Global equity strategy - Credit Suisse
Transcript of Global equity strategy - Credit Suisse
Global equity strategy Andrew Garthwaite and team Our concerns about China
25th June 2013
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ research disclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse 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 analysts
Andrew Garthwaite, [email protected], +44 20 7883 6477
Marina Pronina, [email protected], +44 20 7883 6476
Mark Richards, [email protected], +44 20 7883 6484
Sebastian Raedler, [email protected], +44 20 7888 7554
Robert Griffiths, [email protected] +44 207 883 8885
Nicolas Wylenzek, [email protected] +44 20 7883 6480
2
We are bears of China GDP growth medium term (Slide 3 to Slide 13): high leverage, slowing
sensitivity of growth to leverage, de facto tightening, housing looks a bubble, infrastructure
investment is already running at 20% YoY, labour force has contacted last year, wage growth is
picking up & the real cost of capital has turned positive. In year one of a 10 year term, reform likely
to be preferred to growth! We would not be surprised if Chinese trend GDP growth eased to 6%.
However, we don’t think Chinese GDP growth will fall below 6%, over the next year, as:
government debt-to-GDP is 72% (nominal rates are below nominal GDP growth), loan-to-deposit
ratio in banking system is still 72% and mortgage debt-to-GDP is one third of US levels.
Chinese GDP growth below 6% would be a problem for global markets. Up to that level, the
fall in commodity prices might help developed market GDP growth, reduce inflation (which makes
central banks more stimulatory) and postpone Fed tapering. Limiting overcapacity might also help
some of those industries where China has over-expanded (solar, wind, aluminium etc).
Investment conclusions (Slide 14 to Slide 28): our preferred China-related shorts are mining,
steel, mining equipment, the Australian dollar and domestic Australia. We think that the China
consumer should be resilient: with the consumer share of GDP at half the levels of those in the
US, c12% Chinese discretionary consumption growth is possible even in a lower growth
environment. That said, we are underweight food producers and tobacco, on the back of
worries about earnings momentum, positioning and valuations.
Summary
30
35
40
45
50
55
60
65
3
4
5
6
7
8
9
10
11
12
13
2005 2006 2007 2008 2009 2010 2011 2012 2013
GDP, y/y%, 3m lag
China PMI manufacturing neworders (HSBC), rhs
China PMI new orders (NBS),rhs
5
6
7
8
9
10
11
12
13
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
GDP, y /y %, 3m lag
China PMI new orders/ stock of finished goods, rhs
4
6
8
10
12
14
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
-15
-10
-5
0
5
10
15
20
25
30
35China GDP, y /y %
Electricity output, y /y %, 3mma, rhs
latest
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2005 2006 2007 2008 2009 2010 2011 2012 2013
32
37
42
47
52
57
62
67Chinese M1 grow th / M2 grow th
Chinese manufacturing PMI new orders, rhs
3 3 3 3 Source: Thomson Reuters, Credit Suisse research
China growth momentum is weakening: PMI new orders, M1 versus M2 and
electricity output all appear consistent with slowing GDP growth
The ratio of M1 to M2 and manufacturing PMI new
orders have both fallen since March
China PMI new orders relative to inventories
points to a slowdown in growth Electricity output growth remains weak
China manufacturing PMIs are weakening
5%
7%
9%
11%
13%
15%
17%
19%
21%
23%
1997 1999 2001 2003 2005 2007 2009 2011 2013
China wage growth, %
-5
-3
-1
1
3
5
7
9
2005 2006 2007 2008 2009 2010 2011 2012 2013
20
30
40
50
60
70
80
China headline inflation (y oy , %), w ith CS projection
China PMI - input prices, lead 4 months
We find ourselves worried about Chinese growth in the medium term as: 1) Our China economists predict
inflation of 3.9% by year-end and 4.9% by mid-2014 (although we would note that PMI input prices have fallen
recently). Wage growth and minimum wage growth are modestly accelerating again. There is no obvious labour
shortage – unlike in 2009 and 2010
4 Source: Thomson Reuters, Credit Suisse research
The price component of PMI is falling, but our
economists are more concerned about inflation
0.6
0.7
0.8
0.9
1.0
1.1
Mar-01 Jan-02 Nov-02 Sep-03 Jul-04 May-05 Mar-06 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12
China City labour market demand/supply ratio
Labour shortage
Labour surplus
The urban labour market demand/supply ratio suggests a
continued labour shortage
Chinese wage growth is accelerating again (in US$ terms)
5 5 5
2) Total leverage is around 230% of GDP. Half of new loans in the last year have come from the shadow
banking system. Total government debt is 72% of GDP (including all off balance sheet lending by local
government), compared to an official figure of 15% of GDP. The local government’s deficit is 8.5% of GDP,
compared to the central government’s deficit of 2%of GDP. Shibor lending rates have recently spiked.
China looks overleveraged for its GDP pc
Source: Thomson Reuters, Credit Suisse research
Hong KongSingapore
China
Chile
Malaysia
RussiaMexico
South Africa
Czech Republic
Brazil
Indonesia
PolandIndiaEgypt
Turkey
Hungary
Norway
Germany
Denmark
Canada
France
UK
Japan
AustraliaUS
Italy
Ireland
Spain
Portugal
Greece
0%
60%
120%
180%
240%
300%
360%
420%
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000
GDP per capita, USD
Tot
al d
ebt l
ess
FX
res
erve
s, %
GD
PGovernment 72%
Central government 15%
Local government 36%
Other 21%
Households 31%
Corporates 127%
Corporate loans & bonds 100%
Outstanding bankers' acceptance notes 11%
Other 16%
Total debt 230%
Note: shadow bank lending 44%
Trust funds 14%
Bank Wealth Management Products 15%
Broker Asset Management 4%
Underground lending 8%
LGFV corporate bonds outstanding 3%
China: total non-financial debt (% of GDP)
100%
110%
120%
130%
140%
150%
160%
170%
180%
190%
Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12
China: total social financing, % of GDP
China’s social lending is ahead of trend
0
2
4
6
8
10
12
2007 2008 2009 2010 2011 2012 2013
1-mth SHIBOR
Shibor lending rates have recently spiked to the
highest level in 6 years
6
0
1
2
3
4
5
6
Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013
New RMB loans (4Q sum) / Annual change in GDP
New total social financing (4Q sum) / Annual change in GDP
0%
2%
4%
6%
8%
10%
12%
14%
16%
Q12004
Q12005
Q12006
Q12007
Q12008
Q12009
Q12010
Q12011
Q12012
Q12013
Non-bank lending
RMB loans
New lending as % of annual GDP
Increasing reliance on debt: more credit is required to
generate an extra unit of GDP
New social lending continues to rise
Total social financing is rising at 23% per year. The sensitivity of GDP growth
to credit is close to all-time lows.
New loans in May dropped, but are still well above average
Total social financing is rising at 23% per year
Source: Thomson Reuters, Credit Suisse research
10%
15%
20%
25%
30%
35%
40%
45%
50%
1954 1973 1992 2011
Japan Korea China
Japan peak in 1973 at 36%
Korea peak in 1991 at 38%
Investment, % of GDPChina: latest 48%
7 7 7
3) Growth is becoming even more imbalanced: China’s investment share of GDP is now at 48%, 10 percentage points higher than any other country has had in recent history. In the decade after investment share of GDP peaked in other industrializing countries, GDP growth fell by between a quarter and a half.
0%
2%
4%
6%
8%
10%
US Peak = 1979 Japan Peak =
1973
Korea = 1991 China Peak =
2010
10y before peak
at peak
10y after peak
20y after peak
Trailing 10y GDP growth around the
peak of investment share in GDP:
China’s investment share of GDP is already considerably
higher than it ever was in Japan and Korea
An economy’s growth tends to slow once the
investment share of GDP has peaked
Source: Thomson Reuters, Credit Suisse research
-2
8
18
28
38
48
58
2005 2006 2007 2008 2009 2010 2011 2012 2013
Industrial
Infrastructure
Real estate
China investment spending, 3mma, y/y%
Infrastructure investment growth has picked up – but this is not the full picture, since it only represents 30% of urban fixed asset investment. Investment by industry (mining, manufacturing and construction) is 40% of the total and this remains weak.
8 Source: Thomson Reuters, Credit Suisse research
Our US capital goods analyst, Julian Mitchell, highlights that Chinese machine tool orders were
down 44% year-on-year in May (see his report i-Spy Global Industrials Weekly, June 24) and that
railway investment in China is likely to fall sharply.
-
200
400
600
800
1,000
1,200
1,400
1,600
1998 2000 2002 2004 2006 2008 2010 2012
Completed
Sold
Starts
China residential construction, 12m mav, 1m sqm
9 9 9
4) Housing in China looks like a classic bubble. It’s clear that the authorities do not want house
prices to rise much. In March, authorities tried to clamp down on property via implementing the
capital gains tax among other measures.
0
10
20
30
40
50
60
70
US 2002-2007 Japan 1985-90 Korea 1994-98 UK 2002-2007 China 2007-12e
Trough to peak in bank credit / GDP (% point) Max 2-year change (% point)
The increase in China’s bank credit to GDP ratio was
greater than in other notable credit booms
Chinese tier 1 cities are more expensive than developed
market cities according to the IMF house price to wage ratio
0%
2%
4%
6%
8%
10%
12%
14%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Ireland Spain
China US
Residential investment, % of GDP
Housing investment is approaching peak levels seen in
other housing booms (as % of GDP)
Source: IMF data, Thomson Reuters, Credit Suisse research
Residential real estate starts have fallen slightly but
are still 20% ahead of sales
10 10 10
When did a housing bubble not end in a bust? However, there are some differences in China:
There is not a lot of consumer debt in housing. Total mortgage debt-to-GDP is 18% (compared to
76% of GDP in the US in 2006) – and corporate debt in property is only 13% of GDP.
Banks will continue to lend: the typical loan-to-value ratio on home-related loans is 50%; banks’
loan-to-deposit ratio, at 71%, is low; in 2004, banks were recapitalised using FX reserves (which
stand at 45% of GDP), and banks lend when they are told to lend.
Social housing completions should rise (from 5m to 6m in 2013), though social housing starts fall
from 10m in 2011 to 7m in 2013.
Our worry is the proportion of local government revenue from housing/ property development
(expropriation of land)….30% to 40%.
-2
0
2
4
6
8
10
2001 2003 2005 2007 2009 2011 2013
Deposit rate
Headline CPI
5) The working age population started declining in 2012 (by 3m), suggesting GDP can only grow in line with
productivity (c6%). Evidence for this: labour shortage in spite of the slowdown; 6) China is moving from a
negative to a positive cost of capital, owing to deposit de-regulation.
11
Deposit growth has increased (January data point
likely distorted by the Chinese New Year) Real deposit rates are now positive
10
15
20
25
30
35
1998 2001 2004 2007 2010 2013
China, Loans, y /y %
Deposits, y /y %
Source: Thomson Reuters, Credit Suisse research
88
93
98
103
108
113
118
-3%
-1%
1%
3%
5%
7%
9%
11%
13%
Q1 1998 Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010 Q1 2012
China, current account, % of GDP, 4q lag
Chinese yuan TWI, inverted, rhs
7) The RmB has appreciated strongly year to date – this puts pressure on the external balance and
corporate margins. Low margin, strong currency, rise in real cost of capital, slowing growth=a NPL problem
(officially 1% of loans and our banks team believe will rise to 7 ½% of loans).
12 Source: Thomson Reuters, Credit Suisse research
93
95
97
99
101
103
105
107
109
Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13
Chinese YuanBrazilian RealIndian RupeeRussia trade
BRIC currencies trade weighted (100= 1st January 2013)
Yuan trade-weighted is the only major
GEM currency to have risen year-to-date
A strong currency should put downward
pressures on the current account balance…
0%
2%
4%
6%
8%
10%
12%
14%
16%
Rus
sia
Indo
nesi
a
Mal
aysi
a
Sou
th A
fric
a
US
Indi
a
Kor
ea
Bra
zil
Glo
bal
Tha
iland
Mex
ico
Tur
key
GE
M
Tai
wan
Pol
and
Chi
na
2013E consensus non-financial margins
… as well as the already low corporate margins
In sum, the main drivers of Chinese GDP growth in the last decade are sharply diminished:
13
Population is peaking ergo rate of growth has to be closer to productivity growth;
The benefits of joining WTO in 2001 a decade ago have severely waned;
The housing boom has led to overbuild and expensive valuations, with residential investment rising
from 5% of GDP in 2001 to 13% of GDP now (with the indirect effect perhaps equally as large);
A rise in the real cost of capital owing to rate de-regulation. Negative real deposit rates for large
portions of the last decade helped to fuel a substantial rise in the investment share of GDP, to an
unprecedented 48% of GDP. Real deposit rates having now turned positive, which will ultimately raise
the real cost of capital, and yet deposit growth is currently close to its lowest rate on record;
Aggregate leverage (private and public) is now 15% above trend and 30% too high relative to other
emerging markets;
The RmB appreciation against other central banks
Policy: in year 1 of a 10 year term. Pursue reform at the expense of growth.
Our Chinese economist, Dong Tao, points out that there is a risk of uncoordinated policy, as individual parts of the state apparatus (such as the central bank) pursue their own agendas.
-8%
-4%
0%
4%
8%
12%
1995 1998 2001 2004 2007 2010 2013
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
Eur cap goods w ith mining
ex posure on analy st
recommendations rel to
market (+=Buy ; -=Sell)Analy st recommendations,
rhs (1=Buy ; 5=Sell)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Eur cap goods with mining exposure net margins
Average
-30%
-20%
-10%
0%
10%
20%
30%
40%
1995 1998 2001 2004 2007 2010 2013
Eur cap goods w ith mining ex posure 3m breadth
Rel mkt
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
1995 1998 2001 2004 2007 2010 2013
Eur cap goods w ith mining ex posure 12m fw d P/E rel mkt
Av erage
14 14 14
Investment implications: 1) We are cautious on capital goods with mining exposure. Valuations are stretched, mining capex is falling as is relative earnings momentum, net sell-side recommendations are still positive and consensus margin estimates are at historical peak levels. More Japanese competition as the Yen weakens.
Source: Thomson Reuters, Credit Suisse research
Capital goods with mining exposures are now neutral on P/E relatives….
…but the stocks are expensive on P/B relatives
Relative earnings momentum is falling
Consensus margin estimates for mining-exposed stocks are at a 6-year high
Australian mining capex growth is slowing
Net sell-side consensus recommendations are still bullish relative to the market
-50%
-30%
-10%
10%
30%
50%
70%
90%
110%
1989 1993 1997 2001 2005 2009 2013
Mining capex , y /y %
Australia
80%
100%
120%
140%
160%
180%
200%
220%
240%
1995 1998 2001 2004 2007 2010 2013
Eur cap goods w ith mining ex posure P/B rel mktAv erage
These are the plays: Sandvik looks expensive
15
Capital goods stocks with significant % mining exposure and their valuations on our aggregate scorecard
Source: Thomson Reuters, Credit Suisse research
Name Absrel to
Industry
rel to mkt %
above/below
average
Abs
rel to mkt %
above/below
average
FCY DY
Price, %
change to
best
3m EPS 3m Sales Credit Suisse rating
Fenner 60% 10.0 75% 11% 2.1 8% 5.5 3.4 52.3 -9.1 -2.3 2.0 Neutral
Caterpillar 40% 11.3 85% -2% 3.1 -22% 6.3 2.3 38.0 -14.4 -7.6 2.1 Outperform
Metso 42% 10.7 80% 13% 1.9 1% 8.9 6.5 11.8 -3.1 -1.5 2.3 Outperform
Sandvik 42% 12.5 93% -1% 3.1 -1% 7.8 4.2 -6.6 -13.8 -3.2 2.7 Underperform
% sales exposure to
Oil & Gas, mining OE
+ mining aftermarket
Consensus
recommendation
(1=Buy; 5=Sell)
-----P/E (12m fwd) ------ 2013e Momentum, %------ P/B ------- HOLT2013e, %
2) Cautious on mining: Dividend yield relatives and P/B relatives are
attractive – but this has been the case for all year!……..
16
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
12m fwd dividendyield mining rel. world
0.5
0.7
0.9
1.1
1.3
1.5
1.7
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Global mining P/B rel
P/B relative of global mining is close to a record low…
… whereas the 12m fwd dividend yield is at a record high.
Source: Thomson Reuters, Credit Suisse research
4.0
4.2
4.4
4.6
4.8
5.0
5.2
5.4
5.6
5.8
6.0
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Equally-weighted metals real price index (logs) 100-year average
Real industrial commodity prices are at 100-year norms, suggesting that
earnings levels are realistic (i.e. not artificially low)……..
17
50
75
100
125
150
175
200
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
2005 2006 2007 2008 2009 2010 2011 2012
European mining relative
Chinese Iron Ore USD/tonne (rhs)
CS Iron Ore forecast, end 2013
Iron ore prices are expected to fall to $90 per tonne…falling iron ore prices are normally bad for mining
Real prices are above their 100-year average
Source: Thomson Reuters, Credit Suisse research
20%
40%
60%
80%
100%
120%
140%
160%
1992 1995 1998 2001 2004 2007 2010 2013
World mining stocks 12m fw d P/E rel mkt
Av erage
Pan Eur sectors FCFY 2013e
0%
2%
4%
6%
8%
10%
12%
14%
Tel
ecom
s
En.
Util
s.
Util
ities
Med
ia
Tob
acco
Pha
rma
Hot
els
& L
ei
Met
& M
in
Com
ml S
vs
S/W
& S
vs
Hea
lthca
re
Bev
erag
es
Aut
os
Foo
d R
tl
Cap
Goo
ds
Ret
ail
Fd
Pro
ds
H/H
& P
er P
rod
Con
s D
ur &
App
Ene
rgy
Sem
is
Market ex -financials
0.3
0.8
1.3
1.8
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1990 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Diversified mining CFROI®, lhs
Price/Cost Ratio
R2 = 0.66
Implied price/cost ratio
Our model implies a price/cost ratio of 0.9 for 2016 down from 1.07 now which suggests 4% upside in metal prices if costs inflation runs at 4% p.a.
Consequently, we think it is not unfair to look at P/E and FCF yield relatives
– and these are not yet attractive.
18
Mining has moderate FCF yields
Global mining’s P/E relative is at historical average levels
Mining stocks are implying a minor rise in in metal prices if we assume 4% p.a. cost inflation
Source: CS HOLT, Thomson Reuters, Credit Suisse research
Australia
Canada
Denmark
Europe
Japan
Mexico
Norway
New Zealand
Switzerland
United States
Czech Republic
Finland
Hungary
Korea
Poland
Turkey
China
Russia
Brazil
Thailand
Singapore
India
South africa
-100%
-50%
0%
50%
100%
150%
200%
-80% -60% -40% -20% 0% 20% 40% 60%
Net international creditor(IIP % GDP)
Undervalued currency (vs OECD PPP)
Overvalued currency
50
55
60
65
70
75
80
300
400
500
600
700
800
900
1000
1100
1200
2006 2007 2008 2009 2010 2011 2012 2013
CRB metals, lhs
Australian dollar,trade-weighted, rhs
50
55
60
65
70
75
80
1
1.2
1.4
1.6
1.8
2
2.2
2.4
2.6
2.8
2007 2008 2009 2010 2011 2012 2013
Mining sector relative
Australian dollar, trade-weighted, rhs
3) Short the Australian dollar: The AUD is still c40% overvalued and has a lot
further to fall to play catch up with mining or industrial commodity prices.
19
The Australian dollar is around 40% overvalued, despite Australia being a net international debtor
The Australian dollar has remained stronger than implied by the fall in metals prices…
…with its detachment from the global mining sector even more pronounced
Source: Thomson Reuters, Credit Suisse research
75%
85%
95%
105%
115%
125%
135%
1996 1998 2001 2004 2007 2010 2013
Australia rel World: P/B
Average (+/- 1SD)
75%
80%
85%
90%
95%
100%
105%
110%
115%
120%
125%
1996 1998 2001 2004 2007 2010 2013
Australia rel World: P/E
Average (+/- 1SD)
On the Australian equity market, valuations appear stretched relative to global
markets. We have a short Delta one basket of domestic Australian stocks (CSAPASHT
index).
20
The PE relative of Australia is extremely elevated The P/B relative of Australia is less extreme, but remains above average
Consumption, Share of GDP
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
1995 1996 1998 1999 2000 2002 2003 2005 2006 2007 2009 2010 2012
China United States
GEM consumer story should be much more resilient. (1) The BRIC consumer share of GDP remains abnormally low and the Chinese consumer share of GDP is still just around half that in the US and Japan.
21
Emerging markets have a low consumption share of GDP
Source: Thomson Reuters, Credit Suisse research
In particular, China’s consumption share of GDP is less than half the US levels
40%
45%
50%
55%
60%
65%
1997 2000 2003 2006 2009 2012
G7 consumption share of GDP
BRIC consumption share of GDP
-5%
0%
5%
10%
15%
20%
25%
1997 2001 2005 2009 2013
GEM
Developed
Hourly wages, yoy, %
22 22
(2) The key drivers of consumption are higher wage growth in emerging markets (compounding at c.10% p.a), a fall in the savings ratio (China’s savings ratio is still c.40%) as there are moves towards a more state-sponsored social security system that diminishes the need for individuals to save for old age or ill health. Chinese retail sales have been resilient to swings in the global cycle.
22
Chinese retail sales are growing considerably faster than those in the US
Source: Thomson Reuters, Credit Suisse research
Asian exports have continued to follow the US cycle
-11%
-6%
-1%
4%
9%
14%
19%
24%
2002 2003 2005 2007 2009 2011 2013
US
China
Retail sales y oy , 3mma
20
30
40
50
60
70
1994 1998 2003 2008 2013
-35%
-25%
-15%
-5%
5%
15%
25%
35%
45%
ISM new orders, 6m lead, lhsAsian ex port grow th, y /y , rhs
Emerging market wage growth is running at around 10%
23 23 23
Even with pessimistic assumptions on trend growth, discretionary GEM consumption still rises strongly in nominal terms. (High savings ratios and falling food price-food is a third of CPI-should help). In China’s case even with 6% GDP, discretionary consumption growth can still be c12% and in a currency that is appreciating against the dollar.
Source: Thomson Reuters, Credit Suisse research
0%
5%
10%
15%
20%
25%
30%
35%
40%
US
Kor
ea
Bra
zil
UK
Japa
n
Ger
man
y
Tha
iland
Indi
a
Chi
na
Household savings ratio
(% of disposable income)
Savings ratios are still high in many emerging
markets Food prices have fallen over the past
two years
China grows by 6% per year in real terms between now and 2020, then consumption is likely
to grow by 10%, and discretionary spending by 12%
GDP
2012 Target
Brazil 2.0% 61% 63% 2.3% 64% 65% 2.5% 6.0%
China 6.0% 36% 50% 9.7% 52% 65% 12.0% 14.5%
India 5.0% 56% 62% 6.2% 55% 60% 7.0% 11.0%
Russia 2.0% 51% 56% 3.0% 59% 65% 4.0% 7.5%
BRIC 5.0% 44% 54% 7.1% 56% 64% 8.6% 12.1%
Developed
countries2.4% 64% 74%
Implied nominal
growth
CountryConsumption share of GDP
Consumption
Implied real
growth
Implied real
growth Latest 2020E
Real trend
growth
Discretionary consumption (% of total)
390
410
430
450
470
490
510
Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13
CRB Food
The problem has been currency weakness (with exception of China).
24 Source: Thomson Reuters, Credit Suisse research
EM currencies rel. Euro
-21%
-18%
-15%
-12%
-9%
-6%
-3%
0%
3%
6%
9%
12%
15%
18%
Brazilian Real Indian Rupee Chinese Yuan IndonesianRupiah
Singapore Dollar Russian Rouble South AfricanRand
Q1 vs Q1 Q2 vs Q2 Q3 vs Q3Q4 vs Q4 YTD
Performance of EM currencies relative to Euro (period average) 2012 vs 2011 & YTD 2013:
The indirect plays are cheap direct plays. If we value their emerging market businesses on the valuation of their subsidiaries.
25
Developed market consumer stocks with emerging market exposure are trading
cheaply relative to their foreign-listed subsidiaries
Source: Thomson Reuters, Credit Suisse research
For example, 54% of Unilever’s business comes from emerging markets and Hindustan Unilever (its Indian subsidiary) and Unilever Indonesia (its Indonesian subsidiary) trade on 35x and 37.5x earnings multiples, respectively. Hence if we accord the emerging market business of Unilever the average of these two multiples, the developed market business is to be had almost for free.
Firm Country GEM Exposure 12m fwd PE GEM PE / Main PE* Developed Market P/E*
UK 14.5
Malaysia 21.3
UK/Netherlands 17.8
India 35.0
Indonesia 37.5
Belgium 18.1
Brazil (AMBEV) 20.5
US 19.6
India 29.9
Switzerland 16.9
Malaysia 26.8
India 36.6
*GEM equal weighted
Unilever 54% 204% -3.9
Nestle 42% 187% 6.2
153% 10.4
Anheuser-Busch-Inbev 49% 113% 15.8
Colgate Palmolive 47%
British American Tobacco 60% 147% 4.3
20
60
100
140
180
220
260
1990 1993 1997 2001 2005 2009 2013
GEM indirect play s rel S&P 500
NJA mkt rel S&P 500
50%
80%
110%
140%
170%
200%
1991 1994 1998 2002 2005 2009 2013
12m fw d P/E GEM consumer indirect rel GEM consumer direct
Av erage (+/- 1 SD)
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
1991 1994 1998 2002 2005 2009 2013
GEM indirect consumer 12m fw d P/E rel World
Av erage
60%
80%
100%
120%
140%
160%
1994 1997 2000 2003 2006 2009 2013
GEM direct consumer play s 12m fw d P/E rel GEM mkt
Av erage
26 26 26
The debate is valuation of the direct plays… The GEM consumer staples are trading close to all-time highs on P/E relatives.
Direct plays on GEM consumption look expensive
relative to emerging markets overall...
Source: Thomson Reuters, Credit Suisse research
...as do indirect plays relative to global markets
Indirect GEM consumer plays at 4% premium over
direct plays on 12m forward P/E
In the long-run indirect consumer plays have been a better
way to play emerging markets than the direct plays
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2001 2003 2005 2007 2009 2011 2013
BAT 12m fwd PE rel. global
0.6
0.8
1
1.2
1.4
1.6
2001 2003 2005 2007 2009 2011 2013
Unilever 12m fwd PE rel. global
Unilever P/E relatives relative to emerging markets P/E relatives: emerging market funds might now look for direct non-consumer related plays!
27
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
2001 2003 2005 2007 2009 2011 2013
SAB 12m fwd PE rel. global
Unilever 12m fwd P/E rel. global BAT 12m fwd P/E rel. global
SAB 12m fwd P/E rel. global
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
MSCI Emerging markets 12m fwd PE rel. global
Emerging market 12m fwd PE rel global
is at a 5 year low
Source: Thomson Reuters, Credit Suisse research
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1992 1995 1999 2002 2006 2009 2013
GEM indirect consumer %dev from 6mma,
rel to WorldAv erage
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
1994 1997 2000 2003 2006 2009 2013
2.1
2.3
2.5
2.7
GEM indirect consumer on analy st recommendations rel to
World (+=Buy ; -=Sell)Analy st recommendations (1=Buy ; 5=Sell)
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1992 1995 1999 2002 2006 2009 2013
GEM indirect consumer 3m breadth
Rel World
28 28 28
Indirect GEM plays’ relative earnings momentum have turned negative and
sell side are bullish.
Relative earnings momentum of Indirect GEM
consumer plays have turned negative
Source: Thomson Reuters, Credit Suisse research
Sell-side analyst net buy recommendations on the
indirect GEM consumer plays are now positive
... and not overbought on our price momentum monitor
Companies Mentioned (Price as of 24-Jun-2013)
Anheuser-Busch InBev (ABI.BR, €65.05) British American Tobacco (BATS.L, 3293.0p) Caterpillar Inc. (CAT.N, $81.52) Colgate-Palmolive (CL.N, $56.15) Fenner (FENR.L, 317.0p) Metso (MEO1V.HE, €26.32) Nestle (NESN.VX, SFr59.3) Sandvik (SAND.ST, Skr80.9) Unilever (UNc.AS, €28.82)
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