European Equity Themes
PRODUCT MARKETING THEME
Back to normal
With leading indicators having marked a clear turning point in the cycle,
the incentive to lengthen the time horizon to value the earnings stream of
companies has increased. The slope of the yield curve would say the
same. Having focused on valuations reflective of a trough in the cycle
over the last year, the market focus shifts to consider stocks in more
‘normal’ or, perhaps, mid-cycle economic conditions. In this report, our
analysts conduct a scenario analysis for their stocks and sectors to
consider potential target prices if valuations and earnings return to a midcycle
level. We stress the word ‘scenario’. Our strategists and economists
have provided the top-down context. We highlight the following:
■
Having recently raised their economic forecasts, our economists estimate
that a conservative view can see output in developed economies back to
trend by 2012. Analysts have worked off this assumption.
■
The analysis does not offer a blanket buy for cyclical sectors. There appear
to be as many cyclical sectors well priced for recovery as those underpricing
it. Oils, chemicals and capital goods are among the former with real
estate, travel & leisure and software among the latter.
■
We also find that a number of less cyclical sectors emerge as attractive
given their inherent growth qualities and having in some cases endured a
significant de-rating of late. Aerospace and defence and medtech stand out
here. Telcos—although to a degree economically sensitive—also ranks well.
■
We detail the calculations stock by stock inside but stocks with some of the
most potential upside on this ‘normalised’ approach and rated Outperform by
our analysts include Punch, Cap Gemini, TNT, Finmeccanica, Synthes and
Telefonica from the sectors above. We would also highlight DSGI, Peugeot
and Smurfit as being among the strong stories from our analysts.
■
On the negative side, Statoil and Royal Dutch Shell stand out among oils,
Akzo Nobel in chemicals and Atlas Copco, SKF and ABB in capital goods.
Away from the general sector negatives, Michelin contrasts with Peugeot,
and EADS with Finmeccanica.
■
In looking at our emerging market coverage, our analysts find the potential
greatest in the Middle East where construction and real estate now appear
underpriced on a recovery. This is in contrast to Russia and the basic
material stocks in particular. Outperform-rated stocks include Arabtec, Palm
Hills and Turk Telekom. Among the Underperforms are Mechel, Norilsk
Nickel and Novolipetsk. Away from this regional contrast, we would highlight
Outperform-rated stocks Comstar, CEZ and Vodacom.

Table of contents
Executive summary 3
Bottom-up analysis
Aerospace & Defence 6
Autos 12
Banks 17
Beverages 26
Building Materials 31
Capital Goods 35
Chemicals 39
Food Producers and HPC 43
Food Retail 47
General Retail 51
Healthcare and Medtech 56
Infrastructure 61
Insurance 64
Integrated Oils 69
Luxury Goods and Tobacco 74
Media 78
Paper & packaging 84
Real Estate 87
Semiconductors 91
Software and services 97
Specialty finance 102
Steel and Metals & Mining 105
Telecom Equipment 111
Telecoms 115
Travel & Leisure and Transport 118
Utilities 121
Emerging markets
Middle East 126
Russia 130
Turkey 141
EEMEA Telecoms 146
Top-down analysis
Economics 150
Developed markets equity strategy 154
Emerging EMEA overview 160
Unless otherwise