Wim Jan 2012

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The handout that I prepared for my Weekly Investment Meetings (WIM). I did all of this except the advisory parts, which were implementing recommendations that I had made. The US equity part was done over two weeks earlier in the month.

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Wim Jan 2012

  1. 1. Bank of China (Suisse) S.A. Weekly Investment Meeting For 30 Jan 2012 Marshall Gittler Chief Investment Officer marshall.gittler@bocsuisse.ch +41 22 888 8816
  2. 2. Weekly investment meeting for 30 Jan. 2012Agenda 1 Calendar of events for the week 2 Advisory: allocation model review 3 Advisory: theme commodities 4 US equity strategy 5 US equities: recommended stocks 6 RMB Monitor 7 Eurozone crisis monitor 2
  3. 3. Calendar of events for this week Last week: better-than-expected data plus Fed easing improves risk sentimentEconomic indicators surprising on the upside Risk aversion diminishing on all counts 3.0 Global Financial Stress Index 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 GFSI Risk -1.0 Flow Skew 2010 2011 2012Source: Bloomberg Financial L.P. Source: Bloomberg Financial L.P., Bank of America/Merrill Lynch Recent economic indicators have generally surprised on the upside, particularly in the US. Last week’s data included higher-than- expected Q4 GDP (albeit with much of the growth coming from inventories), lower initial jobless claims, better business surveys for January, rising consumer sentiment and a rebound in core capital goods. Even data in the Eurozone has exceeded expectations. The business and consumer surveys for January firmed up, with the flash PMIs reaching a level that suggests no recession. Only the record plunge in bank lending in December was worrisome. With the data improving and the Fed announcing it would hold rates at zero until 2014, risk aversion has fallen across the board. As long as the debt talks with Greece make progress, we think investors could continue to reduce their short positions and thereby boost markets further. 3
  4. 4. Calendar of events for this week This week’s global indicators: Purchasing Managers’ Indices  The main indicators out globally this week are the PMIs: manufacturing on Wednesday, non-manufacturing Friday.Manufacturing PMI and 3m change  Last week’s preliminary PMIs from Europe were a big Expanding at accelerating pace 54 Expanding, but pace of surprise: the composite output index rose 2.1 pts to 50.4, US expansion is slowing which would suggest modest growth and not the recession 53 that many forecasters are assuming. The details were 52 optimistic as well: new orders and the orders-to-inventory balance both improved significantly in manufacturing.Current level 51 Germany  The Chinese economy has been slowing gradually, with China Japan most demand-side indicators dropping during the past 50 several months. The fall in exports is one example. As the UK 49 slowdown in overseas markets and the correction in Eurozone France Contracting, but trend is domestic property markets continues, output is likely to 48 Contracting at an accelerating pace improving slow further for the next several months. -4 -3 -2 -1 0 1 2 3 Change over 3m  In the US by contrast we look for both of the Institute of PMIs: Forecast for January and Previous Supply Management (ISM) indicators to accelerate. Last Manufacturing Services month’s survey pointed to increased activity ahead, with Forecast Previous Forecast Previous the new orders index increasing and the gap between China 49.6 50.3 n.a. 56.0 orders and inventories widening. The regional US 54.5 53.9 53.2 52.6 manufacturing surveys released so far in January also have EU 48.7 48.7 50.5 50.5 Japan n.a. 50.2 -- -- shown improvement. UK 50.0 49.6 53.3 54.0  The stronger PMIs should be bullish for risky assets, in Source: Bloomberg Finance L.P. particular cyclical stocks and commodities. 4
  5. 5. Calendar of events for this week This week’s main US indicator: nonfarm payrolls  The main indicator for the US this week is Friday’s non-farm payrolls figure. While this has always been a key number,Change in NFP vs unemployment rate the market was once again reminded of its importance last400K % 4 week when the Fed pledged to keep rates low until at least 2014 because of the need to concern itself with both sides 5200K of its “dual mandate,” that is, the requirement that it work 6 towards full employment. Thus any change in Fed policy is K likely to require a substantial improvement in employment. 7  Payrolls are likely to show less of a gain than in December,-200K w hen they were boosted by an unusual round of hiring by Change in non-farm 8 payrolls (L) package delivery services. Nonetheless, the trend should-400K Unemployment rate (R. 9 be upwards. The market expects +150k; anything over inverted) +127k would show an increase over the previous six-month-600K 10 rate of growth.  Earnings should pick up as the unemployment rate-800K 11 2005 2006 2007 2008 2009 2010 2011 declines, but not by much. Still, even modestly higher earnings may help to underpin consumption. The average US payrolls data workweek returned to its cyclical peak in December; the Forecast Dec actual Change in NFP 150k 200k higher ISM numbers suggest that the workweek remains at Change in pvt payrolls 168k 212k those levels. Unemployment rate 8.50% 8.50%  A better employment picture in the US is good for Average earnings mom 0.20% 0.20% confidence and for consumption. A figure at or above Average workweek (hours) 34.4 34.4 Source: Bloomberg Finance L.P. expectations should help to keep the rally going. 5
  6. 6. Calendar of events for this week Other US indicators likely to show rise in incomes, confidence, but not house pricesPersonal income Consumer confidence Case/Shiller house prices 20 % yoy 000 annual 1400 pace 15 1200 10 1000 5 0 800 -5 600 Case/Shiller 20-city -10 house price index (L) 400 -15 New home sales (R) -20 200 01 02 03 04 05 06 07 08 09 10 11 The market is looking for a decent rise  Consumer confidence continues to in personal income. However, the rise rise recently as the private sector  Many housing market indicators have in spending probably did not keep started to improve, such as homebuilder employment picture picks up. pace as consumers continue to pay sentiment, and mortgage purchase  Most measures of consumer applications. But prices remain weak. down debt. sentiment have been improving  Other price surveys showed a rise in Nov, The experience of 2008/09 suggests recently, such as the U of M survey. but since the C/S survey is a 3m moving that Chinese exports can rise even average, we do not think it will turn  US consumer confidence can be a before US consumer spending does. upwards yet.Source: Bloomberg Financial L.P. leading indicator of Chinese exports. 6
  7. 7. Calendar of events for this week Eurozone indicators: ECB bank lending survey, European Commission surveyECB Bank Lending Survey European business sentiment40 2.5 Tighter lending conditions, 2.030 more demand 1.5 1.020 0.5 0.010 -0.5 -1.0 0 -1.5 Ifo expectations-10 -2.0 BNB manufacturing Deviation from -2.5 ISAE headline mean, 3m-20 -3.0 INSEE headline moving avg Looser lending conditions, -3.5-30 less demand 2005 2006 2007 2008 2009 2010 2011 2012 2003 2004 2005 2006 2007 2008 2009 2010 2011 Businesses - lending Businesses - demand Households - lending Households - demand Last week’s Dec money supply report showed the largest monthly fall in bank lending on record. But the question remains whether this was due to  Confidence continues to rise in the Eurozone lower supply or lower demand for loans? as the ECB’s massive liquidity injection calms This week’s ECB bank lending survey will go some fears of an implosion in the periphery. way to clearing up that point as it will show if banks  Another focus this month will be the are tightening their lending criteria. quarterly question about manufacturing Source: ECB capacity utilization. Source: Bloomberg Financial L.P. 7
  8. 8. Calendar of events for this week Other Eurozone points to watch: EU summit, Greek talks Monday: Informal EU summit  This may be even more pointless than most summits. On the one hand, the leaders want to conclude their “fiscal compact” so that they can sign it at their next formal meeting on March 1st. On the other hand, they want this to be a “growth summit” that will discuss plans to “enhance economic growth and stimulate job creation.” How to implement austerity while stimulating growth? A draft of the communique apparently calls for “growth-friendly consolidation and job-friendly growth.’’  Apparently there will not be any mention of fiscal stimulus from Germany, the one thing that might fix these contradictions.  Greece might not be a major issue, as the Troika update on its progress towards adjustment goals will not be available in time. Greek debt negotiations  It looks as if this round of negotiations over private sector involvement (PSI) in rescheduling Greece’s debt will finish this week as the private sector seems willing to accept a lower coupon of around 3.6%. PASOK party leader Papandreou will meet Thursday with the parliamentary party to discuss PSI and second loan program.  If either the private sector fails to go along with the agreement, or the govt rejects it, we could expect a nearly violent negative reaction in markets.  The government seems to be under increasing pressure to surrender its budgetary sovereignty in exchange for further rescue funding from the EU/IMF. The UK press over the weekend reported on a German proposal to create a European Union “budget commissioner” with the power to veto Greek tax and spending decisions. Several Greek officials angrily rejected the idea. German magazine Der Spiegel also reported that because of the fiscal and economic slippage, Greece now needs €145bn under its second loan program, €15bn more than what was originally agreed in October last year. Several countries have said that €130bn was the absolute maximum, so it remains to be seen how that news will be received.  An article on an obscure web site, www.examiner.com, quoted two unnamed sources close to PM Papademos as saying that Greece plans an orderly exit out of the Eurozone by early March. No confirmation was possible. Bond auctions  Some EUR 22bn of Eurozone govt bond auctions this week, including Italy (Monday), Belgium (Tuesday), Germany (Wednesday), Spain and France (Thursday). It will be a good test of whether investors are willing to buy bonds at the current lower levels.  An Italian EUR 26bn bond maturing Wed and EUR 16bn in coupon payments by Italy and Spain should help. 8
  9. 9. Weekly investment meeting for 30 Jan. 2012Agenda 1 Calendar of events for the week 2 Advisory: allocation model review 3 Advisory: theme commodities 4 US equity strategy 5 US equities: recommended stocks 6 RMB Monitor 7 Eurozone crisis monitor 9
  10. 10. Advisory Allocation Model – USD – GlobalTemplate for each client profile 10
  11. 11. Advisory Allocation Model – USD - GlobalTemplate for each client profile 11
  12. 12. Discretionary Model Portfolio – Preservation Global USD Preservation MP Performance from 15.12.11 – 20.01.12 MP Pres +2.25% VS BM +1.73% Investment Strategy OW Cash 15/0 because of uncertainty and to leave room for opportunistic investments UW Bonds 60/80 in general & Sovereign in particular since safe area yields are very low UW Equity 15/20 in general, with OW EM OW HF 5/0 with credit arbitrage OW Commodities 5/0 Gold as a tail risk insurance Preservation MP Top contributors from 15.12.11 to 20.01.12 12
  13. 13. Discretionary Model Portfolio – Balanced Global USD Balanced MP Performance from 15.12.11 – 20.01.12 MP Bal +3.78% VS BM +3.05% Investment Strategy OW Cash 15/0 because of uncertainty and to leave room for opportunistic investments UW Bonds 43/65 in general & Sovereign in particular since safe area yields are very low UW Equity 32/35 in general, with OW EM OW HF 5/0 with credit arbitrage OW Commodities 5/0 Gold as a tail risk insurance Balanced MP top contributors from 15.12.11 to 20.01.12 13
  14. 14. Discretionary Model Portfolio – Dynamic Global USD Dynamic MP Performance from 15.12.11 – 20.01.12 MP Dyn +4.66% VS BM +5.13% Investment Strategy OW Cash 10/0 because of uncertainty and to leave room for opportunistic investments UW Bonds 40/54 in general & Sovereign in particular since safe area yields are very low UW Equity 40/45 in general, with OW EM OW HF 5/0 with credit arbitrage OW Commodities 5/0 Gold as a tail risk insurance Dynamic MP top contributors from 15.12.11 to 20.01.12 14
  15. 15. Discr. Model Port. Global USD – Close - I Share US Oil & Gas Exploration  Trade Type CIO view:  Asset Class - Equity We are closing our active bet in the energy sector because we think it is likely to be another year of  Thesis – Oil & Gas high volatility for energy prices. The increasing  Strategy – Active Bet tensions with Iran, the concerns about global  Risk – Moderate growth, strife in Nigeria, elections in Russia…  Model Port – YES Pres 1%, Bal 2%, Dyn 2.5% There is quite a long list of potential problems.  Underlying – US4642888519  Open / Close  Open on 14.12.2011 @ 58.74$  Closed on 20.01.2012 @ 63.14$  GAIN / LOSS  Close & Take Profit + 7.49% Source: Bloomberg 16.01.2012 15
  16. 16. Discr. Model Port. Global USD – Increase -I Share S&P 500 Index CIO view:  Trade Type Market is expecting higher profits again this year,  Asset Class - Equity although much of that comes from financials – we  Thesis – S&P500 have a hard time seeing that  Strategy – Maintain our Equity Exposure On the other hand, continued growth in the US (no  Risk – Moderate recession) and low inflation should support the market in general, while any recovery in sales should  Model Port – YES Pres 1%, Bal 2%, Dyn 2.5% significantly boost some companies’ profits as margins  Underlying – US4642872000 are high  Open & Increase  Increase on 20.01.2012 @ 131.91$  Open 14.12.2011@122.13$ Source: Bloomberg 16.01.2012 16
  17. 17. Weekly investment meeting for 30 Jan. 2012Agenda 1 Calendar of events for the week 2 Advisory: allocation model review 3 Advisory: theme commodities 4 US equity strategy 5 US equities: recommended stocks 6 RMB Monitor 7 Eurozone crisis monitor 17
  18. 18. Advisory - Theme Commodities – HKD Up & Out XAU – 2y CPN  Trade Type  Asset Class – Gold  Currency - HKD  Thesis – up to 30% XAU ie 2236$  Risk – Capital Protected 100%  Tenor – 2 Years  Strategy – Satellite  Model Port – Not Implemented  Scenarios  Gold trades above 130% you receive 100% + 6%  Gold trades below 130% you receive 100% + appreciation  Gold trades at the end below 100% you get 100%  Condition  Re-offer 99% ie 1% margin  Issuer, choice HSBC, UBS, BOA Source: Bloomberg 16.01.2012 18
  19. 19. Theme commodities – buy industrial metals vs gold Gold has been keeping pace with nickel, but hopes for reflation are changing thatGold/Nickel ratio vs US manufacturing ISM  People invest in gold during times of65 1 uncertainty or fear. Nickel on the other60 2 hand is one of the key industrial 3 metals, as it is essential in making55 4 steel.50 5  Gold has been keeping pace or even45 6 outpacing nickel recently as fears 740 about the fiat money system outweigh 835 hopes about the economic recovery. 9  Recently though nickel has started to30 10 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 pull ahead as fears of a US recession receded and central banks globally Peri ods when ISM i s a bove 50 US Ma nufa cturi ng ISM i ndex (L) loosen monetary policy. Gol d/Ni ckel ra tio (R, revers ed)  Nickel and other industrial metals could continue to outpace gold if investors believe reflation is here to stay. Source: Bloomberg Financial L.P. 19
  20. 20. Weekly investment meeting for 30 Jan. 2012Agenda 1 Calendar of events for the week 2 Advisory: allocation model review 3 Advisory: theme commodities 4 US equity strategy 5 US equities: recommended stocks 6 RMB Monitor 7 Eurozone crisis monitor 20
  21. 21. US Equities: keep defensive US profits rose last year, but the effect on stock prices was muted as stocks de-rated Market is expecting higher profits again this year, although much of that comes from financials – we have a hard time seeing that The strong dollar is also likely to hurt profits On the other hand, continued growth in the US (no recession) and low inflation should support the market in general, while any recovery in sales should significantly boost some companies’ profits as margins are high We recommend keeping a defensive stance: overweight healthcare and staples We also favor tech stocks Underweight: financials, energy, consumer discretionary 21
  22. 22. US Equities: keep defensive Equities performed poorly last year, with defensive stocks the best performers The two worst performing sectors of the S&P 500 last year were Financials (down 17.1%) and Basic Materials (down 9.8%). Cyclicals, after gaining 43% in 2009 and 22% in 2010, were essentially flat in 2011. The consistency of the Defensives in 2009, 2010, and 2011 is notable. They returned a steady 10%-14% a year. This is probably due to investors’ lingering concerns about the outlook for the economy and the market. 22
  23. 23. US Equities: keep defensive Why did the market do poorly? Derating = rising risk premiumP/E ratios continued to decline “E” held up but “P” fell MSCI All World Index and 450 12m forward EPS 31 29 400 27 350 25 23 300 21 250 19 MSCI All World Index 17 200 price (L) 12m forward EPS (R) 15 150 13 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Factset, Morgan Stanley Research Source: Bloomberg Financial L.P, BOC (Suisse) S.A. P/E ratios declined last year. The US market is now  This was not because of lower earnings or earnings slightly cheap on this basis – it’s at the 39th forecasts, which held up fairly well. percentile vs its long-term history and particularly  Rather, the amount that people were willing to pay cheap compared to the last ten years. for those earnings declined. 23
  24. 24. US Equities: keep defensiveStocks are cheap relative to bonds, or bonds are expensive relative to stocks Another way of looking at the de-rating of stocks is as a rise in the equity risk premium. The equity risk premium compares the discount rate that investors are implicitly using to value future earnings on stocks to the real interest rate available on risk-free government bonds. (The idea is that investors could be getting a risk-free return from Treasuries, so what kind of return over Treasuries – what risk premium – do they need to get them to invest in stocks.) JP Morgan calculates that the equity risk premium is now at the highest level for some 60 years, even higher than it was during the Asia crisis or the subprime crisis. That is to say, stocks are at their cheapest relative to bonds – or bonds are at their most expensive relative to stocks – in 60 years. The question is whether equities will continue to de-rate this year or whether they will hold steady. We think that equities could de-rate further, at least in the first half, as fears of the Eurozone crisis and the slowdown in China continue to make investors nervous. We therefore prefer to keep a defensive stance. 24
  25. 25. US Equities: keep defensive Market is expecting higher profits in 2012, especially from financialsMarket expecting rise in profits in 2012 Much of it coming from financials Source: Bloomberg Financial L.P.Source: Factset, Morgan Stanley Research  A surprising 14% of the forecast increase in profits is  The market is expecting a further rise in supposed to come from Bank of America, which is profits in the US this year. predicted to turn from a loss into a profit.  In total about one quarter of the increase is supposed to come just from the top six financial companies. 25
  26. 26. US Equities: keep defensive Companies are being cautious; so are analysts Corporate guidance is mostly negative Profit growth expected to slow in Q1&Q2 Source: S&P Compustat, Deutsche Bank Global Markets Research Source: Factset, Deutsche Bank Global Markets  Consensus expectations for earnings growth in Q1 and Q2 Recent corporate guidance has been very cautious; the proportion of are low, but still positive yoy. negative announcements is near 2008 levels and positive guidance is falling off  On a qoq basis, the consensus now looks for a 5% fall in EPS, The ratio of negative to positive pre-announcements for Q4 S&P500 is the first sequential fall since Q4’08. 3.6x, well above the long-term average of 2.4x. However, this indicator  Expectations are higher for Q3 and much higher for Q4 has sometimes been a contrarian one. 26
  27. 27. US Equities: keep defensive Stronger dollar likely to hurt profitsForeign profits have been rising steadily USD appreciation to hurt profits Source: Haver, Deutsche Bank Global Markets Research Source: US BEA, Deutsche Bank Global Markets The share of foreign profits for US corporates has  The dollar appreciated close to 4% in Q4, been rising steadily and is about 30% presently. similar to the increases in Q1 and Q2 of 2010. The rule of thumb is that every 1% rise in the trade- That will hurt foreign profits weighted USD reduces S&P 500 profits by 1%. 27
  28. 28. US Equities: keep defensive Continued growth in US should allow some companies to flourishMarket expects higher US growth Profit margins are already near the peak 5 US GDP 35 S&P 500 P/E vs profit margins 16 % yoy 4 15 30 3 14 25 2 13 20 1 12 0 15 11 -1 10 Actual P/E (L) 10 -2 Forecasts 5 Profit margin (R ) 9 -3 0 8 -4 1998 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012Source: Bloomberg Financial L.P., BOC (Suisse) Source: Bloomberg Financial L.P., BOC (Suisse)  The market consensus from Bloomberg is that  Profit margins are already near peak levels. US GDP grew 1.8% yoy in 2011 but that this Any further increase in sales should provide a will rise to 2.1% in 2012 and 2.5% in 2013. strong boost to the bottom line. 28
  29. 29. US Equities: keep defensive But buybacks, low inflation should support the marketBuybacks should support market Low inflation should help stocks Source: Bloomberg Financial L.P., Deutsche Bank Global Markets Research Source: JP Morgan, Schiller data since 1872  Buybacks have been very strong in the last  Equities tend to perform best in low but few quarters and should continue to boost positive inflation conditions, which is what we EPS growth expect to have this year. 29
  30. 30. Weekly investment meeting for 30 Jan. 2012Agenda 1 Calendar of events for the week 2 Advisory: allocation model review 3 Advisory: theme commodities 4 US equity strategy 5 US equities: recommended stocks 6 RMB Monitor 7 Eurozone crisis monitor 30
  31. 31. US Equity Model Portfolio Recommended asset allocation Asset Class Recommendation Sub-asset class Recommendation Preserv Balanced Dynamic Presv Balanced Dynamic Cash 15 15 10 15 15 10 Sovereign FI 15 10 5 US 12 8 3 Europe 0 0 0 Other 3 2 2 Corp bonds 30 23 20 IG 25 18 10 HY 5 5 10 EM bonds 15 10 15 External 12 8 10 Local currency 3 2 5 FI Total 60 43 40 60 43 40 DM Equities 10 20 25 US 8 15 20 Europe ex UK 0 2 2 UK 2 2 2 Japan 0 1 1 EM equities 5 12 15 China 3 5 6 Other AxJ 2 5 6 Latam 0 2 3 EMEA 0 0 0 Equities Total 15 32 40 15 32 40 Hedge funds 5 5 5 0 5 5 5 Commodities 5 5 5 Gold 3 3 3 Other 2 2 2 We are generally underweight equities relative to our benchmark. Within global equities, our largest exposure is to the US. We expect the US economy to avoid recession this year and for US stocks to be among the best-performing stock markets this year (relative to other markets). 31
  32. 32. US Equity Model Portfolio  Our recommended portfolio in US stocks emphasizes the defensive sectors of health care and staples.Our recommended sector weighting  We deviate somewhat from the usual defensive Health Care pattern by putting technology above utilities. We Info. Tech see many exciting developments this year in Consumer staples consumer technology, while industrial tech Telecoms investment should continue to be driven by record high levels of corporate cash and the desire to hold Industrials down personnel costs. Meanwhile, Utilities were Materials the best performing sector last year, and with Utilities energy costs possibly rising further this year, may Energy not outperform again. We also have a smallConsumer Discretionary overweight in telecoms, simply for the yield. Financials  Our underweights are financials, which we think -5 -4 -3 -2 -1 0 1 2 3 4 5 are likely to have a difficult time once again this year as deleveraging continues and financial markets remain volatile; energy, which could suffer from further turmoil in the Middle East and a slowdown in global growth; and consumer discretionary, which is likely to suffer if the US economy slows further, as we think possible. 32
  33. 33. US Equity Model Portfolio Summary of our stock recommendations Sector Weighting Stock Rationale Consumer Staples +3% --> 15% Costco (COST) Benefit from people economizing. Income from membership fees is rising. Colgate-Palmolive (CL) High EPS growth; better pricing ability as commodities stabilize; continued strength in EM Info Tech +3% --> 22% Microsoft (MSFT) Windows 8, other new prodiucts should boost earnings, yet P/E is at a discount to the sector. Accenture (ACN) Demand for companys services should grow as computers become ever more dominant. Health Care +4% --> 15.7% AmerisourceBergen (ABC) Growth of generics and biosimilar drugs should increase volume & need for specialized services Pfizer (PFE) Pfizer has several drugs that could have important regulatory events this year Telecoms +1% --> 3.8% CenturyLink (CTL) One of the highest dividend yields in the S&P 500 (7.6%) Industrials 10.90% SPX (SPW) Pricing for transmission & distribution of electricity should improve. Late-cycle stock. Materials 3.70% Air Products & Chemicals (APD) 21% of revenues from Asia. Also supplies the electronic industry, which we expect to do well. Utilities 3.60% NextEra Energy (NEE) Likely to win rate increase in Florida; demand for renewable energy should continue to rise Consumer Discretionary -4% --> 6.8% Yum! Brands (YUM) Restaurants at the low end of the market winning market share; we also like Yum!s China business Energy -4% --> 8.1% Schlumberger Higher oil prices should spur exploration; firm beat estimates and raised its dividend Financials -3% --> 11.2% PNC Financial Services (PNC) High degree of analyst confidence, low exposure to Europe 33
  34. 34. US Equity Model Portfolio Consumer Staples: Overweight (+3  15.0)  We are overweight the consumer staples sector, as Top Pick #1: Costco Wholesale Corp. (COST) we believe markets are likely to become nervous about the European problems again and defensiveCostco: Share price and relative performance stocks should benefit. 90 Jan 2007 140  Within consumer staples, food staples & retailing = 100 135 should benefit from falling prices of agricultural 80 130 commodities, in our view. 125 70  Costco operates wholesale membership 120 warehouses selling food, household products, auto 60 115 equipment, hardware, and other goods. The 110 company enjoys rising income from its membership 50 105 fees, which supply 80% of earnings. These were 40 100 recently raised by 10%, while the number of 95 members is also growing. 30 90  The company benefits from the high average 2007 2008 2009 2010 2011 2012 Share price (L) Share price relative to index (R) income of its customers ($96,000).  Yet sales have been rising as more people even inCompany valuation vs its sub-industry average P/E P/E EPS 1yr P/FCF Div Yld this income bracket try to economize. The next FY growth company has gained market share in food – itsCostco 24.45 18.67 12.70 19.57 1.18 sales are rising by double digits, while most groceryAverage 24.00 18.29 16.67 36.30 1.49 firms are anywhere from -2% to +5%.Source: Bloomberg Financial L.P., BOC (Suisse) SA 34
  35. 35. US Equity Model Portfolio Consumer Staples: Overweight (+3  15.0)  We are overweight consumer staples, as we fear Top Pick #2: Colgate-Palmolive Co. (CL) markets may become nervous about Europe again, in which case defensive stocks should benefit.Colgate-Palmolive: Share price and relative performance  Within consumer staples, EPS estimates for Household & Personal Care stocks are already fairly100 130 Jan 2007 high. Nonetheless we expect the defensive nature = 100 of the sector should support share prices. 90 120  Colgate-Palmolive, a maker of consumer products such as soap and toothpaste, outperformed its 80 major competitor, Proctor & Gamble, by 1,126 bps 110 in 2011. It could underperform early in 2012 on 70 mean reversion, but longer term we expect it will 100 continue to outperform. 60  The market view is that the stock is likely to post one of if not the highest EPS growth among its 50 90 2007 2008 2009 2010 2011 2012 peers. Easing yoy comparisons, better pricing Share price (L) Share price relative to index (R) ability as commodity prices stabilize, robust innovation and the continued strength in EM,Company valuation vs its sub-industry average P/E P/E EPS 1yr P/FCF Div Yld where CP has a relatively high exposure, should next FY growth keep the stock as one of the top defensive picks.CL 17.91 15.17 -1.77 17.56 2.61  While CP trades at a premium to P&G, we believeAverage 19.14 16.23 -5.74 82.82* 1.64*distorted by one company w 802 P/FCF the premium may even be too low, given CP’sSource: Bloomberg Financial L.P., BOC (Suisse) SA better fundamentals. 35
  36. 36. US Equity Model Portfolio Information technology: Overweight (+3  22.3) Top Pick #1: Microsoft Corp. (MSFT)  With corporate cash at record levels and companies reluctant to hire, we expect robust investment inMicrosoft : Share price and relative performance labor-saving technology. New, shiny gizmos for40 120 consumers should also keep these companies busy. Jan 2007 = 100  Microsoft has been hurt recently because of fears 110 about the impact of the Thai floods on PC sales. However we believe these fears are now fully30 100 discounted in the price.  Meanwhile, Windows 8 may be launched in the fall, 90 which would probably boost PC sales and Microsoft20 with it. It may also help Microsoft to boost its 80 presence on tablets.  There are also other product launches coming as10 70 well, such as SQL Server 2012 and Windows Server 8, 2007 2008 2009 Share price (L) 2010 2011 Share price relative to index (R) 2012 which have the potential to drive revenue and margins higher. Sales of the game unit Xbox 360 have Company valuation vs its sub-industry average also been stronger than expected. The company is P/E P/E EPS 1yr P/FCF Div Yld next FY growth also expanding its presence in the search market, Microsoft 10.96 9.90 28.17 9.35 2.69 mobile computing and cloud computing. Average 62.03* 36.82 -51.19 72.95 0.19  Despite these new businesses to boost growth, the *distorted by one company with a P/E of 721 company’s P/E is at a discount to the overall market. Source: Bloomberg Financial L.P., BOC (Suisse) SA 36
  37. 37. US Equity Model Portfolio Information technology: Overweight (+3  22.3) Top Pick #2: Accenture PLC (ACN)  We prefer computer services and IT consulting to the hardware firms. The pace of technological change isAccenture : Share price and relative performance accelerating so much that it can be hard to make a 70 Jan 2007 150 profit on hardware. The same blinding speed of 65 = 100 change increases the need for specialist consulting 140 60 services, however. 55 130  Accenture provides management and technology 50 120 consulting services and outsourcing worldwide. 45  The company beat revenue, EPS and bookings 110 40 estimates in fiscal 1Q. Even after the two highest- 35 100 ever bookings quarters, FY12 contracted refenues are 30 up 13% yoy and the book-to-bill ratio is 1.1x, which 90 25 shows that it can still grow. It also has an active share 20 80 buyback program to support the stock. 2007 2008 2009 2010 2011 2012 Share price (L) Share price relative to index (R)  Despite the problems in Europe, ACN’s EMEA revenues grew 10% in F1Q, up from 8% in the Company valuation vs its sub-industry average* previous quarter. The firm is well positioned to P/E P/E EPS 1yr P/FCF Div Yld benefit as its European clients need to cut costs in a next FY growth Accenture 15.72 13.28 26.52 11.32 2.42 deflationary environment. Average 16.72 12.92 8.91 23.02 1.09  The forward EPS is in line with its recent average and *compared to global competitors, not just US hence not fully reflecting the opportunities. Source: Bloomberg Financial L.P., BOC (Suisse) SA 37
  38. 38. US Equity Model Portfolio Health care: Overweight (+4  15.7) Top Pick #1: AmerisourceBergen Corp. (ABC)ABC: Share price and relative performance  Economic growth may be slow for several years, but there will be no change in the demographic trends. 50 200 Jan 2007 We believe health care is likely to be one of the more = 100 180 stable and dependable sectors. 40  ABC distributes pharmaceutical products and services 160 and healthcare supplies to healthcare providers.  The company benefits from the growth of generic 30 140 drugs, which may increase volumes, and specialty 120 drugs such as biosimilars, which require more 20 services than generics. It is upgrading its computer 100 systems to improve system efficiencies and customer service. 10 80 2007 2008 2009 2010 2011 2012  Drug prices continue to rise, which means higher fees Share price (L) Share price relative to index (R) for ABC.Company valuation vs its sub-industry average P/E P/E EPS 1yr P/FCF Div Yld next FY growthABC 15.48 14.23 14.60 10.88 1.30Average 15.65 19.17 23.54 20.77 0.50 Source: Bloomberg Financial L.P., BOC (Suisse) SA 38
  39. 39. US Equity Model Portfolio Health care: Overweight (+4  15.7) Top Pick #2: Pfizer Inc. (PFE)PFE: Share price and relative performance  Economic growth may be slow for several years, but there will be no change in the demographic trends. 30 100 Jan 2007 We believe health care is likely to be one of the more = 100 stable and dependable sectors. 90  For the drug industry, much of the bad news about generics and patent expiries is already in the market. Going forward, share prices are likely to be driven 20 80 mostly by news about drug trials, in our view.  Pfizer, a global biopharmaceutical company, has 70 several new drugs that could have important events this year. Prevnar-13, a vaccine against pneumonia that was approved for adults at the end of last year, 10 60 could win a recommendation for routine vaccination 2007 2008 2009 2010 2011 2012 Share price (L) Share price relative to index (R) in older adults this year. Tofacitinib, a drug under development for rheumatoid arthiritis, may get anCompany valuation vs its sub-industry average FDA decision in August; and two studies on P/E P/E EPS 1yr P/FCF Div Yld next FY growth bapineuzumab, a drug under development forPfizer 9.56 9.51 -16.26 8.83 4.02 Alzheimer’s, are likely to finish this year.Average 35.89 16.85 -37.52 35.90 0.51 Source: Bloomberg Financial L.P., BOC (Suisse) SA 39
  40. 40. US Equity Model Portfolio Telecoms: Overweight (+1  3.8)  The telecoms sector often underperforms the Top Pick: CenturyLink Inc. (CTL) market in Q1. There are a variety of reasons for this seasonal event to happen again this year: pensionCenturyLink: Share price and relative performance contributions, regulatory uncertainty, and FX headwinds, to name a few. But the sector still has 50 Jan 2007 130 some of the highest dividend yields in the S&P 500, = 100 and investors are likely to remain keen to avoid 120 cyclicals and anything connected to Europe. 40 110  CenturyLink is an integrated communications company that provides communications services, 100 including voice, internet, data and video throughout the US (and only the US). 30 90  The company’s main attraction is a dividend yield 80 of 7.6%, one of the highest in the S&P 500. Some investors apparently question whether the 20 70 dividend is sustainable, because of the integration 2007 2008 2009 2010 2011 2012 Share price (L) Share price relative to index (R) of acquisitions (Qwest), mounting regulatory pressures and possible capital spending. But with Company valuation vs its sub-industry average P/E P/E EPS 1yr P/FCF Div Yld cash flow covering the dividend 2x, strong liquidity next FY growth and low leverage (~2.6x), we do not think a cut in CenturyLink 16.50 14.62 22.75 7.61 7.64 the dividend is likely any time soon. Average 45.14* 22.70 -14.06 19.72 2.72 Distorted by one company with a P/E of 105 and another at 435 Source: Bloomberg Financial L.P., BOC (Suisse) SA 40
  41. 41. US Equity Model Portfolio Industrials: Neutral (10.9) Top Pick: SPX Corp. (SPW)  Industrials were the third worst performing sector in the S&P 500 during 2011 (after materials andSPX : Share price and relative performance financials). But expectations have come down and140 240 the sector is valued more conservatively. Jan 2007 = 100 220  With government austerity a world-wide trend, we120 would avoid companies that depend on defense or 200 public works contracts.100 180  SPX Corp. is a global manufacturer of highly 80 160 specialized engineering goods and services. Its major 140 products are power generating equipment, diagnostic 60 tools and process equipment. 120 40  Pricing for transmission & distribution of electricity is 100 forecast to improve, increasing the company’s 20 80 leverage. The firm is also likely to get a larger 2007 2008 2009 Share price (L) 2010 2011 Share price relative to index (R) 2012 contribution this year from previous acquisitions.  SPX tends to perform best late in the economic cycle Company valuation vs its sub-industry average and so should outperform over the next several P/E P/E EPS 1yr P/FCF Div Yld years, assuming that the global expansion continues next FY growth SPX 13.26 13.06 307.29 15.52 1.49 but at a more modest pace. Average 20.34 15.63 102.64 43.43 1.10 Source: Bloomberg Financial L.P., BOC (Suisse) SAm 41
  42. 42. US Equity Model Portfolio Materials: Neutral (3.7)  Materials were the worst performing sector last Top Pick: Air Products & Chemicals Inc. (APD) year. We are neutral on the sector this year as we expect some mean reversion, but the outlookAPD: Share price and relative performance is not terribly exciting.100 Jan 2007 115 = 100  Our pick in materials is Air Products & Chemicals, which produces industrial gasses and related 90 110 industrial process equipment.  Although 30% of the firm’s revenue came from Europe last year, the firm recently sold its 80 105 continental European homecare business, which will reduce its European exposure slightly. 70 100 Meanwhile, 21% of revenues come from Asia, which we expect to do well. APD is involved in supplying oxygen for coal gasification in China, a 60 95 growing business. 2010 2011 Share price (L) Share price relative to index (R)  Demand for hydrogen is also rising world-wide.  APD is also linked to the electronics industry, as it Company valuation vs its sub-industry average supplies materials for semiconductor chips, P/E P/E next EPS 1yr P/FCF Div Yld FY growth displays, solar, etc. We are bullish on this Air Products 15.82 13.35 17.73 47.82 2.56 industry as new products are developed and Average 19.28 16.20 29.35 66.89 1.20 Windows 8 is to be released this year. Source: Bloomberg Financial L.P., BOC (Suisse) SA 42
  43. 43. US Equity Model Portfolio Utilities: Neutral (3.6)  Utilities remain in demand for their steady earnings Top Pick: NextEra Energy Inc. (NEE) and dividends. This year there could be some differentiation among stocks based on fallingNextEra: Share price and relative performance natural gas prices and the impact of rulings from the Environmental Protection Agency (EPA), which 75 150 Jan 2007 = 100 could cause problems for coal-based utilities. 140  We favor NextEra, one of the largest US electric 65 companies and the leading producer of renewable 130 energy. Its business is comprised largely of Florida Power & Light (FPL) and NextEra Energy Resources. 55 120  FPL is hostage to the Florida economy, where it 110 serves nearly 5mn customers. Although the 45 economy may be weak, the company is likely to file 100 a request to raise rates this year.  Energy Resources gets about 75% of its value and 35 90 2007 2008 2009 2010 2011 2012 profitability from assets under long-term contracts, Share price (L) Share price relative to index (R) including wind, solar and nuclear projects, so is little affected by the decline in forward gas prices. Company valuation vs its sub-industry average P/E P/E EPS 1yr P/FCF Div Yld  Renewable energy accounted for some 4%~5% of next FY growth US power generation in 2011, vs a target of over NEE 14.02 13.03 19.55 36.30 3.71 10% by 2025, which means there is still Average 17.89 14.78 20.46 n.a. 3.75 considerable upside to NEE’s business. Source: Bloomberg Financial L.P., BOC (Suisse) SA 43

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