) Analyst -Sherry Lin Centex (CTX, $57.48, OUTPERFORM, TP $55.00, MARKET WEIGHT) Analyst -Ivy Zelman ChevronTexaco Corporation (CVX, $53.08, OUTPERFORM, TP $57.00, MARKET WEIGHT) Analyst -Mark Flannery China Mobile (HK) (0941.HK, HK$26.50, OUTPERFORM, TP HK$28.80) Analyst -Edison Lee Cintas (CTAS, $46.33, NEUTRAL, TP $45.00, MARKET WEIGHT) Analyst -Gregory Cappelli Clariant (CLN.VX, SFr18.30, NEUTRAL [V], TP SFr17.00, UNDERWEIGHT) Analyst -Neil Tyler Colgate-Palmolive (CL, $50.48, OUTPERFORM, TP $53.00, MARKET WEIGHT) Analyst -Lauren R. Lieberman Computer Sciences Corp (CSC, $57.17, NEUTRAL, TP $50.00, MARKET WEIGHT) Analyst -Dris Upitis Credit Agricole SA (CAGR.PA, Eu22.82, OUTPERFORM, TP Eu26.00, OVERWEIGHT) Analyst -Marc Rubinstein Danone (DANO.PA, Eu67.95, NEUTRAL, TP Eu70.00, UNDERWEIGHT) Analyst -Charlie Mills Dassault Systemes (DAST.PA, Eu38.10, NEUTRAL, TP Eu40.00, OVERWEIGHT) Analyst -Matthew Hammond DBS Group (DBSM.SI, S$15.80, OUTPERFORM, TP S$19.00) Analyst -Roger Lum Deere & Co. (DE, $71.65, OUTPERFORM, TP $85.00, OVERWEIGHT) Analyst -John McGinty Dell, Inc. (DELL, $42.33, OUTPERFORM, TP $42.00, MARKET WEIGHT) Analyst -Rob Semple Diageo (DGE.L, 746.00 p, OUTPERFORM, TP 830.00 p, MARKET WEIGHT) Analyst -Michael Bleakley Eisai (4523, ¥3160.00, OUTPERFORM, TP ¥3600.00, MARKET WEIGHT) Analyst -Philip Hall Electrolux (ELUXb.ST, SKr145.50, UNDERPERFORM, TP SKr120.00, MARKET WEIGHT) Analyst -Patrick Marshall Eni (ENI.MI, Eu18.19, OUTPERFORM, TP Eu19.70, MARKET WEIGHT) Analyst -Edward Westlake EPCOS (EPCGn.DE, Eu11.59, UNDERPERFORM [V], TP Eu10.40, UNDERWEIGHT) Analyst -Jean Danjou Far EasTone Telecom (4904.TWO, NT$38.30, OUTPERFORM, TP NT$42.00) Analyst -Jeff Kahng


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France Telecom (FTE.PA, Eu24.68, OUTPERFORM, TP Eu24.00, OVERWEIGHT) Analyst -Justinian Clifford Bowles Gannett Co., Inc. (GCI, $81.28, OUTPERFORM, TP $101.00, OVERWEIGHT) Analyst -William Drewry General Electric (GE, $37.38, OUTPERFORM, TP $41.00, OVERWEIGHT) Analyst -Nicole Parent General Mills (GIS, $48.52, NEUTRAL, TP $47.00, UNDERWEIGHT) Analyst -David Nelson GlaxoSmithKline (GSK.L, 1171.00 p, OUTPERFORM, TP 1310.00 p, MARKET WEIGHT) Analyst -Steve Plag Goldman Sachs Group, Inc. (GS, $109.88, OUTPERFORM, TP $125.00, MARKET WEIGHT) Analyst -Susan Roth HeidelbergCement (HEIG.DE, Eu43.17, NEUTRAL, TP Eu42.00, UNDERWEIGHT) Analyst -Roger Collison Henderson Land Dev (0012.HK, HK$39.40, OUTPERFORM, TP HK$48.00) Analyst -Victor Kwok Hennes & Mauritz (HMb.ST, SKr218.50, UNDERPERFORM, TP SKr160.00, UNDERWEIGHT) Analyst -Tony Shiret Hon Hai Precision (2317.TW, NT$134.00, OUTPERFORM, TP NT$144.60) Analyst -Alison Yip Hunter Douglas (HUDN.AS, Eu37.26, OUTPERFORM, TP Eu43.00, UNDERWEIGHT) Analyst -Andre Moons InterContinental Hotels (IHG.L, 661.50 p, OUTPERFORM, TP 585.00 p, MARKET WEIGHT) Inbev (INTB.BR, Eu27.58, OUTPERFORM, TP Eu31.50, MARKET WEIGHT) Analyst -Michael Bleakley Italcementi (ITAIn.MI, Eu11.70, NEUTRAL, TP Eu12.50, UNDERWEIGHT) Analyst -Luca Franza Keppel Land (KLAN.SI, S$2.00, OUTPERFORM, TP S$2.60) Analyst -Ernest Fong Kerry Properties (0683.HK, HK$16.00, OUTPERFORM, TP HK$17.90) Analyst -Victor Kwok Kesa Electricals (KESA.L, 280.00 p, OUTPERFORM, TP 325.00 p, UNDERWEIGHT) Analyst -Nathan Cockrell Krung Thai Bank (KTB.BK, Bt8.65, OUTPERFORM, TP Bt10.40) Analyst -Sanjay Jain Kulicke & Soffa Industries (KLIC, $8.75, NEUTRAL [V], TP $7.50, UNDERWEIGHT) Analyst -John Pitzer Lafarge (LAFP.PA, Eu69.80, OUTPERFORM, TP Eu83.00, UNDERWEIGHT) Analyst -Roger Collison Lennar (LEN, $50.83, OUTPERFORM, TP $51.00, MARKET WEIGHT) Analyst -Ivy Zelman Liz Claiborne, Inc. (LIZ, $40.30, NEUTRAL, TP $44.00, MARKET WEIGHT) Analyst -Dennis Rosenberg LOreal (OREP.PA, Eu55.75, UNDERPERFORM, TP Eu55.00, UNDERWEIGHT) Analyst -Guillaume Dalibot LVMH (LVMH.PA, Eu54.60, OUTPERFORM, TP Eu68.00, MARKET WEIGHT) Analyst -Neville Pike Malayan Banking (MBBM.KL, RM11.80, OUTPERFORM, TP RM13.00) Analyst -Danny Goh MAN (MANG.F, Eu27.95, OUTPERFORM, TP Eu35.00, MARKET WEIGHT) Manpower (MAN, $49.49, OUTPERFORM, TP $53.00, MARKET WEIGHT) Analyst -Gregory Cappelli MediaTek Inc. (2454.TW, NT$210.00, OUTPERFORM, TP NT$244.00) Analyst -Michael Lin Medtronic (MDT, $48.70, OUTPERFORM, TP $58.00, OVERWEIGHT) Analyst -Adam Galeon Millennium & Copthorne (MLC.L, 375.25 p, OUTPERFORM, TP 400.00 p, MARKET WEIGHT) Analyst -Alistair Scobie mm02 (OOM.L, 120.75 p, NEUTRAL, TP 130.00 p, OVERWEIGHT) Analyst -Justin Funnell Mohawk Industries (MHK, $91.00, OUTPERFORM, TP $93.00, MARKET WEIGHT) Analyst -Dennis Rosenberg M-real (MRLBV.HE, Eu4.60, OUTPERFORM, TP Eu5.85, OVERWEIGHT) Analyst -Lars Kjellberg NGT (NGT.L, 475.75 p, OUTPERFORM, TP 533.00 p, UNDERWEIGHT) Analyst -Dominic Nash Navistar (NAV, $41.02, OUTPERFORM, TP $63.00, OVERWEIGHT) Analyst -John McGinty Nestle (NESN.VX, SFr299.25, NEUTRAL, TP SFr325.00, UNDERWEIGHT) Analyst -Charlie Mills New World Development (0017.HK, HK$8.40, OUTPERFORM [V], TP HK$9.90) Analyst -Victor Kwok Nike Inc. (NKE, $86.53, OUTPERFORM, TP $90.00, MARKET WEIGHT) Analyst -Dennis Rosenberg Nokia (NOK1V.HE, Eu11.69, NEUTRAL, TP Eu12.00, MARKET WEIGHT) Analyst -Kulbinder Garcha Nokia Corporation (NOK, $15.61, NEUTRAL, TP $15.50, MARKET WEIGHT) Analyst -Kulbinder Garcha Northrop Grumman Corporation (NOC, $56.95, OUTPERFORM, TP $59.00, MARKET WEIGHT) Analyst -James Higgins Paccar Inc. (PCAR, $78.29, OUTPERFORM, TP $81.00, OVERWEIGHT) Analyst -John McGinty


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Parker Hannifin Corporation (PH, $75.96, OUTPERFORM, TP $82.00, OVERWEIGHT) Analyst -John McGinty Pernod-Ricard (PERP.PA, Eu113.80, OUTPERFORM, TP Eu116.00, MARKET WEIGHT) Analyst -Michael Bleakley Portugal Telecom (PTCO.IN, Eu9.25, NEUTRAL, TP Eu9.00, OVERWEIGHT) Analyst -Petros Katsoulas POSCO (05490.KS, W186500.00, OUTPERFORM, TP W230000.00) Analyst -Hocheol Kim PPG Industries, Inc. (PPG, $67.16, OUTPERFORM, TP $77.00, OVERWEIGHT) Analyst -William Young Procter & Gamble Co. (PG, $56.49, NEUTRAL, TP $57.00, MARKET WEIGHT) Analyst -Lauren R. Lieberman PT Bank Mandiri (Persero) (BMRI.JK, Rp1775.00, OUTPERFORM, TP Rp2411.00) Analyst -Bill Stacey Puma (PUMG.DE, Eu195.02, OUTPERFORM, TP Eu258.00, OVERWEIGHT) Analyst -Michael Geiger Rank Group (RNK.L, 298.50 p, NEUTRAL, TP 270.00 p, MARKET WEIGHT) Analyst -Tassos Stassopoulos Reebok International (RBK, $40.85, OUTPERFORM, TP $48.00, MARKET WEIGHT) Analyst -Dennis Rosenberg Royal Bank of Scotland (RBS.L, 1696.00 p, OUTPERFORM, TP 2180.00 p, OVERWEIGHT) Analyst -Michael Lever Sage Group (SGE.L, 193.75 p, OUTPERFORM, TP 225.00 p, OVERWEIGHT) Analyst -Matthew Hammond Samsung Electronics (05930.KS, W412500.00, OUTPERFORM, TP W520000.00) Analyst -MS Hwang Sanofi-Aventis (SASY.PA, Eu57.10, OUTPERFORM, TP Eu66.00, MARKET WEIGHT) Analyst -Steve Plag SAP (SAPG.F, Eu135.20, OUTPERFORM, TP Eu150.00, OVERWEIGHT) Analyst -Matthew Hammond Sappi Limited (SPP, $13.68, OUTPERFORM, TP $17.00, OVERWEIGHT) Analyst -Mark Connelly Schlumberger (SLB, $65.08, OUTPERFORM, TP $76.00, OVERWEIGHT) Analyst -Ken Sill Schneider (SCHN.PA, Eu52.15, OUTPERFORM, TP Eu62.00, MARKET WEIGHT) Analyst -Patrick Marshall Scottish & Southern Energy (SSE.L, 830.50 p, OUTPERFORM, TP 840.00 p, UNDERWEIGHT) Analyst -Jason Goddard ScottishPower (SPW.L, 394.50 p, NEUTRAL, TP 393.00 p, UNDERWEIGHT) Analyst -Jason Goddard Sherwin-Williams Company (SHW, $44.25, OUTPERFORM, TP $46.00, MARKET WEIGHT) Analyst -Ivy Zelman Shinhan Financial Group (55550.KS, W20800.00, OUTPERFORM, TP W26000.00) Analyst -SunMok Ha SK Telecom (17670.KS, W187500.00, OUTPERFORM, TP W250000.00) Analyst -Jeff Kahng SKF (SKFb.ST, SKr289.00, OUTPERFORM, TP SKr310.00, MARKET WEIGHT) Analyst -Patrick Marshall Smith (WH) (SMWH.L, 306.75 p, OUTPERFORM, TP 350.00 p, UNDERWEIGHT) Analyst -David Jeary Smithfield Foods (SFD, $29.45, OUTPERFORM, TP $37.00, MARKET WEIGHT) Analyst -David Nelson Smurfit-Stone Container (SSCC, $18.08, OUTPERFORM, TP $23.00, OVERWEIGHT) Analyst -Mark Connelly Societe Generale (SOGN.PA, Eu75.20, NEUTRAL, TP Eu75.00, OVERWEIGHT) Analyst -Marc Rubinstein Standard Chartered Plc (2888.HK, HK$144.00, NEUTRAL, TP HK$143.00) Analyst -Bill Stacey STMicroelectronics (STM.PA, $19.65, NEUTRAL, UNDERWEIGHT) Analyst -Jean Danjou Stora Enso (STERV.HE, Eu11.53, OUTPERFORM, TP Eu14.60, OVERWEIGHT) Analyst -Lars Kjellberg Swatch Group (UHR.VX, SFr163.80, OUTPERFORM, TP SFr185.00, MARKET WEIGHT) Analyst -Neville Pike Takeda Chemical Industries (4502, ¥5170.00, OUTPERFORM, TP ¥6000.00, MARKET WEIGHT) Analyst -Philip Hall Telecinco (TL5.MC, Eu14.79, OUTPERFORM [V], TP Eu17.70, OVERWEIGHT) Analyst -Frederik Kooij Teradyne Inc. (TER, $16.75, NEUTRAL [V], TP $15.00, UNDERWEIGHT) Analyst -John Pitzer


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Tesco (TSCO.L, 310.50 p, OUTPERFORM, TP 325.00 p, MARKET WEIGHT) Analyst -Andrew Kasoulis Tomkins (TOMK.L, 252.50 p, OUTPERFORM, TP 300.00 p, MARKET WEIGHT) Analyst -Patrick Marshall Toppan Printing (7911, ¥1068.00, RESTRICTED) Analyst - Total (TOTF.PA, Eu161.20, OUTPERFORM) Analyst -Colin Smith Travis Perkins (TPK.L, 1582.00 p, NEUTRAL, TP 1450.00 p, UNDERWEIGHT) Analyst -Raymond Tay UBS (UBSN.VX, SFr96.10, OUTPERFORM, TP SFr110.00, OVERWEIGHT) Analyst -Marc Rubinstein UPM-Kymmene (UPM1V.HE, Eu16.48, OUTPERFORM, TP Eu20.30, OVERWEIGHT) Analyst -Lars Kjellberg Valeo (VLOF.PA, Eu29.01, NEUTRAL, TP Eu36.00, UNDERWEIGHT) Analyst -Harald Hendrikse Vodafone Group (VOD.L, 139.50 p, OUTPERFORM, TP 150.00 p, OVERWEIGHT) Analyst -Justin Funnell Volkswagen (VOWG.F, Eu33.70, OUTPERFORM, TP Eu41.00, UNDERWEIGHT) Analyst -Harald Hendrikse Vontobel (VONN.S, SFr26.75, OUTPERFORM, TP SFr30.00, OVERWEIGHT) Analyst -Habib Subjally Walt Disney Company (DIS, $27.66, OUTPERFORM, TP $40.00, OVERWEIGHT) Analyst -William Drewry West Japan Railway (9021, ¥408000.00, OUTPERFORM, TP ¥670000.00, OVERWEIGHT) Analyst -Osuke Itazaki Wolseley (WOS.L, 926.00 p, OUTPERFORM, TP 980.00 p, UNDERWEIGHT) Analyst -Roger Collison WPP (WPP.L, 563.50 p, NEUTRAL, TP 615.00 p, OVERWEIGHT) Analyst -Frederik Kooij Not covered stocks mentioned in this report: Anthem, Ingersoll-Rand, Erg,Carter Holt,SSCC,3M,Fresenius (Our analysis used IBES consensus numbers).


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Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including CSFB's total revenues, a portion of which are generated by CSFB's investment banking activities. Analysts’ stock ratings are defined as follows***: Outperform: The stock’s total return is expected to exceed the industry average* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral: The stock’s total return is expected to be in line with the industry average* (range of ±10%) over the next 12 months. Underperform**: The stock’s total return is expected to underperform the industry average* by 10-15% or more over the next 12 months.

*The industry average refers to the average total return of the analyst's industry coverage universe (except with respect to Asia/Pacific, Latin America and Emerging Markets, where stock ratings are relative to the relevant country index, and CSFB HOLT Small and Mid-Cap Advisor stocks, where stock ratings are relative to the regional CSFB HOLT Small and Mid-Cap Advisor investment universe. **In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that analysts maintain at least 15% of their rated coverage universe as Underperform. This guideline is subject to change depending on several factors, including general market conditions. ***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating definitions.

Restricted: In certain circumstances, CSFB policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of CSFB's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. All CSFB HOLT Small and Mid-Cap Advisor stocks are automatically rated volatile. All IPO stocks are automatically rated volatile within the first 12 months of trading.

Analysts’ coverage universe weightings* are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe** versus the relevant broad market benchmark***: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *CSFB HOLT Small and Mid-Cap Advisor stocks do not have coverage universe weightings. **An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. ***The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. CSFB’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 37% (57% banking clients) Neutral/Hold* 43% (58% banking clients) Underperform/Sell* 18% (45% banking clients) Restricted 2%


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*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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2005 Outlook Sectors and themes - Executive Summary

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2005 Outlook Sectors and themes - Executive Summary