Issue 02May 2007Expert know-how for Credit Suisse investment clientsGlobal InvestorUnlocking global valueEmerging market brands on the riseBasics In ation-linked bonds / emerging market domestic bonds / logistics / superior business models of Swiss small and mid-capsEnrichment The Northwest Passage / Kazakh banksSwitching One network for everything / energizing solar cells / a regulatory gift for banks
In this segment, we discuss inflation-linked bonds, highlighting among other things their portfolio diversification characteristics, and we analyze the convergence of strong EM sovereign bonds with those of developed sovereigns. We explain why and how the logistics sector is recovering. Swiss small and mid caps are en vogue, and we highlight a few in this section. See page 18The debate about global warming is providing ammunition for those favoring the Northwest Passage (sea route) as a shortcut between Europe and Asia. Kazakh banking is set to benefit from strong economic growth, and therefore appears on investors radar screens. See page 32New generation networks will be built by 2010, enabling telecom service providers to offer better service in terms of quantity, and especially quality (IPTV). Nanotechnology will influence the next generation of solar cells. MiFID, a new financial directive to be introduced in November 2007, will benefit certain banks. See page 42
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What moves the world 1B oth equity and bond Globalization is increasingly reflected in the convergence of prices for various asset classes, such as equities and bonds. In the case of equities, we illustrate this process using the example of the price to book ratio. For a number of years now, the emerging markets have been undergoing an adjustment process towards the global equity markets. This is being driven by higher earnings growth and return on equity as well as increased risk tolerance on the part of investors. Relative price to bookMarket cap of MSCI EMF as a % of MSCI World% markets vs. WorldLatin America vs. WorldAsia vs. WorldEastern Europe vs. WorldSource: Datastream, MSCISource: Datastream
What moves the world 2 valuations continue t he adjustment processEconomic setbacks such as the Asia crisis in the late 1990s are only of a short-term nature and have no effect on the long-term adjustment process. This investor pattern is also taking place with bond investments and is reflected in narrowing yield differentials. Hence, the risk premium for EM government bonds vs. US Treasuries is steadily market bond benchmark spreadIndex18001500120090060030001998199920002001200220032004200520062007Source: Bloomberg
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GLOBAL INVESTOR Editorial07Globalization is evident not only in hard facts such as gross domes-tic product (GDP) growth or increasing worker mobility but also in the increasing convergence of prices for financial assets. We broadly refer to this process as the unlocking of global value, which is also the main theme covered by the current issue of Global In-vestor. Global value can be unlocked through investments in a general sense or by investing in certain sectors of emerging mar-kets or even in new technologies in industrialized countries. We offer a broad perspective here, beginning with an article on the new national champions in the emerging EMEA region (Europe /Middle East / Africa), whose brands could rise to the ranks of todays giants, just as Toyota or Sony rose to rival Ford and Philips three or four decades ago. Growth in emerging markets shows no sign of abating. The term emerging markets no longer applies to only certain well-known countries in Latin America and Eastern Europe and the Asian Tigers. The frontiers of emerging markets are in a state of flux; countries like Kazakhstan have recently appeared on investor radar screens. Kazakhstans GDP has expanded at an annual rate of more than 10% for the past six years. Rising living standards and growing in-ternational trade flows have created a boom in the banking most practical way of investing in emerging markets is through the stock market or stock market-related products. In emerg-ing markets investors can also consider bond investments, because domestic bond issues are increasingly being used to finance growth. We think the current prices of EM bonds do not reflect the given liquidity and credit ratings. We consider inflation-indexed bonds an interesting proposition here, and not only for potential bond inves-tors, because they represent a hedge against inflationary risk while enhancing portfolio trade volumes have surged during the past five years and are likely to continue to grow in the wake of globalization. Certain segments of the logistics sector stand to benefit strongly from this rising trend. Global warming has raised the prospects of using the Northwest Passage as a shortcut between Europe and Asia. If commercially viable, this new sea route would have a positive ef-fect on global trade flows. Besides these macro-driven issues, we also take a look at micro issues such as the next-generation net-works that telecom companies are working on, the impact of nano-technology on manufacturing solar cells and the implications of MiFID (Markets in Financial Instruments Directive) for the trading volumes handled by banks. Whether macro or micro, we hope you can take advantage of our ideas in this issue of Global Investor to make sound investment Dolores Lamas, Head of Financial Products & Investment Advisory Photo: Martin Stollenwerk
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GLOBAL INVESTOR Content09Unlocking global valueEmerging market brands on the riseLead article10We believe that several emerging market companies are on the verge of becoming larger and more powerful brandsInflation-linked bonds as an asset classBasics19Inflation-linked bonds show a solid risk/return ratio and low correlation to other asset classes, making them a valuable alternative investment assetEmerging market domestic bonds22Emerging market credits are expected to fund more than 90% of their financing needs in 2007 by increasing net domestic issuance by USD 228 billionGlobalization driving logistics26Global trade volumes have surged in the last five years and logistics companies have been the main beneficiaries of this trendInvest in superior business models30Taking advantage of a robust economic environment, Swiss small and mid-cap companies have generated above average shareholder returns in recent yearsThe Northwest PassageEnrichment33Increasing visibility on the opening up of a Northwest Passage could potentially have mammoth ecological, economic and political impactsKazakh banks on the rise38Between 2000 and 2006, Kazakhstans real GDP rose by 10% on average, making the country one of the fastest-growing economies worldwideOne network for everythingSwitching43Full-scale digitalization of telecommunications networks and faster data rates are profoundly changing the environment in which telecom companies operateNanotech for energizing solar cells47In some areas, photovoltaic technology may catch up to conventional electricity by as early as 2011, opening up enormous markets for the industryA regulatory gift for banks52MiFID is a regulatory initiative intended to open up competition and create a single pan-European financial services marketThinking outside the boxServices56HOLT software is (almost) all that is needed to value almost any company: a sound and reliable valuation model and a global database of comparable data58Authors60DisclaimerImprint
GLOBAL INVESTOR Lead11 Emerging market brands on the riseWith the growing contribution of emerging markets (EMs) to world gross domestic product (GDP) growth, we believe that s everal EM-based companies are on the verge of becoming larger and more powerful brands. We identify two types of firms: companies that are export-oriented and gaining market share at the expense of Western competitors, which we call national champions, and companies benefitingfrom the emergence of a middle class in several EMs, which we refer to as mirror companies because of the way they emulate Western business Kalbreier, Head of Global Equities and Alternatives Research, Herv Prettre, Head of Commodities and Equities Trading Research, Etrita Ibroci, Trading StrategistThe rise of new brands from emerging markets (EMs) is not a new in the domestic market to benefit from the rising middle class. In the phenomenon. The emergence of local brands follows a traditional past few years, the rapid acceleration of economic growth in most development pattern that is similar to the historic development of EMs has revived the theme of emerging brands. Rapid economic US, European and Japanese companies in past decades. Depend-growth has translated into significant increases in gross domestic ing on the size of the country, a brand usually follows one of two product (GDP) per capita, boosting the turnover of local companies types of developmental models: domestic market model: geared to consumption. Globalization has also increased the export a strong domestic market long protected from foreign competition opportunities of a number of companies, reinvigorating the idea of will support local brands. With economic growth, standards of liv-national champions. In our view, the emergence of this new com-ing rise rapidly in the developing economy. As a result, consumers petitive landscape in the coming years is unmatched in recent his-in such markets have growing amounts of disposable income and tory and can be compared to the rise of Japanese and Korean higher salaries, which fuel domestic consumption, enabling some brands in the 1970s and brands to gain significant size and reach the status of brand Historic benchmark: The emergence of Japanese brandsbehemoths. As such, they eventually achieve economies of scale, global status and export model: coun-Japans development started in the 1960s, as the country began to tries with insufficient domestic markets choose to specialize in select-build up its own brands and distribution systems. Japan developed ed competences and focus on the export of value-added products. innovative products and production processes at such a fast pace These companies are often backed by their governments and are that by the mid-1970s, they were dominating American and Euro-thus qualified as national champions. They have some competitive pean companies in sectors from automobiles to consumer electron-advantages in terms of resources, an educated and cheap work-ics. Brands such as Toyota and Sony became world leaders from a force, and research, just to name a base. In 1953, Japan accounted for % of world exports. By In recent history, the two models have tended to merge into 1978, its export share had risen to %. Investment in its emerging one. In the 1970s, companies in countries such as Japan, which brands, based on domestic consumption or national champions, emerged thanks to the rise of domestic consumption, also got a turned out to be a profitable move. A Japanese company like Toyota boost from their governments to raise their competitiveness and offered significant performance if included in a portfolio in 1973, by become national champions. The opposite is currently happening in which time it had established a presence in most Western coun-China, where national export champions are increasingly expanding tries and seven years before its market share gains skyrocketed at
GLOBAL INVESTOR Lead126 %Source: 1700 2004 from The World Economy: A Millennial Perspective, by Angus Maddison; 2001 2025 from EIA, International Energy Outlook 20055 %4 %3 %2 %1 %0 %17001725175017751800182518501875190019251950197520002025Figure 2 L ong-term world GDP growth rate (1700 2025 E)The emerging economies are expected to become the engines of global growth for the next 20 years. Golden era of globalization Retreat Postwar rebuild and Japan China, India and other developing countries China, India and other developing countries
GLOBAL INVESTOR Lead13the expense of US firms. Opportunities are now open for the next Figure 1 generation of EM mirror companies and national champions. We Return in months from USD 100 invested at startbeCompanies becoming national champions have historically delivered strong lieve investing in the right ones could deliver significant returns returns during the first 10 to 15 years of growth. on a long-term horizon. A look at Figure 1 shows the profitability of Source: Bloomberg, National Bureau of Economic Research, Credit Suisseinvestment in past national champions. Of course, investors should not expect to see a straight line: the return on these investments on Returna 10-to-15-year horizon would reach close to +13% per annum, more 1000than twice the geometric mean of world equity markets since 1900 900(estimated at +% . according to Dimson, Marsh and Staunton). 800However, volatility in most cases would be significant. Corrections in 700world equity markets tend to be more pronounced for EMs, as high-600lighted by the May 2006 or March 2007 corrections. However, in the 500long run, there may be superior returns, as highlighted by Figure 1 400showing the performance of some national champions of the past 300during selected secular rise of the emerging market consumer 1000EM consumers have grown in importance and are able to fuel local Months121416181101121141161companies geared to consumption. As highlighted by Figure 2, global economic growth has accelerated in the past decades, and is increas- US technology in 1990 Acer in 1996 US industrials in 1945 Toyota in 1984 British steel and copper in 1887ingly supported by EM growth. As a result, EMs now represent just under 50% of world GDP (see Figure 3) in terms of purchasing power parity (PPP). According to the IMF, in recent years, consumption in EMs has grown by an average +7% per annum, compared to +2% to +3% in Western countries. Per capita income growth in the emerg-Figure 3 ing markets is very high compared to the Group of 5 (G5) coun-Share of world GDP tries, and such a rapid pace of growth is likely to continue into the The world is becoming more geographically diversified, with less foreseeable future (see Figure 4 and Table 3). Moreover, widening in-dependency on the USA, Europe and Japan. Soon emerging economies will come distribution in these regions suggests that the higher-income be as important as the developed ones. Source: International Monetary Fundpopulation will likely grow at an even faster rate (according to Credit Suisse research, the number of households in China earning %over USD 5,000 is likely to grow more than six times faster than the 70growth rate of average incomes).60Moreover, in the past decade or so, several countries have record-ed a significant rise in their GDP per capita, and some cities (like 50Shanghai) are already seeing their population benefit from a GDP 40per capita above USD 7,000, which is the benchmark for luxury goods consumption. The level of wealth in these cities matches the 30level of GDP per capita in countries like Greece or Portugal, but 20with a much larger population base. Urbanization particularly sup-ports consumption, as new urban residents in many countries dis-10cover national or international brands which have not yet reached 0the countryside. The younger urban population is also changing 19801982198419861988199019921994199619982000200220042006 Esavings habits of the older generation: in China for instance, many urban youngsters are known as yueguangjue, or broke every Emerging Developedmonth, as they venture on a consumption spree regularly. We are far from the 40% savings rates of the Chinese population in the year 2000. Still, the EM consumer market is underdeveloped, consider-ing the proportion of domestic consumer stocks in total EM market capitalization, let alone compared to the size of the consumer sector in Western stock exchanges. EM consumerism is in its infancy, but its growth potential may present some interesting long-term invest-ment opportunities, as highlighted by Figure 4 and Table 3. Opportunities for exposure to this rising EM middle classWe believe that some local companies are benefiting from this rapid accumulation of wealth. Many consumption-geared EM com-panies have not needed to reinvent their business models; they simply mirror the models used by their Western peers in recent
GLOBAL INVESTOR Lead14Table 1 Selection of mirror companies with brief descriptions This is a selection of EM companies which Credit Suisse believes have the potential to become major companies in the long term, based on the emergence of a middle class in countries posting superior economic growth as well as Credit Suisses view on these companies. Source: Bloomberg, Credit SuisseRegionCountryNameTickerSectorShort descriptionAsiaKoreaSamsung 000810 KSInsuranceKoreans are increasingly buying more non-traditional insurance Fire & Marine products that offer both protection and Ning2331 HKApparel retailAlternative to the Western sports apparel and shoe companies such as Nike or Adidas, focused mainly on Chinese ADRBIDU USInternet contentLargest search engine and portal in China with search algorithms that are suited specifically to the Chinese Motors203 HKCar Core business: making and distributing sedans in China through manufacturingits 50%-owned Guangzhou Honda JV with Honda Japan. It also has an auto component 489 HKCar One of the largest car manufacturers in China. Its joint ventures Motormanufacturingwith a number of international brands, namely Kia, Peugeot-Citron, Honda, and Nissan, provide it with one of the most diversified product Mengniu 2319 HKFood and Chinas largest dairy product manufacturer with a more than 30% Dairybeveragesmarket share. It is one of the most innovative and cost-efficient players in the Wine828 HKFood and One of the top three local wine brands in China. It owns one of the beverageslargest distribution networks. Its partnership with Remy Cointreau SA also helps it stay ahead of its competitors in terms of wine quality and R&D 168 HKFood and Chinas most famous brewery and therefore the major player in the Brewerybeverageshigh-end market. It runs an extensive distribution network in the affluent coastal RussiaVimpelcomVIMP RUMobile phone Russias second largest mobile phone operator, covering most of EuropeoperatorsRussias population, with a focus on RUCosmetics A strong presence in the Russian personal care market: 18% share and toiletriesin facial care in value terms, 9% in oral care and 16% in skin -WBD USFood, juice Russias Danone. It produces yoghurt, fruit-flavored milk, and fruit Bill-Dann ADRand dairyjuices, which are sold in the former Soviet Union (FSU) and some export PWMediaPublishes the Gazeta Wyborcza daily newspaper, operates ten regional radio stations and owns a minority stake in the operator of cable television station Canal Plus BrazilPorto SeguroPSSA3 BZInsuranceThe largest auto insurance company in Brazil, with a 16% market Americashare in the auto insurance business, which is a growing business catering to the Brazilian middle ADRGOL USAirlinesThe only low-fare, low-cost airline operating in Brazil, providing frequen t service on routes between all of Brazils major MMRetailA mirror company of US Wal-Mart as it retails food, clothing, and other merchandise under a variety of store formats. It also operates restaurants.
GLOBAL INVESTOR Lead15decades, which are based, among other things, on just-in-time Figure 4 delivery, consumer credit, and use of the Internet. As a result, se-Per capita income growth Per capita income growth in EMs is high compared to G5 countries, lected EM mirror companies are likely to develop faster than, for and such a rapid pace of growth is likely to continue into the foreseeable example, Ford did in the USA in the 1920s, or Metro in Germany future. Widening income distribution suggests that the higher-income after World War II. population will likely grow at an even faster rate. Source: International Monetary Fund, The Economist Intelligence Unit, Credit SuisseSelected sectors expected to benefit%As credit and mortgage availability grows, banks that operate in the 6consumer credit area in EMs could be viewed as growth stocks. There is a notable lack of leverage across EMs, especially in the 5domestic consumer sector, and investors can anticipate a strong 4boom in consumer credit cycles. We believe this new trend is likely to be particularly pronounced in Asia, where domestic demand re-3mains weak compared to exports, and external surpluses are huge. 2Finally, the recent access to wealth usually induces a spending spree on some prestige items as a way to highlight personal suc-1cess. Further opportunities in the credit business remain in several 0countries, such as Kazakhstan, which is discussed in detail in a separate article in this sector significantly geared to the emergence of a local China France Japan United Statesmiddle class is consumer staples. As incomes rise in EM countries, Russia Germany United Kingdomthere is often a move toward branded food and beverages, focus-ing on international brands like Danone, Coca-Cola or Nestl but also on famous local brands such as Ambev in Brazil, Will-Bill-Dann or Kalina in Russia or Tsingtao in China. Since the middle class is mostly urban, it needs access to organized retailers, which carry the largest number of branded products. Retail chains and specialized retail, pharmacy chains for instance, have grown rap-idly in recent years and are currently preparing for even higher de-mand, usually adapting the Western model of just-in-time delivery, size and customer loyalty. We would also highlight sectors like local media, which are benefiting from a greater appetite among the middle class for information flow, higher advertising fees and higher subscription rates. Emergence of potential EM national champions As mentioned earlier, the national champion model is no longer the reserve of small countries looking for a niche. It has become the priority of large emerging markets wishing to increase their share of added value in the world economy. This is illustrated in the pro-gressive up-market moves of Chinese, Indian and other firms, away from competing merely on price and toward own brand and distri-bution network development, backed by leapfrogging technology. China was the first EM country to endeavor expanding its product mix and selling higher-value-added items, as the country had already reached a significant size in labor-intensive electronics and textile exports, and growth momentum in those low-value-added items appeared limited for the future. A Chinese initiative for national champions has therefore started in recent years and has focused on several sweeping measures: AStrong public research and development (R&D) efforts: R&D rose from % of GDP in 1997 to % in 2002, with % targeted for this year. The OECD estimates that China has become the worlds third largest investor in R&D, after the USA and Japan, spending 18 billion euros in 2005. Close to 12 million Chinese students are cur-rently enrolled in post graduate scientific education, which could make China the biggest source of researchers in the coming decade. BGrowing international investment: 70% of Chinese companies currently have capital expenditure plans in foreign
GLOBAL INVESTOR Lead16Table 2 Selection of national champions with brief descriptions We have not included all official national champions in this list. In China for instance, 50 companies are officially qualified by the government. According to our information, some of those companies are still not fit for international competition, while many others are already well advanced in their international development projects and do not fit this selection, which is more geared to selecting nascent brands. Source: Bloomberg, Credit Suisse RegionCountryNameTickerSectorShort descriptionAsiaChinaLenovo992 HKPC hardwareChinas leading manufacturer of PCs and handheld devices. Benefits from the Chinese governments target of making it a Chinese high tech HKTelecom The leading Chinese telecom equipment provider. ZTE now endeavors equipmentto serve emerging markets around the world. Its goal is to be as competitive as Western providers in commodities telecom equipment, but much cheaper, thanks to Chinese labor HKOil and gasOne of the worlds largest integrated oil companies. It owns more than half of the countrys oil reserves. It also runs the countrys second largest retail network for oil KongEsprit 330 HKApparel retailAlready a well-known brand for high-quality lifestyle clothes and shoes. HoldingsEsprit Holdings derives 80% of sales from Europe. The company plans further expansion in Europe to catch the current consumption trend toward ADRINFY USSoftwareIn ten years, the company has gone from being a basic outsourcer for data typing to a provider of application software solutions and consulting services. It is now trying to include higher-value-added services by offering global outsourcing packages to leading international ADRWIT USSoftwareOne of Indias leading providers of system integration and outsourcing services. Operating in about 35 countries, its Wipro Technologies division offers software development and business process outsourcing (BPO) services, as well as management consulting and product ADRSAY USSoftwareAmong the top five Indian IT services companies (in terms of revenue). Its main market is the USA, from where it derives 69% of its revenue, followed by Europe (15%), and the remainder from Asia Pacific. Satyam derives its revenue from the banking and finance, insurance and manu-facturing PROH MKCar Malaysias biggest carmaker. Through its subsidiaries, the company Holdingsmanufacturingmanufactures, assembles, and sells motor vehicles and related products such as accessories, spare parts, and other components. Proton is looking for international partners to significantly boost its Czech ZentivaZEN CPPharmaceuticalsVia a large dedicated sales force and a unique marketing approach, EuropeRepublicZentiva has established a solid generics and OTC position in the Czech Republic and Slovakia, and has also actively entered the high-growth markets of Poland, Russia and RICHT HBPharmaceuticalsThe largest Hungarian drugmaker. During the Communist era, it was Richterone of the leading suppliers of pharmaceuticals within the Soviet Bloc and remains a leading player and a well-recognized brand in the Russian market. Around two-thirds of revenues are still generated in Central and Eastern BrazilPetrobras PBR USOilCreated in 1953 by the Brazilian government to develop the countrys AmericaADRoil sector. It operates in both upstream and downstream and continues to have one of the best growth profiles thanks to unparalleled access to ERJ USAerospaceOne of the worlds leading manufacturers of commercial, corporate, Brasileira de and defense aircraft. It is one of the only EM aerospace companies in Aeronautica the HoldingVALE5 BZBasic materialsA vast mining-industrial complex with its main activities in the area of mining, processing and sale of iron ore, pellets, manganese, titanium, gold, copper, potassium and other minerals. With the acquisition of Inco, CVRD has definitely become a major league HIK LNPharmaceuticalsOne of the fastest-growing generics companies, profiting from the Pharma-Eastern European, Middle Eastern and North African regions. Moreover, ceuticalsHikma is growing strongly in its injectable drugs division. In January 2007, Hikma announced the acquisition of the German oncology inject-ables business, Ribosepharm, which should further enhance the outlook for this division and strengthen the companys presence in Europe.
GLOBAL INVESTOR Lead17Dismantling of some of the regulations that hinder corporate dyna-Table 3 mism: reforms of state-owned banks, an end to exchange control Per capita GDP: Compound annual growth rate (CAGR) Per capita GDP growth in EMs is high compared to G5 countries, and for corporations, privatizations, and an end to administrative authori-such a rapid pace of growth is likely to continue into the foreseeable future. zations for mergers have become recurrent features in the past few Source: International Monetary Fund, The Economist Intelligence Unit, Credit Suisseyears. China is endeavoring to create 50 national champions by Historical growthEst. growth2010 in several key sectors including telecom, oil, automobiles, and 5-year 10-year 14-year 200608 200611 consumer electronics. If China follows the example of Japan, then CAGR CAGR CAGRCAGRCAGRChinese sector champions are likely to become the next Fujitsus China13%11%12%13%13%or Sonys. Russia27%10%19%17%14%Overall, we believe we can identify Chinas National Champions France10%3%3%4%4%in three fields: large state-owned companies with signifi-Germany9%2%2%4%4%cant cash holdings and strong financing capabilities, which could Japan2%1%1%3%3%be very active in acquisition activities in overseas markets in the United Kingdom10%7%5%6%5%years ahead. Examples include the three oil companies (PetroChina, United States5%4%4%4%4%Sinopec and CNOOC), major financial institutions (ICBC, China Life, BOC, CCB) and the major telecom companies (China Telecom and possibly China Netcom). domestic consumer brands, which are beginning to obtain international recognition, like Lenovo or Tsingtao leaders: China is particu-larly strong in the telecom equipment segment, and the domestic issuance of 3G licenses should give domestic companies a strong boost. ZTE tops the list, but the unlisted Huawei Technology is prob-ably the genuine leader of the pack. Also, Chinas machinery sector is on a rising trend, with Shanghai Electric the main focus here. India is focusing on IT services and software as the countrys key competitive advantage. India benefits from a low-cost (GDP per capita is only USD 600), English-speaking workforce that enjoys an above-average education level. In the past decade or so, the government has aided the development of IT services through tu-ition for its residents in Western universities, subsidies for skilled foreign management to come to India, and infrastructure develop-ment such as the technology parks of Bangalore. In Latin America, the state has been relatively less inclined to directly promote/sup-port national champions either through special incentives or subsi-dies or by discriminatory treatment of foreign firms in the same sector domestically. Many of the successes in terms of the devel-opment of Latin American national champions have been entrepre-neurial rather than state-led efforts. Interestingly, a partial excep-tion may be Brazil, where the country has aggressively defended the interests of Brazilian corporations (in terms of market access). This has been most relevant for agribusiness but also for the air-craft manufacturer, Embraer. Finally, in Eastern Europe, the emer-gence of national champions is starting too, mostly pushed by Western corporations thanks to business relocation. New European Union members are benefiting from this business relocation, as Western corporations move to take advantage of local bases of excellent skills, low labor costs, good transport and well-developed infrastructure. As a result of these flows from the West, some niche sectors have developed, including auto construction in the Czech Republic or pharmaceuticals in Hungary (Richter Gedeon Nyrt and Egis). Pharmaceuticals are being positioned as both national cham-pions and mirror companies. Pharmaceutical companies enjoy increasi ng public support and foreign recognition, as most Western pharmaceutical companies have developed partnerships with them working together on joint projects.
GLOBAL INVESTOR Basics18 Roadway, Guangzhou, ChinaPhoto: Justin Guariglia/Getty Images
GLOBAL INVESTOR Basics19In ation-linked bonds as an asset classInflation-linked bonds are primarily issued by governments. The bonds offer investors a direct hedge against inflation, as well as a real yield. Historically, inflation-linked bonds have exhibited a negative correlation to equities. Their solid risk/r eturn ratio and low correlation to other asset classes make them a valuable alternative investment asset in both strategic and tactical asset allocation. Dr. Jeremy J. Field, Credit Analyst, Dr. Karsten Linowsky, Fixed Income StrategistPaul Volcker, the chairman of the US Federal Reserve Bank from Figure 11979 to 1987, is generally credited with bringing the US economy US CPI and annual inflation rateout of the stagflation crisis (stagflation is a period of inflation, low US headline consumer price index (CPI) normalized to 100 in 1983 and inflation rate from 1913 to present. Source: Credit Suisse, Fed Res Bk Minneapolisgrowth) that followed the two oil price shocks of the 1970s. The US consumer price inflation peaked in 1980 at % (Figure 1). The CPIInflation rate %Federal Funds rate peaked at 20% in June 1981 (Figure 2), and the 2502015yield on the 10-year US Treasury Note (US T-Note) rose to around 2001016%. This tight monetary policy had the desired result of lowering 1505inflation, which came down dramatically to % in 1983. Following 0100–5the traumatic inflation experience of 1979 to 1981, the UK was the 50–10first government to start offering inflation-linked bonds in 1981 in 0–15response to demand from institutional investors. Other industrial-19141926193819501962197419861998ized countries have followed suit: Australia (1985), Canada (1991), Cumulated inflation Inflation rate (.)Sweden (1994), USA (1997), France (1998), Italy (2003), Japan (2004) and Germany (2006). Figure 3 shows the development of the consumer price ind ices of selected industrialized countries. T able 1 Figure 2shows the index details of Barclays world inflation-linked bond index. While governments are by far the largest issuers of inflation-Fed Funds and 10-year Treasury yieldThe US Federal Reserve Bank target rate and the US Treasury Note linked bonds, there are other issuers, such as the French govern-10-year yield. Source: Credit Suisse, Bloombergment agency CADES, as well as some utilities and banks. However %the non-government issues generally suffer from a lack of liquidity 20in secondary return performance of ILBs as an asset classChanges in inflation expectations and real yields, together with 10changes in risk and liquidity premiums, are the main factors that 5drive ILB total returns versus the total returns of other asset class-es, as well as the correlation of returns. Table 2 details the average 0annual total returns for USD assets from 1997 to the present. The 01/7101/7401/7701/8001/8301/8601/8901/9201/9501/9801/0101/0401/07excess return is the return over Treasury Bills (cash). The standard Fed fund target 10-year benchmark ratedeviation indicates the price volatility of the asset class. Of the as-set classes analyzed, the highest total return was achieved by real estate, %, with an excess return per unit of risk (Sharpe ratio) of . Hedge funds also performed well with % and a Sharpe ratio of . Emerging market bonds were the second-best-per-forming asset class with an average return of %, but with a less satisfactory risk/return than real estate, hedge funds and ILBs. With an average return of %, equities outperformed US gov-ernment ILBs (TIPS, Treasury Inflation Protected Securities) but
GLOBAL INVESTOR Basics20with a worse Sharpe ratio. Although commodities (CRB index) have Figure 3performed well in the past couple of years, they were the under-CPI for various countries (logarithmic scale)peHeadline Consumer Price Index, normalized to 100 in 1960, for selected rforming asset class for the time period analyzed. Figure 4 charts industrialized countries. Source: Credit Suisse, Bloombergtotal returns for the main asset classes. Since their launch in 1997, %the historical total return performance of TIPS has been better than 10,000that of nominal US T-Notes, namely % versus %. This higher total return of TIPS was achieved with a better Sharpe ratio (which 1,000measures the excess return over T-Bills per unit of risk), for TIPS versus for T-Notes. Figure 5 highlights the annual total 100returns of equities, T-Notes and TIPS, and illustrates the negative 01/6001/6501/7001/7501/8001/8501/9001/9501/0001/05correlation between TIPS and equities, which is desirable from the standpoint of portfolio diversification. France Switzerland Germany UK Italy USA JapanThe general feature of government ILBs is that both the princi-pal and the coupon increase in line with the linked consumer price inflation index. Breakeven (BE) inflation is defined as the differ-ence between the real yield of an ILB and the quoted nominal Figure 4yield of a normal government bond of the same maturity. Figure 6 Total returns by asset classshows the development of the real yield and the BE inflation for the Cumulative total returns by USD asset class, normalized to 100 in March 1997. Source: Credit Suisse, Bloomberg, Datastream10-year TIPS. Real yields have declined since the year 2000. BE inflation has remained relatively stable at around % since 2003. %F450igure 7 shows a rise in real yields of around 40 basis points over the same in total return portfolios150TIPS make50 a beneficial contribution to fixed income, equity and balanced equity-fixed income portfolios in terms of improving the 03/9703/9803/9903/0003/0103/0203/0303/0403/0503/06efficient frontier. Constructing efficient portfolios with TIPS pro- EMBI+ Hedge funds Equities Real estateduces a benef TIPS T-Bills CRBicial diversifying effect in most contexts. In our view, a comparison of the returns of various asset classes is only a cred-ible exercise when the risk differentials across the classes are taken into account. The expected returns and asset class volatility Figure 5of our analysis are based on the monthly data from March 1997 to Returns for equities, T-Notes and TIPSend-December 2006. Table 3 shows that the correlation between Annualized returns for USD equities, government bonds and T-Notes and TIPS is relatively high at . From Table 3 we see inflation-linked bonds, illustrating the negative correlation between equities that the correlation between TIPS and equities is negative, at , and TIPS. Source: Credit Suisse, Bloomberg, Datastreamhence we would expect a very strong diversification effect from %mixing the two asset classes. Figure 8 shows how the performance 3020volatility of a portfolio of T-Notes (government bonds) and equities 10can be reduced by the addition of TIPS. 0–10Inflation-linked bonds offer investors a certain protection of –20their assets against future inflation, contingent on how well an in-–30vestors inflation risk is aligned to the CPI to which a particular 2000200120022003200420052006bond is linked. These instruments provide the opportunity for real Equities T-Notes TIPSasset/liability matching. Generally speaking, it is attractive to in-vest in ILBs when real yields are high and BE inflation is low. The solid risk/reward ratio of TIPS and their low correlation with other asset classes make them a valuable diversifying alternative invest-Figure 6ment class for both strategic and tactical asset allocation. It is par-Real yields and BE inflationticularly worth noting that TIPS exhibit a negative correlation to Development of real yield and breakeven inflation for 10-year TIPS. Source: Credit Suisse, Bloombergequities. % Volcker was born in New Jersey in 1927 and studied at the universities of Princeton and Harvard and the London School of Economics. He is best known for time as Chairman of the Board of Governors of the Fed-eral Reserve System, 19791987. He is also a former Undersecretary the Department of the Treasury and President of the Federal Re-Jan. 97Jan. 00Jan. 03Jan. 06serve Bank of New York. He is Professor Emeritus of International Economic Policy at Princeton University. 10-year real yield from TIPS 10-year breakeven inflationPhoto: Corbis
GLOBAL INVESTOR Basics21Figure 7Figure 8Real yields have risenTIPS help reduce portfolio volatilityReal yields have risen across the TIPS yield curve since Adding TIPS to an equity/bond portfolio helps reduce return volatility due to the the end of 2005. Source: Credit Suisse, Bloombergnegative correlation of TIPS to equities. Source: Bloomberg, Datastream, Credit Suisse% 100% equities 50% equities, 50% T-Notes12 February 2007 30 December 2005 100% TIPS 14% equities, 47% T-Notes, 39% TIPSTable 1Government ILB bond indicesKey parameters of Barclays Capital government inflation-linked bond (ILB) indices. Source: Barclays Capital, Credit SuisseIssuerNo. issuesMkt. val. USD bnAvg. real yield %Avg. maturity 2Risk/return of USD assetsHistorical annual total returns, excess returns over cash, volatility and risk-adjusted returns (Sharpe ratio) for various asset classes. Source: Credit Suisse, BloombergRisk/return overviewEMBI+Hedge fundsEquitiesReal estateTIPST-NotesT-BillsCRBAverage %%%%%%%%Excess %%%%%%%%Std. %%%%%%%%Sharpe 3Correlation of USD assetsHistorical correlation of various asset classes and CPI. Source: Credit Suisse, Bloomberg Correlation matrixEMBI+Hedge fundsEquitiesReal estateTIPST-NotesT-BillsCRBCPIEMBI+
Real interest rates in selected EM creditsForeign currency reservesBrazilBrazil199819992000200120022003200420042005200520062006HungaryHungary199819992000200120022003200420042005200520062006MexicoMexico199819992000200120022003200420042005200520062006PolandPoland199819992000200120022003200420042005200520062006RussiaRussia199819992000200120022003200420042005200520062006South AfricaSouth Africa199819992000200120022003200420042005200520062006TurkeyTurkey1998199920002001200220032004200420052005200620061412108642024050100150200250300%USD bnFigure 1Real interest rates in selected EM credits and foreign currency reservesLonger-term real rates in Brazil and Turkey will probably continue to converge towards more normalized levels, but will remain far higher than rates currently exhibited by credits such as Mexico and South Africa for the foreseeable future. Emerging markets will at some point again face external shocks, whether political or economic in nature. Nevertheless, the dramatic pace of reserve accumulation in recent years seems to suggest that most EM credits are better equipped to deal with some of the negative effects that may : Datastream, Credit Suisse/IMF, Bloomberg, Credit Suisse
GLOBAL INVESTOR Basics23Emerging market domestic bondsDomestic bond markets are experiencing unprecedented growth. Emerging market (EM) credits are expected to fund more than 90% of their financing needs in 2007 by increasing net domestic issuance by a staggering USD 228 billion. The largest issuances in Europe, the Middle Eastand A frica (EMEA) and Latin America will come from Poland and Brazil with close to USD 31 billion and USD 22 billion, respectively. Juan Briceno, Credit Analyst, Dr. Jeremy J. Field, Credit AnalystIt is not well known that in the emerging market space the out-there is a group of emerging domestic markets that command par-standing stock of domestic sovereign debt is approximately three ticular interest; they include Brazil in Latin America and Turkey and times as large as the stock of sovereign external debt. By the end South Africa in the EMEA region. There is another group of domes-of 2006, total domestic debt amounted to approximately USD tic markets that do not offer such attractive carry opportunities, but trillion, with Asia and Latin America the most active issuers of do-where investors have sought exposure. Attracted by the better mestic bonds. Domestic sovereign bond markets have experienced credit ratings and diversification benefits, investors have increased rapid growth in the past, benefiting both issuers and investors. Issu-their holdings of domestic bonds issued by relatively new members ers have been successful in increasing and/or diversifying their of the European Union (EU) such as Hungary and Poland. While funding base, whereas investors now have access to local-cur-not a member of the EU and with persistently negative real rates, rency-denominated instruments, which often offer attractive real Russian local markets continue to captivate some investors who yields. Local debt markets have grown by an impressive 250% in feel the current economic boom is still in its early stages and that the past nine years, whereas the size of the external hard currency the ruble remains fundamentally has actually shrunk. Total external debt has fallen from Driving forces behind local market developmentUSD 903 billion in 1998 to USD 828 billion, as emerging credits have retired old restructured debt and initiated a broad deleverag-Emerging market credits are no strangers to economic and political ing , which many policymakers have seen as a natural conse-Not too long ago, domestic markets were seen as a realm quence of excessive dependence on foreign flows of capital and too where only sophisticated institutional investors dared to venture. much intromission by multilateral financial institutions in domestic This has gradually changed as the individual investor has become issues. The political need for greater economic and financial inde-better informed and as the search for yield has intensified, given pendence without negating globalization and the will to minimize the relatively low rates in the developed world. From this perspective the negative consequences of external shocks have led to a major
GLOBAL INVESTOR Basics24Table 1 push in the development of local capital markets. Brazil is probably the most notable example of this effort, which intensified as a re-External and local leverage ratios The stock of sovereign external debt as a proportion of GDP in large Latin sult of the Lula crisis in 2002, when Brazilian spreads on hard American credits is generally lower than that of Eastern European credits. currency bonds rose to almost 2500 basis points. As a proportion Nevertheless, Mexico (BBB/BBB) and Brazil (BB/BB) are rated lower of gross domestic product (GDP), local markets now stand at 55% than credits such as Hungary (BBB+/BBB+) and Poland (BBB+/A-), as (see Table 1), or 13 percentage points higher than in 2002. Similarly, investors still perceive a meaningful policy direction risk in Latin America. Source: Credit Suissethe total outstanding stock of local sovereign debt currently amounts to an impressive USD 500 billion, most of which is in the Sovereign debt 1998200019982000% of GDPExternalExternalDomesticDomesticform of fixed-rate bonds or instruments tied to the short-term LATAMbenchmark rate (Selic, the Banco Central do Brasils overnight rate). Despite the fact that policymakers have not recently shown EMEAmuch interest in further domestic market development, Turkey has one of the fastest growth rates in this space since . In nominal terms, Turkeys local market is about a third of the of Brazils market or approximately USD 175 billion. However, is a good example for policymakers of how a reasonably South and healthy local market does not amount to having an ASIAinsurance policy that will completely insulate the credit from shocks. In the absence of a strong anchor, external can and usually do lead to foreign exchange volatility, with adverse consequences for inflation dynamics. After the speculative attack on the Turkish lira last summer, local short-term yields rose by more than 900 basis points to almost 25%, and the currency depreciated by approximately 35% in less than two months. How-Table 2 ever, it is reasonable to make the argument that increased reliance on local debt protected the fiscal accounts from sharp deteriora-Selected economic indicators Most credits have been successful in bringing down inflation and continue tion, given the limited impact of external debt service payments on to converge to inflation rates observed in developed markets. The notable government is Russia where the price level remains relatively elevated at close Local yield curves normally have a relatively low duration is-to 9%. External performance is not homogeneous with commodity exporters suance profile. Issuance has traditionally concentrated on short-such as Russia and Brazil exhibiting large and growing current account surpluses . The remaining credits show deficits, which can be large as in the duration securities with the occasional long-duration bond, where case of Turkey and Hungary. Source: Credit Suisseliquid ity is not always available. The need to finance a varied number of long-term projects and in particular the desire to develop a PopulationPer capita General Current Consumer (million)GDPgovernment account Price Indexmortgage market that allows the rapid development of the housing (USD)debtbalance(%)sector, has encouraged governments to start issuing longer-dated (% GDP (% GDP 2006)2006)securities. To ensure that key maturities develop as benchmarks, amounts now tend to be larger than in the past, and of specific bonds are commonplace. Mexico and Russia are of the credits with the most established yield curves at the end. While the duration extension of the Russian curve does appear to be highly related to the development of the housing , the Mexican curve has extended partly in response to a South crafted plan by the government to make housing afford-able for the average Mexican over the next few decades. In the last 12 months, Mexico has issued approximately USD 11 billion in peso-denominated government bonds (MBONOS) with maturities ranging from 2023 up to 2036. Similarly, Russia has issued a fair amount of long-duration securities, with the lions share of the issuance con-centrated in the 2021, 2024 and 2036 government bonds (RFLBs).Investors have noticed improved EM fundamentalsDemand for EM domestic bonds has gradually increased as inves-tors have come to realize that the meaningful improvement in eco-nomic fundamentals may be long-lasting. High growth rates, sound fiscal accounts and large external surpluses have encouraged inves-tors to migrate from hard currency debt into local currency instru-ments. Credit risk perceptions have improved so much that inves-tors are now willing to add currency and local regulatory risk
GLOBAL INVESTOR Basics25dimensions. The 2003 − 2006 compounded annual real GDP growth rates posted by high-beta credits have indeed been impressive. Covered interest parity Turkey and Argentina for example have grown by % and %, respectively, over the aforementioned period. Brazil on the other Covered interest rate parity suggests that we should expect the hand has been a notable laggard with just about %. Such low domestic currency to depreciate in line with interest rate differen-growth may partly explain the puzzle of persistently high real rates tials so that investors are only compensated for the additional credit in reals, to the extent that sluggish growth has maintained gross and regulatory risk assumed by holding a local bond. Indeed cur-debt levels, as a proportion of GDP, at relatively high levels. How-rency forwards are priced in such a way that virtually no arbitrage ever, given a reasonably benign macro backdrop, it is precisely the or excess returns can be generated over time. However, investors very high real yields offered by some credits that act as a powerful have captured excess returns in an uncovered way. For example, magnetizing force on investor holding a basket of Brazilian local bonds without a cur-There is no such thing as a free lunch, and if a credit offers rency hedge would have outperformed a similar basket of Brazilian very high yields, there are usually good reasons for it. Brazil and hard-currency bonds by close to 8% since December 2005 (see Turkey currently offer the highest rates in the emerging market Figure 2). Going forward, future returns in local debt should normal-space, with one-year real rates at approximately % and %, ize as a result of mild currency depreciation. This suggests that respectively (see Figure 1). This compares favorably not only with investors are likely to favor local markets where monetary condi-rates in other emerging market credits but also with rate levels in tions are supportive enough for further inflation convergence and core markets. Similarly, South Africa is an interesting market in the external accounts are in surplus or at least the flows financing that it is an investment grade credit and currently offers attractive any deficits are relatively , given its relatively high ratings. Short-term real yields have risen sharply in the last 12 months and are currently close to 4%, but unhedged foreign investors have experienced large negative total returns as a result of the 25% depreciation of the South African rand since April of last external balances, Latin America, previously a region prone to recurrent balance of payments crises and maxi currency Figure 2 devaluations, is currently enjoying a healthy surplus. Reserve ac-Local markets performance should remain strong cumulation has accelerated (seeExcess returns in local markets relative to hard-currency bonds are likely to Figure 1), with Brazil and Mexico be smaller going forward. The handsome rewards investors have been boasting a combined war chest of close to USD 160 billion. With reapin g do not come without risks. Turkey exhibited total return swings of the notable exception of Russia, EMEA credits suffer from acute more than 20% last summer. Source: Credit Suisse, Bloombergexternal imbalances, which in the case of Poland and Hungary 130have not led to sharply rising yields or rapidly falling currencies thanks to the anchor provided by European Union membership (see 120Table 2). 110Local market instruments100There is a growing trend in the market where AAA-rated issuers 90such as supranationals and government agencies are tapping Eu-robond markets with local currency issues. The European Invest-80ment Bank and KfW (development bank) are now relatively popular issuers in still somewhat exotic currencies such as the Turkish lira, the real, the rand and the Mexican peso. Investors must be aware, Brazil external Brazil local Turkey localhowever, that issue size and secondary market liquidity is not always ideal. Investors usually have exposure to local markets through these instruments, but this has been changing as a result of positive regulatory changes that allow full and easy access to local capital markets. Investors must exercise care in deciding whether to have exposure through onshore or offshore securities, as there can be large yield differences between bonds of similar duration. In Brazil for example, it is somewhat surprising that yield differentials between the onshore and Eurobond curves have wid-ened since last September. There is a rating effect, which some-times helps explain yield differentials, but this is not always the case. The BRL Brazil 2016 and the locally issued BNTF 2014 are bonds with similar duration and the same credit risk but with a yield differential of close to 240 basis points. Withholding taxes and ac-count confidentiality issues were two notable market imperfections that previously explained a chronic yield gap, but fortunately they do not exist anymore. 12/0501/0602/0603/0604/0605/0606/0607/0608/0609/0610/0611/0612/0601/0702/07
GLOBAL INVESTOR Basics26LogisticscutcuutcteioeiioeoxxxnEEEProductionWarehouse Warehouse ClientsfacilityfacilityGlobalization driving logisticsGlobal trade volumes have surged in the last five years. Logistics companies have been one of the main beneficiaries of this trend. The drive for further globalization should continue to underpin strong demand for logistics expertise and facilities in the future. Investors can participate in this theme by investing in asset-light freight forwarding providers, asset-intensive executers as well as providers of warehousing Mchler, Equity Sector Analyst, Eric Gller, Equity Sector Analyst, Bettina Simioni, Global Real Estate Analyst, Zoltan Szelyes, Global Real Estate Analystnn
GLOBAL INVESTOR Basics27The world economy is being transformed by the global expansion of segments: the service providers, the executers, and the providers trade flows: since 2003, global goods export growth has reached of warehousing property. The service providers coordinate the lo-an average of +8% per annum (.), far above global economic gistics process, while the executers transport the goods from loca-growth of +% . Trade volume growth has thus significantly tion A to B. As production chains start to spread globally, in-house accelerated. Figure 1 shows world exports of goods and services in as well as external logistics become ever more complex. With their real terms as a proxy for global trade volumes. In this new world-focus on cost-efficient production, companies therefore tend to wide market, emerging markets (EMs) play an ever increasing role: outsource logistics to third-party providers. There exists a full range since 2000 they have accounted for roughly two-thirds of world of logistics operators from companies focusing on freight forward-economic growth compared to 55% in the 1990s and less than 50% ing brokerage only, such as Panalpina, to fully integrated logistics in the 1980s. The emerging markets share in global trade has in-providers such as Deutsche Post. The advantage of asset-light creased significantly, as many countries have capitalized on com-logist ics providers such as Panalpina is their flexibility. By using petitive advantages to boost exports. Parallel to EMs rising share third-party resources, they are very flexible in adding destinations of global production, some Western countries, like Germany or to their portfolio according to customer needs. In some regions like Switzerland, have benefited from their specialization in production Eastern Europe, access to third-party resources might become infrastructure, advanced machine tools, and logistics management challenging. Kuehne + Nagel therefore decided to acquire some to increase their exports to new rising EM industrial stars. As a land, including assets, which was perceived as a strategy change result, demand for infrastructure and Western demand for logistics by some investors. The third segment, the emerging warehousing to cope with rising imports has surged. market, is benefiting from a trend towards outsourcing logistics While global trade has created increased demand for logistics property. . Mller-Maersk is a global leader in fully integrated services, the internationalization of production processes has had a profound impact on logistics management. The complexity of glo-bal distribution networks call for ever more sophisticated logistics services, embracing a variety of transportation forms (such as rail, road, air or sea freight transport channels) and a multitude of pro-Figure 1 duction interfaces. Looking to the future, we see further robust Surge in global trade demand growThe aggregated value of global export activity has surged in real terms th for logistics services. In Asia, we expect continued in recent years. The growth of real global exports can be used as strong growth in China, increasingly a manufacturing hub for the a proxy for global trade volumes and indicates the growth of global trade. world. China has become the worlds third largest exporter, ac-Source: Datastream, Credit Suissecounting for 8% of global exports, and we expect its share to con-tinue rising. China is also increasingly focusing on purely domestic USD bninfrastructure, which is still in its infancy, and requires significant 3,000logistics support. In many less developed countries only starting to 2,800participate in world trade, such as Vietnam, the very low infrastruc-2,600ture and service bases usually translate into full outsourcing of the 2,400logistics process to foreign corporations. Emerging markets are 2,200not the only drivers for logistics. In Europe too, export growth of 2,000machinery and production devices to EMs also increases the need 1,800for logistics. Another significant factor of change in the logistics 1,600landscape is the enlargement of the European Union towards the 1,400East. With Bulgaria and Romanias entrance into the European Union 1,200(EU), the economic integration of the Eastern European states brings 1,000an extension of the existing distribution networks and increases 03/9603/9703/9803/9903/0003/0103/0203/0303/0403/0503/06demand for warehousing. New strategic locations are emerging, com- World export of goods and services in constant prices (2000 prices)peting with the established ones, as Western companies relocate their production to those parts of Europe with low labor costs. Growing logistics demand drives specializationThe transportation industry is heavily fragmented with only a few global players but many regional and domestic operators. Growing logistics demand has led to both specialization and consolidation. Overall, the logistics industry has developed into the following sub-
GLOBAL INVESTOR Basics28Figure 2 transportation. Its portfolio includes everything from oil fields to container shipping and facilities. As long as demand is rising ahead Leasing rental cycle for warehouses The rental cycle for logistics warehouses is currently attractive globally. Rents have of new supply, the pricing situation is favorable. In our view, 2006 either bottomed out or have started to increase again. Source: Credit Suissemarked the peak, since more new capacity, mainly in overseas transportation, is coming to the market. Capacity expansion for container shipping is expected to rise by % in 2007 after in-creasing % last year. Airline transport capacity is expected to improve by % after % last year. Pricing power has already US averagestarted to fade on main transportation routes, with an immediate effect on the bottom line. Besides transportation, the most impor-Shanghaitant physical component in logistics operations is warehouse real estate. Up to the present, warehouse real estate has mainly been owner-occupied. But recently, there has been an emergence of Eastern EuropeIle de Francesale and leaseback agreements, which result in a transfer of own-AlsaceItalyGermanyership and management to specialist real estate companies. We see this trend of efficient sharing of competences continuing in the DownturnRecoveryExpansionSlowdownnext few years. As logistics providers expand internationally, com- Decreasing rental Decreasing to stable Growth in rental Stagnating rentalpetition intensifies and economies of scale appear. There is thus a prices rental prices prices prices High vacancies Declining vacancies Declining vacancies Increasing vacanciesconsolidation process underway in the logistics sector, which has Excess supply Reduction of Absorption of new Increasing supply oversupply supplyled to stronger demand for larger warehousing real estate as a new investment themeThis change in the logistics real estate landscape offers potential for real estate investors. Due to the relatively high rental yield levels Figure 3 in the sector (% − 8%), investors can benefit from relatively high income returns. Investors are also exposed to changes in capital Warehouse yields Purchasing yields for logistics warehouses are still significantly higher values. This can come from one of two sources: either a change in compared to the office sector. As the investment markets mature, rents or a valuation change in property (for instance due to higher warehousing capital values are expected to grow and purchasing yields demand, rising real estate prices, etc.). The latter is usually called to decline. Source: Cushman and Wakefield, JLL, Credit Suissea change in purchasing yields or yield shift. We think that invest-ments in warehouses are supported globally, yet we would focus 10on investments and developments in Continental Europe and Asia, 9as investors are likely to benefit from capital appreciation due to 8stable-to-increasing rents and a further expected yield rental cycle attractive5Investments in logistics real estate should find support in the seg-4ments currently attractive position in the rental cycle. In almost all 3regions, warehousing rents are increasing or have started to bot-2tom out (see Figure 2, illustration of the global rental cycle). In the USA, 1the cycle for warehouse rents is the furthest advanced. However, 0the outlook is still positive for 2007 and 2008, with an expected annual growth rate of warehouse rents between 5% and 6%.Pickup in warehouse demand in Western EuropeThe warehousing rental cycle in Europe has just passed its bottom. Warehouse rents in Europe have fallen due to supply overhangs in the last five years. Driven by a pickup in demand, rents have begun Current industrial yield Current prime office yields 10y govt. bondsto bottom out and have been stable in Central Europe over the last year. In Frances most important logistics area, Ile de France, they have already started to increase again. Based on our forecast of robust demand, we are expecting rents to remain stable or to in-crease slightly throughout Europe in the year ahead. This pickup in rents should also find support in strong investment demand. Yields for logistics real estate have thus started to fall. Since we expect the warehouse investment sector to continue to mature, we fore-see a further drop in yields. In Germany and Italy yields are currently around 7% − 8%, which we still consider to be an attractive level. In France, yields are lower at % − %, but the rental growth up-ParisPragueStrasbourgBerlinBudapestWarsawMilanHamburgZurichShanghai(Shanghai Exchange)Sofia (Bulgaria (10yr series, maturity 06/06/12)
GLOBAL INVESTOR Basics29side in the coming years should be higher than in Germany. Based Table 1 on our expectations for stable-to-slightly-increasing rents and a Investing in the logistics theme Logistics services, executers and warehousing real estate companies further decrease in yields for warehouses, we see further potential are benefiting from the globalization trend and offer strong long-term for investments in Germany, Italy and France. In France, we favor growth. Source: Bloomberg, Credit Suissethe long-established Ile de France region and the Alsace, the latter mainly due to its favorable location and a relatively low cost struc-BankRatingInvestment thesisture (labor). Northern Italy is also likely to profit from the eastward Panalpina BUYOffers the most appealing business expansion, thanks to intensifying trade flows from Eastern to South (PWTN SW)strategy in the freight forwarding industry, West Europe (Southern France, Spain) and vice versa. with its asset-light company + NageHOLDl Aiming for a more fully integrated business Potential for warehouse development in Eastern Europe(KNIN SW)structure and adding fixed assets to its existing business Eastern European markets are still immature and characterized Deutsche Post BUYAlready offers the full range of services, by a low supply of modern logistics facilities. But we expect the (DPW GR)from brokerage to transportation and strong economic momentum in Central and Eastern Europe (CEE) express lead to stronger demand dynamics and convergence with the . Mller-MaerskHOLDA pure executer focusing on sea freight (MAERSKB DC) of Europe. As Figure 3 on page 28 shows, warehouse purchas-PrologisBUYOne of the leading global providers of ing yields in Prague, Warsaw and Budapest are already at the (PLD US)warehousing properties with large level of German cities. Yields in Bulgaria and Romania are still development projects in under-equipped higher and are trading with only a small premium to the office sec-emerging markets, such as China and Eastern . Due to low warehouse stock and strong expected demand The above recommendations represent our mid- to longer-term investment view at the growth, we would recommend investors to focus on warehouse time of writing and are subject to change depending on market conditions. Please contact deyour relationship manager for regular updates on specific projects in Eastern : China (Shanghai) has a strong growth outlookIn China, we expect strong growth in the logistics market in the years ahead, since it is still underdeveloped relative to Chinese trade volume. Over 85% of warehousing facilities are concentrated on the coast and are mainly focused on export logistics rather than domestic retail logistics. While export logistics make up the largest part of the distribution network, we also expect retail distribution networks to expand around Shanghai, as incomes and retail sales are on a strong uptrend. We see the coastal areas as the most at-tractive, since high market fragmentation, high regulation, regional politics and border controls are still hindering the creation of an integrated national logistics network. Shanghai is the most devel-oped market and is expected to grow further in the next few years, as it is favored by international operators and developers. Shanghai yields for logistics properties are trading between 8% and 9%. This still-high yield could be explained by the fact that investors are just starting to discover the potential of the warehouse market and until now have been focused on office and residential investments. How-ever, the presence of international investors and developers is expecte d to increase, resulting in higher capital values and lower yields. Due to the high demand dynamics, the logistics sector in Shanghai is also expected to find support in further rent in a growth marketThe outlook for global trade remains favorable in most regions, and logistics services should strongly benefit from this secular trend. The coordination and transportation complexity arising from glob-alization leads to further outsourcing, which in our view is unlikely to change soon, as producing companies tend to focus increas-ingly on their core businesses. Investors who want to gain expo-sure to the logistics theme can do so by investing in logistics ser-vices, executers or warehousing real estate companies. As all three subsegments are benefiting from the globalization trend, all look attractive and offer strong long-term growth. Warehousing is prob-ably the most defensive way to gain exposure to the logistics theme, while executers will likely be the most volatile investments.
GLOBAL INVESTOR Basics30Invest in superior business modelsTaking advantage of a robust economic environment, Swiss small and mid-cap companies have generated above-average shareholder returns in recent years. We expect them to continue to deliver solid long-term investment performance thanks to innovation, focus, and superior business models with a proven ability to adapt to changing global industry dynamics. Robin Seydoux, Head of European Equity Sector Research, Markus Mchler, Equity Sector Analyst, Olivier P. Mller, Equity Sector AnalystCredit Suisse maintains its positive stance on global equities. We markets. We think this premium is justified, given the markets believe the world is primed to experience robust economic growth higher expected earnings growth rate of more than 10% for the in the years to come. Globalization, and in particular the urbaniza-current year. tion of emerging market countries like China, has helped fuel a Swiss small caps: Focus on superior business modelssurge in global productivity growth. These forces are expected to remain in place and magnify opportunities in the market. With a Small caps normally perform well in an environment of healthy forecast expansion of 5% this year after % in 2006, 2007 is set global and domestic economic growth. Although they trade at a to be the fifth year in a global boom. The slowdown that we experi-premium to large caps in most regions, they should continue to ence may turn out less pronounced than most market participants benefit not only from attractive financing in a low-interest-rate fear. By mid-year we expect a re-acceleration, as long-term trends environment but also from investors risk appetite. Within the Swiss like infrastructure spending in emerging markets will likely gain small and mid-cap landscape, we favor companies that are innova-momentum again. So much growth from outside the industrialized tive, focused, exposed to foreign markets, with superior business world bodes well for corporate earnings, which are expected to con-models, and a proven ability to adapt to changed industry dynam-tinue to grow above historic averages worldwide. Equity markets ics. In Switzerland, we highlight Hiestand, Calida, Geberit, AFG should also benefit from undemanding valuations with estimated Arbonia-Forster, Georg Fischer and Komax. 12-month forward price-earnings (P/E) ratios close to their long-term averages in Europe and in the is a leading producer of frozen and convenience bakery Switzerland benefiting from bias towards exportsgoods. Founded in 1967 as an innovative pioneer baking company, Along with its European neighbors, the Swiss economy is benefiting Hiestand has achieved a leading position in the Swiss specialty from the integration of emerging markets into the world economy, foods segment and was listed in 1997. We are impressed by Hie-a process which has spurred international trade volumes. Moreover, stands excellent business model, which includes both a production its bias towards exports offers a superior risk/reward profile. The and distribution platform, meaning that Hiestand owns its produc-Swiss economy benefits from low unemployment, low inflation and tion facilities and controls the logistics from the bakery to the end-strong exports (40% of GDP is export-related). According to our consumer. Hiestands product range consists of different bakery forecasts, these advantages should enable the Swiss economy to products broken down into various stages of completion. Hiestand post superior economic growth compared to Continental Europe. uses its own logistics and distribution network to deliver its products Following its impressive performance since 2003, we expect the to its customers: convenience stores, gas stations, food retailers Swiss stock market to continue to do well in the years to come, and caterers. Hiestand operates mainly in Switzerland and Germany thanks to a strong global macroeconomic backdrop. In terms of and to a lesser extent in Asia. Owing to its superior model, Hiestand forward P/E (for fiscal year 2007), the Swiss Market Index is trad-has higher organic sales growth rates and better profitability than ing at a premium to the global market, particularly versus European the sector average.
GLOBAL INVESTOR Basics31CalidaKomaxCalida is a clothing retailer and manufacturer which has successfully Komax is the global leading supplier of wire processing machines managed to adapt its business model over the last few years. Found-(WPMs), having entered the assembly automation business in 1998. ed in 1929, Calida was a traditional Swiss producer of underwear and WPMs provide 60% of turnover and are the companys cash gen-sleepwear. Over the last few years, Calida has changed its business erator. With a market cap of around a half a billion Swiss francs, model from a pure manufacturer to a brand owner and marketer and Komax belongs to the small-cap segment in Switzerland. It enjoys outsourced a major part of its production facilities to Southern and good growth potential thanks to its increasing exposure to the solar Eastern Europe and also Asia. Today, Calida focuses more on brand-(photovoltaic) industry through its advanced automation tools. Oth-ing, design, product development and sales strategy than pure produc-er areas of activity include the medical technology market and the tion. In 2005, Calida acquired and integrated the French company telecom industry. We find Komax attractive due to its fundamen-Aubade and introduced a similar outsourcing strategy. We are im-tally solid cash generative business in combination with growth ar-pressed by Calidas turnaround over the last five years, its success-eas likely to boost top line performance in the longer term. ful repositioning in the retail clothing sector and its innovative prod-uct lines. We believe that soon they will have outsourced all of their production capabilities and think that this strategy is likely to trans-late into sustainably higher operating margins in the near future. Figure 1 Swiss small and medium-sized companies GeberitSince their lows in 2003, Swiss small and medium-sized companies have Geberit is a Swiss company that has successfully transitioned itself performed well relative to large-cap stocks. The main drivers have been from a traditional manufacturer of sanitary plumbing to a company the economic upturn, a period of low interest rates and increased investor risk appetite. Source: Credit Suisse, Datastreamproducing more and more systems for domestic water management. It has successfully introduced its innovative water management systems Index in CHF800into its core markets Switzerland and Germany, and we believe that its expansion into new markets such as Eastern Europe and Scandi-700navia will be an additional positive catalyst, further boosting sales growth. As water becomes increasingly scarce in both emerging and600 developing countries, we believe that Geberits water-conserving sani-500tary systems will experience strong demand from these countries. 400Georg Fischer300Georg Fischer is a leading development partner and system pro-200vider for industrial applications focused on automotive activities, piping systems and machine tools. GF Automotive, with its focus on 20032004200520062007high-performance cast components and systems in iron and light Swiss small and medium-sized companies Swiss Market Index (adjusted)metals for chassis, power trains and bodies, benefits from the on-going need for lighter and safer car bodies. Given its technologi cal know-how, Georg Fischer enjoys strong pricing power. GF Piping Systems currently benefits from favorable conditions in the Euro-Table 1 pean construction industry, which are expected to continue in the Focus on superior business models medium term. Supported by good market conditions, Agie Charmilles Small caps normally perform well in an environment of healthy global and (machine tools) has recovered from a loss-making period and now domestic economic growth and, in our view, should continue to benefit underpins our positive stance on Georg Fischer overall. from attractive financing in a low-interest-rate environment and from the increasing risk appetite of investors. Source: Credit Suisse, BloombergAFG Arbonia-ForsterNameSectorRatingBloomberg TickerAFG Arbonia-Forster is mainly exposed to the Swiss (45% of sales) AFG Arbonia-ForsterCapital GoodsHOLDAFG SWand German (35% of sales) building and construction markets. With CalidaTextilesBUY CALN SWits radiator activities, the company also has some exposure to the GeberitCapital GoodsBUYGEBN SWCzech Republic construction market, and is gradually increasing Georg FischerCapital GoodsBUYFI/N SWglobal exposure. AFG Arbonia currently provides its full product HiestandFood ProductsBUYHIEN SWrange of radiators, kitchen cabinets, cooling appliances, windows, KomaxCapital GoodsBUYKOMN SWdoors and steel tubing in Switzerland only. CEO Dr. Edgar Oehler is The above recommendations represent our mid- to longer-term investment view at the time of writing and are subject to change depending on market conditions. Please contact following a very aggressive growth path with frequent acquisitions, your relationship manager for regular updates on specific expanding the companys product offering in an effort to enhance its one building one shop strategy. We prefer AFG Arbonia because of its core competence in heating and sanitary equipment, kitchen fixtures, cooling appliances, steel technology, windows and doors, as well as surface technology. We also find the companys successful expansion and integration of complementary activities attractive.
GLOBAL INVESTOR Enrichment32Square of the Republic, Almaty, KazakhstanPhoto: Bildagentur Online
GLOBAL INVESTOR Enrichment33The Northwest PassageGlobal warming has considerably shrunk the average area covered by the Arctic sea ice. The accelerating melting ice phenomenon, particularly evident in Canadas northern Arctic, warms up the prospect of a shorter alternative sea route from Europe to Asia. Increasing visibility on the opening up of a Northwest Passage, a treasure many have coveted for centuries, could potentially have mammoth ecological, economic and political Mahendran, Head of Asian Research, Maggie Yeo, Equity Sector Analyst, Justin Nankivell 22Continuous permafrost, which results in the permanent presence 2005 ( million km) and March 2006 ( million km) was at its of hard and thick sea ice on the entire Arctic basin, is unique to lowest levels for the 1979 2005 period. These results further re-the polar region. Rising global temperatures have been adversely vealed that the Arctics sea ice extent at the end of the melting affecting the ecological systems of the Arctic region, including at-season (month of September) had declined by 7% per decade dur-mosphere, ocean, sea ice cover and land area. ing this period, corroborating the intense sensitivity of the polar regions physical conditions to climate changes. Moreover, the ice The year 2005 was the warmest in more than a centuryat the center of the Arctic Ocean is up to 40% thinner than it was Both empirical and recent scientific research of the Arctic region in the revealed continued warming permafrost temperatures in north-The holy grail of the Arcticwest Canada. This warming has led to declines in the extent of sea ice cover and increased the greenness in tundra regions over the The Suez and Panama Canals are the common water routes con-past several decades. A more recent analysis on the state of the necting Asian countries to markets in the United States and Europe. Arctic undertaken by the National Oceanic and Atmospheric Admin-The Suez Canal can accommodate larger ships, including aircraft istration (NOAA), a federal agency within the US Department of Com-carriers and supertankers, while the Panama Canal does not have merce, found record-high surface air temperatures in 2005, the this capacity due to the presence of locks. In 1999, 13,003 ships highest in more than a century. Climatologists at the NASA Goddard passed through the Panama Canal compared to 11,280 ships Institute for Space Studies (GISS) have ranked 2005, 1998, 2002, through the Suez Canal. However, only 196 million tons of cargo 2003, and 2006 as the five warmest years in descending order since passed through the Panama Canal compared to 386 million tons via the late 1880s. Figure 1 shows that the accelerating trend in climate the Suez Canal. World container traffic is expected to rise progres-warming has been most pronounced in northern over the years, implying intensifying traffic volume through The sea ice extent and sea ice thickness are generally viewed these canals, particularly the Panama Canal, where a canal expan-to be negatively correlated to the conditions of the ocean and atmos-sion proposal has been submitted for approval (Figures 2 and 3).phere temperatures. During the 1979 2005 period, the mean sea Recent structural environmental changes, particularly the ice extent for September (end of the melting season) and March shrinking of the land area covered by polar sea ice and the thinning (end of the frost season) totaled million square kilometers of the sea ice, could fundamentally affect marine transportation 22(km) and million km, respectively (Figure 5). NOAAs results and commercial shipping around the Arctic basin. Within the Arctic provided compelling evidence that the sea ice extent in September lies the legendary Northwest Passage, known as the holy grail of
GLOBAL INVESTOR Enrichment34YokohamaBSAHong KongVancouverCSingaporeAANorth PoleBBHamburgI Northw97e9s1t Pnia sesca igaee r souicttec AI Arrctic sea2005 ice in Figure 5 N orthwest Passage routeBBBSMade possible by receding ice sheets, the Northwest Passage route extends from Baffin Bay in the east to the Bering Strait in the west, AACAthrough the Arctic Archipelago , to the north of Canada and along the northern coast of Alaska .Source: Athropolis Productions Limited
GLOBAL INVESTOR Enrichment35the Arctic. The key impediment preventing ships from traversing Figure 1the Northw est Passage has always been ice. Floating ice or ice-Annual mean temperature anomaliesbeTemperature anomalies in northern latitudes started diverging rgs can bring hazards for ships, as it did for the Titanic. The from other l atitudes in the mid-1990s. This resulted in record-high Northwest Passage is a sea route connecting the Atlantic and Pa-surface temperatures in 2005, the highest in more than a century. cific Oceans through the Arctic Archipelago of northern Canada Source: The NASA Goddard Institute for Space Studies (GISS)and along the northern coast of Alaska, USA (Figure 5). It extends from Baffin Bay (situated between West Greenland and Baffin Temperature anomaly (°C)) to the Bering Strait (Figure 5). In the 16th century, the idea of traveling to China and India by across the North Pole became increasingly popular. Ever then, explorers have been searching for the Arctic grail,a shortcut from Europe to East Asia through the American . The existence of such a shortcut route was proven in the early 019th century, but it was not navigated until 1903, when the Norwe-gian explorer, Mr. Roald Amundsen, successfully traversed the – Passage in a 3-year voyage. – time and cost advantages– maritime history, the Northwest Passage has promised 19051915192519351945195519651975198519952005a potential oceanic bridge that could link the trading fortunes of Northern latitudes (90°N–°N)Europe and East Asia. Marine transportation companies are aware Low latitudes (°N–°S)that, if navigable, widespread use of the Northwest Passage would Southern latitudes (°S–90°S)enhance global trade this century. Traveling along the Northwest Passage would effectively reduce the mileage distance required to move goods between the largest trading blocks in the world by almos t half, meaning less shipping time, less manpower, fewer labor Figure 2hours and lower maintenance and other time-sensitive variables World container trafficConsulting companies Drewry Shipping Consultant Ltd and Global in marine transportation. The mileage advantages of the Northwest Insight estimate world container traffic will exceed 300 million twenty-foot Passage are shown in Figure 4 and suggest that the potential sav-equivalent units (TEU) in 2020. Source: Drewry Shipping Consultant Ltd, Global Insightings offered by the Northwest Passage route are considerable. A Hamburg (Germany) to Vancouver (Canada) voyage via the North-Million TEUwest Passage rather than through the second most attractive 350alternat ive, the Panama Canal, would entail a huge 24% savings in 300nautic al miles. The Hamburg-to-Yokohama trip is more than 4,000 nautical miles, or 38%, shorter than the current Suez Canal route. 250With fuel costs ever increasing and the paramount importance of 200supply chain timing and coordination for economic growth in todays increasing globalization era, the Northwest Passage at face value 150could be said to represent the future of global trade. 100Arctic region rich in hydrocarbon resources50In the late 1960s, energy companies displayed enormous interest0in exploring the Arctic, after the discovery of oil at Prudhoe Bay, 19992002200520082011201420172020Alaska, in 1968. Subsequent exploration activities in the Canadian Beaufort and Russian Siberian regions have resulted in significant discoveries of oil and gas resources in the nearshore/offshore areas of the Beaufort Sea and also in the Siberian Sea region. Hydroc arbon reserves in these regions have been estimated to be comparable to those available in the Middle East. The United States Geological Survey (USGS) estimates that 25% of the worlds undiscovered fossil fuels are located in the waters of the Arctic. The USGS is participating in the International Polar Year (20072008) to research energy resources in the Arctic area including oil, gas, coal-bed methane and methane hydrat es. This will build on the USGSs World Energy Project, a global attempt to discover untapped hydrocarbon fuel continued steady decline in the extent and thickness of Arctic ice cover could lead the way to the development of offshore oil drilling and production in the Canadian and Russian Arctic regions.
GLOBAL INVESTOR Enrichment366,92012,42011,07314,542Yokohama8,37012,9206,6359,3608,74113,10915,37718,846VancouverHong KongSingapore9,73015,2088,37711,846Hamburg ep NoHo rdthowoeG sfto P eapsasaC ge Panama Canal Suez Canal in nauticalles miFigure 4 A lternative shipping routesMileage distances to major seaports in the Pacific and Atlantic Oceans are greatly reduced via navigation through the Northwest : Ivanov, Y. and Ushakov, A. (1992), The Northern Sea Route Now open. International Challenges, 12(1): 1520
GLOBAL INVESTOR Enrichment37The lure of exploration, development, production and transportation Figure 3of petroleum in the Arctic region amid escalating crude oil prices Capacity of Panama Canalcaused byPanama Canal Authority expects a sizeable growth in tonnage the depletion of oil reserves elsewhere could be a major transiting the Panama Canal from 2005 to 2025. This growth would be impetus for the opening of the Northwest Passage. augmented with an expansion of the canal to accommodate larger ships. Source: Panama Canal AuthorityLegal conflict over the use of the Arctics watersMillion tonsThere are, however, several obstacles to the opening of the Pas-600sage. The main unknown concerns how political bargaining and 500deliberation will unfold between Canada and other Arctic states, 400principally the United States, over the use of the waters. A second 300variable concerns the role that international law has played in Can-200ada and the United States in making decisions about the laws of 100the sea in the Arctic region. Assuming that marine transportation 0would eventually be made available through the Northwest Pas-20252025sage, what rules would be set? And by whom? There would un-2005(without canal expansion)(with canal expansion)doubtedly be a great deal at stake for both Canada and the United States, who have found themselves intertwined in a 40-year po-litical and international legal conflict over the use of the Arctics waters. Table 1The future of the Northwest PassageList of marine transport and energy stocksThe opening of the legendary Arctic grail could provide new-found opportu-Early in 2006, Canadas Defense Minister opined that the Arctic nities for marine transport and energy companies. Source: Credit Suissecould be opened to regular navigation by 2015. Reports by the Unit-SectorNameBloomberg TickerRatinged States Navy issued in 2001 concur that 2015 would see a sea-Marine . Mller-MaerskMAERSKB DCHOLDsonally ice-free Arctic. Recently, Canadian government scientists Tallink GroupTAL1T ETHOLDhave concluded that Arctic oscillation, a circular pattern of atmos-Kuehne + NagelKNIN SWHOLDpheric winds and ocean currents, is pressing the main Arctic ice-Panalpina Welttra NPWTN SWBUYpack against Canadas northwest Arctic boundary, preventing tran-EnergyPetro-CanadaPCA CNBUYsit altogether. However, the Northwest Passages expedition record Lukoil SP ADRLKOD LIBUYset in 2006 by the Canadian ice-breaker Amundsen is noteworthy. RosneftROSN LIBUYThe Amundsen departed for the Northwest Passage from Quebec Petrobras ADRPBR USBUYCity on 22 August 2006 and, as of 8 November 2006, the ship had The above recommendations represent our mid- to longer-term investment view at the traversed the worst of the Passages ice chokepoints successfully, time of writing and are subject to change depending on market conditions. Please contact your relationship manager for regular updates on specific no signs of ice even in the Passages most critical places. Perhaps the year 2006 was an anomaly, or perhaps this signals the start of a melting process long predicted by coordination of vessels, their timing in the maze of global supply lines and, above all, the forecasting of travel routes, are of paramount concern to major shipping companies. Furthermore, af-fordable insurance premiums remain a current and future obstacle. Evaluating the time frame under which commercial shippers could attempt navigating the Arctic route would involve calculations that take into account potential savings, insurance premiums, and the constant presence of open water. At this stage, until all the factors have been considered in their entirety and the necessary calcula-tions made, it is probably too early to hail the Northwest Passage as the next international navigation highway. However, it also bears noting that Royal Dutch Shell has contacted legal officials in the United States and commissioned an analysis of the legal dispute over the Northwest Passage with full knowledge of the statement put forth by USGS that the Arctics waters contain an estimated 25% of the worlds undiscovered fossil fuels. If feasible, major ma-rine transportation and energy companies (Table 1) could be the direct beneficiaries of the opening of the legendary Arctic grail. 1Justin Nankivell is a PhD candidate in political science at the University of British Columbia in Vancouver, and an instructor of Inter-national S ecurity and International Organization at the University of Victoria, Canada. He holds a Masters of Public International Law from the University of Nottingham,
GLOBAL INVESTOR Enrichment38Loan breakdown by borrowerMortgages 9%Other consumers 17%Large corporates 56%SME 18%16= Total banking assets in EUR Czech RepublicModerate growthVery high Bosnia and Albania010 20 30 40 50 60Assets growth, 2003 2005 in EUR, (%)Banking market with strong growthWe expect banking assets to grow substantially in future and per capita assets to pick up significantly. The retail banking segment is expected to post particularl y strong loan per capita, 2005, (EUR 1,000)DevelopingMaturingSource: Intelace & Agency of the Republic of Kazakhstan on regulation and supervision of nancial market and nancial organizations (AFN), Central banks, Credit Suisse
GLOBAL INVESTOR Enrichment39Kazakh banks on the riseBetween 2000 and 2006, Kazakhstans real gross domestic product (GDP) rose by 10% on average, making the country one of the fastest-growing economies worldwide. Rich reserves of accessible oil and other natural resources have turned Kazakhstans economy into a success story. Local banks are among the main beneficiaries of rising living standards and improving international Schmid, Equity Sector Analyst, Peter von Moos, Junior Research AnalystKazakhstan covers an area of million square kilometers and is country aims to become one of the top 50 most competitive the ninth-largest nation in the world. It is not the countrys size, economie s on the globe within the next decade. In September however, that makes Kazakhstan the envy of other emerging mar-2002, Kazakhstan became the first Former Soviet Union (FSU) kets but the fact that its population of 15 million sits on an abun-country to receive an investment grade rating from a major credit dance of accessible mineral and fossil fuel resources. Increasing rating agency, with rating actions pointing toward higher creditwor-international demand for commodities has stimulated industrial thiness since then. From a geopolitical standpoint, Kazakhstan activity and triggered local capital investment and foreign direct enjoys good relationships with China, Russia, the USA and the invest ment since the mid-1990s. With the turn of the 21th century, Europe an Union. Since declaring independence in December 1991, Kazakh stan started to reap the benefits of massive infrastructure Kazakh stan has learned how to balance the interests of its Russian investments. The oil industry has increased oil output by 100% from and Chinese neighbors and the developed world. Although million barrels per day (mbpd) in 2000 to over mbpd cur-cratic progress is relatively slow in Kazakhstan, the election of Presi-rently, and the government plans to nearly double production again dent Nursultan Nazarbayev should help maintain political stability to mbpd by 2015. The oil extraction industry is clearly the driver until Kazakhstans impressive GDP track record (see Figure 1). Banks among the main beneficiariesAccording to official estimates for 2005, the natural resource sec-tor contributed around 22% to GDP. Both its above-average oil The government plans to pour USD 30 billion into infrastructure production growth rate and reserves-to-production ratio indicate projects by 2015. Capital investments are driving the demand for that Kazakhstan is far from being a mature oil producer and still businesses that turn to banks for financing: over the past five years, has huge potential. corporate lending has grown at a rate of 34%. The revenues from oil extraction have also raised disposable incomes. While Kazakh-Kazakhstan in the fast lanestan used to be a poor Central Asian country, it has maintained the Kazakhstan is ranked 56th in the 2006 Global Competitiveness highest GDP per capita growth rate in the region since the turn of Index, well ahead of Bulgaria, the Ukraine, Russia and Turkey. The the century. In 2006, Kazakhstans GDP per capita was USD 5,081.
GLOBAL INVESTOR Enrichment40Figure 1 Real wage growth and improved consumer confidence have stimu-lated private consumption, which is the backbone of Kazakhstans GDP driven by energy boomKazakhstan aims to double oil production by 2015, which would drive economy. Between 2001 and 2006, total loans grew tenfold, and GDP growth and bring the economy closer to advanced markets. the loans-to-GDP ratio rose from 18% in 2002 to 42% by the end Source: Central banks, Credit Suisseof 2005. We expect credit market growth to remain high at a 33% compound annual growth rate (CAGR) until 2010.%USD (in thousand)2512Banking landscape10The 1998 financial turmoil in Russia resulted in a series of reforms. 20Today, Kazakhstan is recognized as the best-regulated FSU country. 815Kazakhstans banking landscape is highly concentrated, with the 6three biggest banks accounting for more than 60% of assets. Signifi-10cant foreign ownership in the banking sector is common to many 4emerging markets but is not the case for Kazakhstan. Only a few for-5eign houses are active, and we estimate the total assets controlled 2by these banks at less than 7%. Since the Kazakh banking sector 00is characterized by exceptionally low deposit penetration, Kazakh HungaryPolandRussiaKazakhstanChinaIndiabanks are heavily reliant on international debt issuance and foreign borrowings to fund loans. GAGR 2000–2005 (.) GDP per capita 2005 (in USD, .)We have witnessed massive loan growth and improved banking penetration in Kazakhstan (see Figure 2). However, the market is far from being saturated. On the consumer side in particular, we still consider the Kazakh banking sector to be at an early stage. Given a relatively low mortgage-to-GDP ratio and the moderate level of Figure 2 vehicle ownership, we expect to see strong growth in mortgage Loan penetration (loans-to-GDP) lending and automobile financing in retail loan demand is a sign of a growing economy. On the banking side, both corporate banking profit and underlying retail banking are benefiting The Kazakh express from the general rise in living standards. Source: National Bank of KazakhstanWe expect Kazakhstans underlying growth story to continue and %consider the environment to be highly conducive to the expansion 45of the financial sector. For these reasons, we believe the London-40listed Global Depositary Receipts (GDRs) of Halyk Bank and 35 Kazkommertsbank are in a position to benefit from this trend. Al-30though richly valued and restricted in terms of liquidity, we believe 25the superior growth outlook and the novelty of this market make 20these two stocks an interesting proposition for risk-tolerant . Halyk Bank, our favorite Kazakh bank, is the former 10National Savings Bank of Kazakhstan and was part of the Soviet-5era Sberbank. It is the largest Kazakh retail bank in terms of cus-0tomer deposits, the number of retail outlets and automatic teller 2002200320042005machines (ATMs), and ranks number three in terms of assets. Halyk Corporate loans Mortgage loans Non-mortgage retail loansBank is managed by the Presidents son-in-law, Mr. Kulibayev, who indirectly holds 64% of the shares. Halyk Bank is the most retail-oriented Kazakh Bank. Its loan book is made up of 18% mortgage loans and 12% other consumer loans. Net fee income contributes 36% to revenues, while net interest accounts for 57%. Halyk Bank is the most profitable Kazakh Bank, with a net interest margin of 767 basis points for FY 2005. We also note that Halyk Bank has the larg-est branch network providing inexpensive funding and margins above the sector average. Halyk Bank is well supported by its domestic deposit base and is therefore least dependent on external bond issuance. The free float is 29%.2. Kazkommertsbank was estab-lished in 1990 and is the largest Kazakh bank in terms of assets and loans. While its historical business focus is the corporate business, the bank is increasingly becoming a universal bank that provides corporate banking, retail banking and asset management. The com-pany is majority-owned and controlled by the management. The com pany has subsidiaries in Russia and Kyrgyzstan. The lending busi-ness contributes % to total revenues. Kazkommertsbank has
GLOBAL INVESTOR Enrichment41its roots in large corporate lending, but management is trying to diver-sify the loan book: corporate loans account for 85%, mortgage loans Macroeconomic background9% and other consumer loans 4%. In the retail segment, the banks focus is on high net worth individuals and middle income groups. Kazakhstans 2006 GDP growth rose to % from % in 2005, underpinned by strong growth in private consumption and construc-Main investment riskstion expenditures. Credit Suisse economists expect rapid econom-Our investment thesis is based on a high expected level of lending ic growth to continue on the back of ambitious oil extraction plans growth. Accordingly, we think the fair values of Halyk Bank and that are likely to foster fixed investments and exports. Rising living Kazkommertsbank will remain very sensitive to the loan book and standards and a stimulating fiscal policy should support private con-margin development. Since the two banks have significant expo-sumption. Managing macro economic risks will be a challenge, but sure to the real estate and natural resources sectors, a collapse in we expect monetary authorities to keep inflation in check by a combi-real estate prices or a sharp decline in natural resource prices nation of tighter monetary policy and a stronger Kazakhstan likely have a negative impact on its growth outlook, even for Explicit targeting of the non-oil deficit introduced in the middle its diversified loan portfolios. However, a typical Kazakh oil com-of 2006 should help the government to enhance fiscal discipline in pany breaks even at an oil price of around USD 25 per barrel, and view of the likely continuation of oil revenue windfalls in the coming our economists do not believe that natural resource prices will fall years. The government is planning to reduce total spending to 24% to critical levels within our forecast period. A limited supply in the of GDP by 2008, as well as reduce the tax burden on the economy real estate market and rising living standards mitigate the risks of and lower the non-oil deficit to % of GDP by 2009 from around a severe devaluation of % of GDP in main risk on the funding side is that the sector loan-to-de-posit ratio stands at around 130% and is by far the highest in the region. Regulators are concerned about the vulnerability of local banks to a tightening of international financing conditions and have already imposed some measures to control debt issuance through limits on open positions and making bond issuance more expen-sive. Both a lower risk appetite of foreign bond investors and an overly restrictive funding regulation would likely lead to a deteriora-tion on the funding side. In the longer term, however, this situation would strengthen the financial system. Political risks are also a factor to consider as well as the countrys emerging market nature with higher underlying volatility. Table 1 Attractive banking stocks in Kazakhstan Strong economic growth is driving demand for retail and corporate banking products. Source: Bloomberg, Credit SuisseStockRatingBloombergSec. rationaleGDR KazkommertsbankBUYKKB LI2774751Strongly growing Kazakh wholesale bank; very high beta; profiting from underlying GDP growth and foreign investor interest. Risk: Depends on economic development, especially the energy sector; political Halyk BankBUYHSBK LI 2833528Strongly growing Kazakh retail bank; more defensive; under lying growth driven by low deposit penetration as well as loan penetration and its potential. Risk: Depends on economic development; political above recommendations represent our mid- to longer-term investment view at the time of writing and are subject to change depending on market conditions. Please contact your relationship manager for regular updates on specific companies.
GLOBAL INVESTOR Switching42Metro Hat, Tokyo, JapanPhoto: ./Corbis
GLOBAL INVESTOR Switching43One network for everythingThe telecommunications sector is undergoing radical change. Full-scale digitalization of telecommunications networks and faster data rates for both fixed networks and mobile handsets are profoundly changing the environment in which telecom companies operate. The distinct markets served by IT services, telecommunications, Internet and media companies are converging into Neumann, Equity Sector AnalystSeveral telecom companies have announced in recent months that technologically possible thanks to UMTS add-on applications such they are hoping to shut down their aging analog voice networks as as High-Speed Downlink Packet Access (HSDPA), High-Speed early as 2010 and migrate to completely digital Next Generation Uplink Packet Access (HSUPA) and Long Term Evolution (LTE; see Networks (NGNs), which should cost less and be more reliable and Figure 1). To date, the so-called 3G standards such as UMTS have easier to maintain. Plans to build upgraded Next Generation Mobile attracted only about 100 million users, a fraction of the total mobile Networks (NGMNs) have also been unveiled. NGMNs could repre-handset population of more than billion. Having pinned its sent an important breakthrough in providing wireless access to the hopes on turning mobile TV and mobile Internet services into a mass-Internet, television, and music or video on demand. It appears that market success, the telecom sector is now challenged to ensure mobile Internet could become a mass-market issue earlier than the that the huge amount of data volume this will entail is available ef-initially projected time frame of 2010 to 2012. At this years 3GSM ficiently and at low cost wherever coverage is offered. Telecom World Congress in Barcelona, telecom companies left no doubt companies worldwide are in the process of upgrading their networks that they are hoping to bring mobile Internet services to the mass and switching to completely Internet Protocol-based (IP-based) market as early as 2009. For example, in his speech at the annual architecture in order to meet this challenge. industry get-together, Vodafones Chief Executive Officer (CEO) Productivity gains and cost savings potentialArun Sarin surprisingly urged the Global System for Mobile Com-munications (GSM) community to step up the development of Uni-The new generation network brings advantages for more than just versal Mobile Telecommunications System (UMTS) technology. end users. It will allow telecommunications companies to achieve There are several motives for such calls to action. For one, the long-term cost savings and give them greater flexibility in develop-telecommunications industry has spent approximately one trillion ing and marketing future products and services. Leaner network euros to build up UMTS networks, and at some point it would like architecture will not only lower hardware costs, but a uniform IT to see some kind of return on its investment. Apparently, even platform also means only one management system will be required. Vodafone, the worlds market leader, is getting nervous about the Up to now companies have worked with various stand-alone solu-decline in revenue growth rates for voice services. Another reason tions, pushing up overall operation, maintenance and training costs. is that now after years of waiting mobile broadband is finally Another advantage the next generation of networks offers telecom-
GLOBAL INVESTOR Switching44Today: Parallel platforms for different servicesTelephonyDataBroadbandMobileCRM/BillingADVADVLong distanceGMTZGMTZADVADVGMTZGMTZRegionalADVADVGMTZGMTZGMTZADVLocal accessGMTZCustomerTomorrow: All-IP one platform for major servicesTelephonyDataBroadbandMobileCRM/BillingOne CRMOne billingVolP/Messaging ServicesIP dataIP TVone phoneservicesControlIMSCoreTransport and EdgeLocal accessCustomerNew network architecture simplifies convergence of different servicesAcronyms such as NGN and NGMN refer to a network built on advanced technology that enables the convergence of multimedia communications and interactivity in wireline and wireless networks. Next Generation (Mobile) Network is a widely used term in the international fixed network community. The core element of a Next Generation Network is its underlying architectural framework, the IP Multimedia Subsystem (IMS). This open and standards-based platform is key to fixed/mobile convergence, since it serves as a bridge between voice and data : Swisscom
GLOBAL INVESTOR Switching45munications companies is that they will be able to develop new Figure 1 services using advanced, standardized software tools, making pro-Evolution of radio access standards ducTelecom service companies in Europe have reinforced their willingness tivity gains possible. With the aid of tried-and-tested software to bring Internet services to the mass market by as early as 2009. development methods and instruments, telecommunications com-Nokia presented its technology roadmap at the 3GSM Conference in panies can now create new services and products on their own in Barcelona Source: Nokia, Credit Suissea very short period of time and add them to or remove them from their networks relatively easily. This was not the case in the pasGSM/EDGE EDGE Evolutiont. IP Multimedia Subsystem (IMS) architecture makes it much faster WCDMAand less complicated to develop and implement new services such Mobileas push to talk, video conferencing, instant messaging, mobile mu-HSPA HSPA Evolution I-HSPA (pre-LTE)sic downloads and, most importantly, specific enterprise applica-LTEtions. IMS can also be a risk, however, as discussed in the follow-ing (Mobile)BWADesktop PC becomes a webtop PC (Fixed)The corporate clients market served by telecommunications com-panies could undergo fundamental change as a result of the new 200520062007200820092010network architecture. In the last two decades, computer processes have mainly involved desktop personal computers (PCs), which were usually part of a companys local information technology (IT) network, a so-called Local Area Network (LAN). The main advan-tage of the client/server structure of a LAN was processing speed. The related maintenance costs and relatively high hardware costs were disadvantages. The new network architecture on which the telecommunications companies are working offers new possibilities that could eliminate the disadvantages. The so-called Wide Area Network (WAN) of telecommunications companies would offer faster application and processing speeds than corporate LANs. Therefore, these new WANs might be able to assume the function of a local network in the future. In other words, it would no longer be necessary for a company to own and maintain a farm of servers on-site in a LAN; the servers could be maintained at a central loca-tion somewhere else. The desktop computers would access the network via the WAN of a telecommunications company. The desk-top PC would thus become a webtop PC. However, the LAN market is a typical IT services business, which means telecommunications companies can penetrate the IT services market given the new functionality offered by their NGNs. Admittedly, the reverse is also true. Large IT companies such as IBM or Capgemini will seize the new opportunities to offer customized business communications and process optimization services. Corporate clients will be eager to make use of the new possibilities because the new network structures can produce considerable savings over the long run. Against this background, mergers between telecom and IT compa-nies would probably also make sense. Internet toll charge for better bandwidth quality Besides the challenges in the corporate accounts business, the competition for individual customers is fierce. Google recently an-nounced that the data traffic generated by YouTube alone in 2006 was equal to the entire web-based data traffic volume in the US in 2000. Demand for personalized services (MySpace) and/or video downloads (YouTube) is clearly growing. However, while Internet companies such as Yahoo and Google become ever more popular and can acquire potential future customers by offering such ser vices, telecommunications companies are not benefiting financially from the growing data traffic flowing through their landline networks. That could change with the increased usage of NGNs and NGMNs, however. One reason is that telecommunications companies could
GLOBAL INVESTOR Switching46better monitor the usage of their networks thanks to the new some catch-up potential because they have relatively strong IT opera-architecture . This could put them in a position to charge a kind of tions. Losers are likely to be the alternative carriers or telecom com-Internet toll for better bandwidth quality. They are also likely to panies that are only active in their domestic market. In this sub-have learned their lesson from past developments with their wireline segment, further market consolidation and merger and acquisition networks and be ready and prepared to better defend their territory (M&A) activity are likely. Telecom equipment suppliers should con-in the mobile Internet business. Moreover it will be easier for them tinue to benefit, too, as more money will have to be spent on build-to develop new services. ing and upgrading landline and wireless networks. With its strong market position in the Internet protocol television (IPTV) business, Winners and losers of the network revolutionAlcatel-Lucent is the company with the best market growth pros-This years 3GSM World Congress in Barcelona left the impression pects among the European manufacturers. Moreover, the surging that telecom companies are more pragmatic and that they are com-growth of data traffic volumes is accompanied by sustained demand mitted to increasing traffic through their networks but also to ben-for optical network elements and edge routers, a business where efiting financially from those traffic flows. They might succeed in Alcatel-Lucent is also well positioned, along with Ciena, Cisco and doing so if they correctly develop and market their new one-size-the smaller European company Adva Optical. In the IT services sector, fits-all network. We consider BT Group, KPN, Verizon and NTT the companies such as Amdocs stand to benefit, since they already have pioneers in this field. Deutsche Telekom and France Tlcom have experience in integrating IT services into telecom networks. Table 1 Companies benefiting from the network revolutionTelecom companies are more pragmatic and committed to increasing traffic through their networks. Telecom equipment suppliers and IT service companies should benefit from additional demand and funds spent on networks. Source: Credit SuisseStockBloombergSec. Investment thesisBT GroupBT/A LN1292393HOLDBT Group operates one of the most advanced next generation networks among KPNKPN NA1076509HOLDKPNs all IP strategy should lead to a successful turnaround of its domestic wireline CommVZ US1095642HOLDVerizons FiOS (fiber optic services) project is a promising value driver for the Tel&Tel9432 JP764057HOLDJapans leading telecom operator with monopoly power in fiber optic network TelekomDTE GR1026592HOLDRestructuring and new VDSL initiative in its domestic broadband business should lead to a TlcomFTE FP720128HOLDFT provides one of the highest FCF and dividend yields among the European telecom -LucentCGE FP485864BUYAlcatel should benefit from its leading position in the IPTV-equipment marke t and from merger US2721615BUYNew products and management leverage Cienas position in the recovering optics US918546BUYLeadership within key network infrastructure segments qualifies Cisco as a main beneficiary of the content digitization US922906BUYRolls-Royce in the growing telecom/Internet billing and mediation systems US941800HOLDIBM continues to benefit from its solid product/service lineup as well as from continued FP488070BUYSuccessful restructuring and new business opportunities through all-IP networ OpticalADV GR498244BUYNiche player with strong growth in the recovering optics US1916494BUYLeader in the Internets evolution to a more dynamic communications and media US453745BUYYahoos next generation search technology (Panama) should fuel continued above recommendations represent our mid- to longer-term investment view at the time of writing and are subject to change depending on market conditions. Please contact your relationship manager for regular updates on specific companies.
GLOBAL INVESTOR Switching47Nanotech for energizing solar cellsImagine you were able to power your laptop just by unfolding a thin photovoltaic foil the size of a sheet of paper. Or think of a mobile phone with a photovoltaic coating delivering enough energy for operation. Or figure the convenience of houses with windows that generate electricity. Development in solar cell nanotechnology promises such scenarios will become reality, potentially within the next . Dominik C. Mueller, Equity Sector Analyst, Dr. Thomas C. Kaufmann, Equity Sector AnalystWithin only 89 minutes, the earths surface receives enough sun-year. Global shipments of PV cells have been growing at an annual light to theoretically satisfy the worlds energy demand for an entire rate of more than 35%, partially driven by governmental energy year. It is inexhaustible and non-polluting energy, free for anyone policies (Figure 1). As of today, solar electricity prices are about who can harness it. According to the International Energy Agency 20−60 US-cents/kWh, or within a factor of 210 of those from (IEA), the worlds electricity consumption will have doubled by the conventional electricity sources. As such, PV energy today can year 2030. Experts estimate that by 2040, up to 16% of worldwide only be competitive in subsidized markets like Germany and Japan, electricity demand could be satisfied by solar power. In particular, or in regions with high insolation (a measure of solar radiation direct sunlight conversion into electricity by means of photovoltaic power) and elevated retail electricity prices. But the price gap (PV) elements enjoys exciting future potential in two distinct areas:continues to shrink, also owing to rising fossil fuel prices. The US replacement of nuclear and fossil fuel anticipates solar energy will become commercially supply for portable devices. While the cost per watt competitive by 2015, providing one to two million American homes is the main driver in the retail electricity market, achievable effi-with solar electricity. Yet in other areas, PV technology may catch ciency, manageability and cell shape factor are crucial factors for up to conventional electricity by as early as 2011, opening up enor-portable device PV markets for the industry (Figure 2). Three critical factors in solar cell technology that primarily control the price per watt of PV PV catching up on competitivenesscells in the electricity market need to be addressed:-Since the 1970s, when the solar energy market was virtually ciency, . the energy conversion factor determining the electric-nonexist ent, prices in the PV energy industry have decreased sub-ity output per cell costs per cell area, stantially, which has led to the production of millions of watts per mainly driven by material consumption and raw material costs.
GLOBAL INVESTOR Switching48 hours hours hours hours hours hoursAmount of solar energy in hoursAmount of solar energy in hours, received each day on an optimally tilted surface during the worst month of the year based on accumulated worldwide solar insolation data. Source:
GLOBAL INVESTOR lifetime: Modern PV elements based on silicon tech-Figure 1nology have lifetimes of over 40 years and pay off their production World PV cell/module productionenergy in 1− 5 growth of the PV industry in the last decade. Japan is the clear leader, accounting for nearly half of the worlds Japan and Germany leaders, USA yet to ariseproduction. Source: European Commission (PV Status Report 2006)Annual Production in Megawatts (MW)The leading producers of PV cells are Japan and Europe (mainly 2000Germany) with a 45% and 28% share of total global 2005 ship-CAGR 1995–2005: 35%ments, respectively, clearly dominating the market. The USA is still 1800lagging behind, with a mere % market share, on a level with 1600China (%). However, the proposed FY 2008 US budget calls for USD 137 million in funding for the Solar America Initiative (SAI), a 1400major new R&D effort to achieve cost-competitive solar energy 1200technologies across all market sectors by 2015. US solar cell com-panies are expanding, and the Silicon Valley start-up Nanosolar last 1000year announced the construction of a manufacturing facility that 800will produce an output of 430 megawatts (MW) per year, almost triple the existing solar production capacity of the USA today. Con-600servative estimates given by the European Photovoltaic Industry 400Association (EPIA) see worldwide PV systems capacity exceeding 400 GWp, or 3% of the global electricity demand in year 2025, im-200plying average annual CO2 savings of 353 million tons per year, 0equivalent to 150 coal-fired power plants. Worldwide revenues of 199019951996199719981999200020012002200320042005the PV industry are expected to soar from USD 11 billion in 2005 to USD 220 billion in 2025 (Figure 3). And these figures do not even Japan Europe United States Rest of Worldtake into account ground-breaking developments in nanotechno-logy-based PV generations of solar cellsFirst-generation PVs are silicon wafer-based solar cells, accounting Figure 2for more than 86% of the market. The technology has come a long Competitiveness of PVsway since the early days of silicon cells in the late 1950s, and conver-Falling solar electricity prices are expected to undercut conventional source sion efficiencies have been boosted from 6% for the first devices prices within the next decade. Source: EPIA (RWE Schott Solar GmbH)to currently over 20%. For satellite applications, some refined cells USD/kWhhave been designed that even reach 40% efficiency. solar cells account for the principal PV sales portion of the 900 hours sun/yearmain suppliers Sharp, Kyocera and Q-Cells. Also, mid caps like (. Berlin, Germany) Solarworld or the US-based SunPower source their main 1800 hours sun/yearrevenues from this technology. However, high material demand is (. Los Angeles, USA)1a grave downside of first-generation devices. Shortages of silicon supply have led to an increase in pricing, and manufacturers have compete with the computer industry for supplies of high-quality Utility power at peaksilicon. This in turn has spurred the development of a new technol-demand generation with lower material usage per watt. Utility bulk powerThe second generation of PV technology came about a decade and is based on the use of thin-film deposits of various semi-conductors. There are different materials under investigation or in production, such as amorphous silicon, cadmium telluride and copper indium sulfide. These materials generally exhibit increased 0light absorption rates that allow for film thicknesses of a few microns 19901995200020052010201520202025203020352040(compared to 200 − 300 microns in first-generation PV elements). Besides the larger players, start-up companies like Daystar Tech-nologies, Shell Solar and Nanosolar are prominent promoters of the thin-film technology with auspicious plans for soaring produc-tion capacities in the medium term. Efficiencies are typically lower compared to first-generation PVs, ranging from 5% to 13%, but owing to reduced material usage, the price per watt achievable with second-generation solar cells is better in the end. Compound consumption for both PV generations together has been reduced from 14 grams/watt in 2003 to currently 9 grams/watt, and the
GLOBAL INVESTOR Switching50industry has managed to cut unit costs by over 5% yearly. Thin-film Figure 3PVs have the potential to drop PV electricity costs to 6 US-cents/PV industry sales estimateskWhen iThe projected annual growth rates used in the forecast continuously ease . But evf thin-film PVs meet their long-term potential, a off, from 35% in 2005 to 11% in 2025. System costs per watt are assumed quantum leap in cost reduction is indispensable in order to provide to fall from USD 8 to USD in 2025. Source: Credit Suisse and EPIA/Greenpeacethe scale of applications the world will need. This is where nanotech-In billion USDnology comes into the generation: New nanomaterials180Nanotechnology, or the ability to architect and assemble things at 160the atomic level, is on its way to optimizing solar cells both in terms of increased conversion efficiency and considerably cheaper raw 140material. Third-generation PVs include organic solar cells, photo-120electrochemical cells and nanocrystal solar cells that may ultimately beat down solar electricity prices to below 5 US-cents/kWh. The 100Nobel prize-winning invention of conductive polymers has paved 80the way to organic solar cells that are made of inexpensive flexible plastic which can be wrapped around structures or even applied like 60paint. Up to now, its degradation upon exposure to ultrav iolet (UV) 40light and relatively low energy efficiency have been a drawback. However, researchers from New Mexico State University and Wake 20Forest University recently achieved a solar energy efficiency level of %. They believe plastic solar cells with efficiencies beyond 10% 200520092013201720212025will be a reality for consumers in four to five years. Early promoters of the technology are BP Solar and Konarka, a private, US-based start-up company with R & D subsidiaries in Austria and Switzerland, TMwhose light-activated Power Plastic foil was selected as one of the best products in 2006 by Builder News magazine. Moreover, researchers from the University of Toronto recently produced the first PV cell able to harness the infrared portion of the sunlight spectrum. It is believed that with further advances of this nanopar-ticle-enhanced polymer technology, plastic PV cells could achieve efficiencies up to 30%.Another promising emerging technology, invented by researchers at the Swiss Federal Institute of Technology in Lausanne (EPFL), is the photoelectrochemical or dye-sensitized solar cell (DSC), often referred to as artificial photosynthesis. Here, the incident light trans-forms the dye molecules by exciting their electrons, which are then absorbed by a titanium dioxide (TiO2) layer to become an electric current, somewhat similar to the photosynthesis process in plants (Figure 4). The concept has been out there for quite some time; how-ever, it did not work well until researchers used TiO2 crystals 30 na-nometers in diameter, which greatly increased the sponge-like con-tact area with the dye, enhancing the efficiency of electron absorption. DSC technology has high market potential owing to the cheap raw material. The Australian Dyesol, a start-up with close ties to EPFL, is a leading developer and manufacturer of dye-sensitized PV cells. Light-absorbing nanocrystals and quantum dotsAnother strategy for capturing sunlight energy is to use nanocrystal solar cells. Silicon nanoparticles of diameters ranging from 1 to 4 nanometers sprayed onto a silicon substrate absorb UV light and convert it into electrical current. With appropriate connections, this ultrathin film of silicon then acts as a PV cell. The concept is being developed by the US start-up Octillion, while a number of research laboratories are working on similar inorganic cells, including Law-rence Berkeley National Laboratory. With this ultrathin, inexpensive technology, glass windows could generate electricity from sunlight, without losing significant transparency, and rooftops or facades could be laminated, with virtually no impact on appearance.
GLOBAL INVESTOR Switching51Finally, cells incorporating quantum dots (QDs) that are connected Figure 4by carbon nanotubes or even proteins will provide extremely high Dye-sensitized solar cellenergy conversion efficiencies oThis nanotechnology solar cell type converts sunlight into electric current f potentially up to 50% at a relative-using organic molecules. Source: Dyesol Ltd., Credit Suissely low cost. By using dots of different sizes, a PV cell can be devised to capture and convert the entire solar spectrum. Though still in an Lightearly stage of research, the technology has breakthrough potential and is, among others, being actively explored by the US National Transparent Renewable Energy Laboratory. Some nanotechnology concepts Conductorare likely to hit the PV mass market within the next five years; others will take more than a decade. Meanwhile, the thin film and conven-Nanoporous –etional wafer-based panels should see continuing Towards– flexible energy supplyNanotechnologyDye&ElectricityIn the long term, cheap and efficient solar cells will likely create an Biomimeticsembedded source of low-cost renewable power wherever there is +Electrolytelight. With solar cells on the rise, a considerable portion of world-wide electric power generation could be decentralized. According to the IEA, developing countries are expected to account for two-Conducting thirds of the increase in world primary energy demand between Substrate2002 and 2030. In terms of global CO2 emissions, these countries will be responsible for 49% of total emissions in 2030. While ma-ture industrialized economies can afford a sustainable energy sup-ply, the renewable energy share in developing countries is forecast to decrease in the future. Price reductions for solar energy could break this trend and provide emerging economies with sustainable energy. Off-grid applications could improve quality of life for about billion people around the world living without basic energy serv-ices (most of whom are in South Asia and sub-Saharan Africa). Solar-powered tools could be a backbone for the infrastructure in many emerging markets. Just a few years from now, a myriad of mobile electronic devices and millions of homes and offices could source their power directly and independently from the on the investors perspectiveIn the short term, first-generation PVs should clearly continue to dominate the market. Consequently, large players in this market segment like Kyocera or the German Q-Cells are most likely to benefit from rising PV sales worldwide. However, EPIA estimates that first-generation market share will drop from its current 92% to below 80% by 2010, while thin-film technology in the same period should see a corresponding increase to 18%. A number of larger providers like Sharp also intend to strengthen thin-film-type solar cells as a second pillar of their product line. Investors wishing to gain exposure to second-generation technology at this stage are likely to see less risk investing in such stocks than in the above-mentioned start-ups. Nanotechnology-based third-generation cells are forecast to gain significant market share of around 10% by 2020, even growing to 30% by 2030. As of today, however, the companies developing third-generation solar technology are mostly early-stage enterprises exposed to both significant business and market risks.
GLOBAL INVESTOR Switching5221 April31 JanuaryAdoption of MiFID Transposition intoby the EU Parliament local law20042005200620072008SeptemberEuropean Commission’sfinal approvalJune1 NovemberEuropean StandardMiFID and national legislationCommittee Approvalenters into force for theindustryGlobal investment banksplan to establish a pan-European tradingplatformFigure 1MiFIDs path to implementationFollowing the adoption of MiFID by the European Parliament back in 2004, member countries were given until 31 January 2007 to adjust their legislation to the new directive. Stock exchanges and retail stockbrokers are likely to have more difficulties, whereas large investment banks should be more on the winning side. Consultants and software developers are also expected to benefit from the introduction of the new : KPMG International/Economist I ntelligence Unit survey 2006, Credit Suisse/European Commission, Credit Suisse
GLOBAL INVESTOR Switching53 A regulatory gift for banksThe Markets in Financial Instruments Directive (MiFID) is a regulatory initiative in the financial services industries intended to open up competition and create a single pan-European financial services market. In our view, MiFID is likely to favor large, technology-led banks. We expect investment banks to be among the winners thanks to higher transaction volumes, while stock exchanges may face increasing pricing pressure and lower Schmid, Equity Sector Analyst, Olivier P. Mller, Equity Sector AnalystMiFID is designed to create a unified European market, introducing concept of best execution to include traded financial instruments regulations to govern the conduct of trading and investment activi-other than equities. A number of questions remain open with regard ties across all European member states. Further, it encourages to instruments other than equities, as their markets are not compa-greater competition between potential trade execution venues and rable to efficient equity markets. While the focus for retail investors market data suppliers, as it establishes standards for regulated is on the total consideration of transactions, best execution for insti-markets and multilateral trading facilities (MTFs). Last but not least, tutional investors also considers other factors such as price traded, it aims to increase transparency and investor protection significant-speed of execution, liquidity/market impact and completion of settle-ly. While MiFID has a rather complicated legal framework, we internalization: Systematic internalizers are lieve that the following elements are most important in understand-institutions that systematically execute client trades internally rather ing the impact of the regulations: of business than externally, such as banks which have both wealth manage-obligations for investment banks: Under MiFID, investment banks ment and investment banking/brokerage facilities. Some examples are asked to conduct their business in a diligent way, such as col-of systematic internalizers include Deutsche Bank and to a lesser lecting supplementary information about clients and their suitability extent some UK and French names. Another typical example would for particular investment products. The regulation also introduces be UBS, with its integrated bank approach and sizeable wealth strict guidelines with regard to non-trading-related services and management in addition to its investment banking facilities. These cost execution: MiFID aims to expand the financial houses will be r equired to provide pre-trade transparency,
GLOBAL INVESTOR . quoted -trade disclosures: While the reporting of off-market transactions has been mandatory in some markets, Key elements of MiFIDthis requirement has now been expanded to all investment firms covered by of concentration rules: The The Markets in Financial Instruments Directive (MiFID) is a European previous investment services directive allowed EU members to law which aims to unify the provision of financial services through-creat e concentration rules requiring equity orders to be handled out the European Community and to address new market develop-through the primary exchange. Under MiFID, these rules will no ments that have taken place since the original implementation of longer be allowed. the Investment Services Directive (ISD) in 1993. MiFID is a compo-nent of the European Commissions Financial Services Action Plan Legal framework with financial sizeand is scheduled for implementation in November 2007. The direc-We believe MiFID will have a substantial impact on the European tive provides for a comprehensive regulatory framework governing financial industry, as it offers strategic opportunities while, at the the execution of transactions by exchanges and investment firms. same time, bringing major challenges for stock exchanges. MiFID It aims to enhance investor protection considerably and provide aims to shift value from the financial industry to customers by in-further market transparency and competition. Markets may become more liquid and more sophisticated and hopefully see greater participa-tion. This in turn could increase the range of available risk-return trade-offs and thereby reduce diversification costs and provide better hedging possibilities. According to a report by the economic consultancy Europe Economics, if the cost of capital is lower, then investment may increase and GDP could rise across the EU. The reports base scenario assumes three to five basis points less on the cost of equity totaling roughly GBP billion. The UK Financial Figure 2Services Authority (FSA) estimates that the benefits of MiFID in the Winners and losers after the implementation UK are roughly GBP 200 million per annum. The one-off cost of Stock exchanges and retail stockbrokers are likely to have more difficulties, implementation would range between GBP 870 million and GBP whereas large investment banks should be more on the winning side. 1 billion, with additional ongoing costs of GBP 100 million per annum. Also, consultants and software developers are expected to benefit from the introduction of the new framework. Source: KPMG International/Economist MiFID has the potential to challenge the financial industry land- Intelligence Unit survey 2006, Credit Suissescape, with material implications for stock exchanges and invest-%ment banks (see Figure 2). The most innovative banks in the early 100stages are likely to be some of the most sophisticated users of technology. In our view, MiFID is a typical example of how a new 80regulatory initiative favors large banks with modern efficient infor-mation technology, as IT changes are less costly for them to realize 60than for smaller financial houses. MiFID is not likely to be a second Y2K in terms of investment technology spending, since investment 40technology seems to be only an underlying decision factor this time. Nevertheless, we believe that the introduction of MiFID will benefit 20selected IT and IT service companies, such as Capgemini. However, banks will need to tap significant resources in their legal and com-0pliance departments (see Table 1), and this is more likely to be one of the main cost drivers for banks. Systematic internalizers and MTFs In our view, the main implications of MiFID relate to the concept of multilateral trading facilities (MTFs) and are likely to affect the fol- Winners Loserslowing market participants most:1. Large investment banks are increasingly acting as systematic internalizers. We believe they will set up MTFs, if they havent done so already. Investment banks with substantial volume flow in equities are likely to set up a joint trading platform with the aim of attracting higher volumes as well as reducing their in-house paid spreads. Systematic internalizers are required to publish the quotes (pre-trade transparency) free of charge, but may charge fees for accessing this information (post-trade transparency). As MTFs are expected to become a meaning-ful market force, their data might be of additional economic value and . A group of seven global investment banks in-cluding Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS have agreed to establish a IT consultanciesSoftwaredevelopersInvestmentbanksAsset managersOutsourceservice providersInstitutionalinvestorsPrivate banksRetail investorsStock exchangesRetail stockbrokers
GLOBAL INVESTOR Switching55pan-European equities trading platform that will compete with the Table 1regions domestic stock exchanges following the introduction of MiFID is more than an exerciseMiFIDTable 1 ranks the relative importance of different issues with respect . This trading platform is to be set up as a joint-venture com-to the introduction of MiFID. It shows that compliance, IT system pany with independent management. It is expected to be operative and legal issues are expected to be the most important, adding to the as of the beginning of 2008. Equities trading should thus be more high burden of legal and compliance costs banks have to bear. cost-effective, obtaining significant liquidity with greater efficiency Source: KPMG International/Economist Intelligence Unit survey, 2006for all participants in the equity . Smaller brokers: Ranking during Since the setup of a trading platform is extremely expensive and Initial ranking implementationcomplicated, we believe smaller brokers are likely to struggle in Compliance11terms of technology, organizational and process costs to comply with IT systems26the MiFID rules, and providing best execution on a pan-European Legal33basis. We expect them to outsource volume to so-called MiFID-com-Internal audit42pliant MTFs, thus resulting in further concentratRisk 54 portfolio managers: Additional rule-based trading could pose an Trading execution67efficient way for smaller portfolio managers to achieve best execu-Client reporting79tion for their client assets and drive volume as a . Stock Client management810exchanges might suffer from the additional competition, resulting in Legal entity structure98clearly lower volumes and lower spreads. We expect the consoli-Marketing105dation discussion to intensify over time, with a greater focus on specialization going forward. MiFID will ultimately speed up the unbund ling of stock exchange roles in the marketplace and increase the likelihood of future Table 2Investment banks benefit from MiFIDIn conclusion, we expect MiFID to bring tighter spreads and overall We believe that large investment banks will benefit from the introduction lower transaction costs for the European equity markets, but also of MiFID, as they will set up MTFs and a joint platform to capture the larger more liquidity and efficiency due to higher transaction volumes, flows. Source: Credit Suissemainly for the banking system. On the other hand, stock exchang-BankRatingInvestment thesises may end up capturing a smaller share of overall market volume UBS (UBSNBUY VX)Unique investment opportunity and thus benefit less from volume growth than before. Although in a bank with a global franchise and global footholds in wealth manage-the initial wording of the MiFID directive addresses securities in ment and increasingly in i nvestment general, MiFID will be mostly relevant for equities at the outset. application of the MiFID directive to bonds is under discussion. Deutsche Bank (DBK GRBUY)Offers exposure to international But since bonds are mostly traded on OTC markets, and given the investment banking and the opportunity to benefit from a lack of unified marketplaces, we believe it will be very difficult, if recovering Germany. not impossible, to apply the MiFID directive to that asset class, at Goldman Sachs (GSUY USB)Dominant franchise position amid least in the beginning. While structured products are barely touched strong, broad-based capital market upon by MiFID, the industry is already making preparations. For climate, although ability to sustain example, German banks are putting a pre-emptive German deriva-high profitability will be increasingly codex into play. The above recommendations represent our mid- to longer-term investment view at the In our view, the implications of the implementation of MiFID in time of writing and are subject to change depending on market conditions. Please contact your relationship manager for regular updates on specific 2007 are clear: systematic internalizers such as the big US and European investment banks should benefit from higher earnings but also from higher deal volume. Stock exchanges could suffer due to higher competition and end up specializing or expect banks such as UBS, Deutsche Bank in Europe and Goldman Sachs in the USA to benefit most from the introduction of MiFID, since they are likely to capture a larger portion of the trading flow and thus the commission volume, allowing them to structure their products better. The impact cannot be fully estimated, as it completely depends on the financial market situation. Additional information regarding the MiFID initiative can be found under:
GLOBAL INVESTOR Services56Thinking outside the boxHOLT software is (almost) all that is needed to value nearly any company: a sound and reliable valuation model and a global database of comparable data. With this tool, asset managers can finally focus their attention on the important things. Interview: Zoe Arnold, freelance writerZoe Arnold: Credit Suisse has offeredflow returns on investment (CFROI) and Robin Seydoux: No, not investors HOLT Value Searchthe estimated growth of invested capital. It is true that data is bought from external for five years now and it also uses theThese two key figures are then compared sources: estimates of earnings per software in-house. What exactly does thiswith market expectations. If the figures share for the next two years, for example, program do?produced by the model are less than what are obtained from the well-known Robin Seydoux: HOLT Value Search market expectations are implying, then data services company IBES (Institutional is a software program with a financial investor expectations are too high and the Brokers Estimate System), but the CFROI database (balance sheet and P&L numbers, value of the stock in question is likely to produced by HOLT is nevertheless unique. cash flow data, etc.) on more than 18,000 undergo a correction at some point in the This is because the valuation software companies worldwide going back 20 to future. If the figures produced by the automatically makes certain adjustments 25 years. And, more importantly, HOLT is model are higher than what the market is to these figures, which is one of the an excellent tool for measuring market expecting, it is an indication that this strong points of HOLT, as these adjust-expectations and projecting future price company has upside make the cash flows calculated by movements. The data used by HOLT are boughtHOLT truly comparable across entire Tell us how these projectionsfrom international data services companies, sectors and across international borders. are means other financial servicesAnd that is a tremendous Seydoux: Based on prior-year companies are also using this data. ArentExactly what adjustments are made?figures and earnings expectations, the all the projections made based Robin Seydoux: One important valuation software calculates future cash on this data somewhat similar then?adjustment is that all the data stored in the system sales, operating profit, etc. is automatically adjusted for inflation. Other adjustments are made to neutralize Life cycle reveals future corporate strategiesthe effect of different accounting The past has shown that the CFROI and the growth of invested capital eventually level out worldwide standards, for example, on how research around 6% and %, respectively. Knowing where a company is in its life cycle is an advantage and development costs are reported. when predicting its future strategies. Source: HOLTA reliable comparison between a company Company’s competitive life cyclein Brazil, for instance, and a company in Switzerland is not possible until such Increasing CFROIs and Above-average Average CFROIsBelow-average CFROIshigh reinvestmentbut fading CFROIsadjustments have been innovationFading CFROIsMatureRestructuring neededDoes the software program make theseadjustments automatically?Robin Seydoux: It does, but they are checked by sector specialists in order Reinvestment ratesto ensure data integrity. As soon as a new set of annual or quarterly results is available and has been recalculated by HOLT, these experts will verify that the adjusted data is correct. Of course, this CFROIscannot be done with every single one of the 18,000 companies in the database Wealth-creation strategiesbut certainly the most important ones, Positive spreadZero spreadNegative . the blue optionsStrategic optionsStrategic options Increase or hold CFROI Increase CFROI Increase CFROIIf HOLT is so good, are analysts even Grow assets Then grow Contract assetsneeded?
GLOBAL INVESTOR Services57Robin Seydoux: HOLT is a great Software with an integrated databasetool to work with, but naturally it cannot HOLT Value Search contains nancial data on more than replace the work that analysts do. In fact, 18,000 companies worldwide that can be reliably compared this valuation software allows analysts across different periods of time and across different to concentrate on what they really should be doing analyzing companies and countries. With this platform asset managers can make precise making sound investment recommenda-projections about the future capital returns of a company tions. The system produces a core and detect deviations to current market expectations. scenario for every company, but there are The acronym HOLT comes from the names of the four people many other possibilities for peering who initially developed the valuation software in Chicago into the future with this tool. For example,back in the 1980s. Credit Suisse First Boston bought HOLT instead of using the default settings, other inputs can be given as the basis forValue Associates in 2002 and has since overseen its ongoing calculation. This means HOLT users development and commercialization. More than 50 can create their own specific scenarios specialists worldwide are constantly working on improving with just a few clicks, change sales the model and updating the margin data, take a bullish or bearis h stance. In the end this can lead to decisions to buy a certain stock even if the models default valuation suggests otherwise. It is extremely important, then, that users develop scenarios of their Do end clients at Credit Suisse haveHOLT is a complex program, and intensive own. And analysts are needed for another access to HOLT?training and guidance are necessary reason, too: for the precise interpretation Robin Seydoux: No, the program is until users are familiar with the software. of the data that is generated by only to institutional clients. In-house, Another difficulty is that it is not always What exactly does that entail?we have analysts and portfolio managerspossible to reconstruct or see every step Robin Seydoux: Lets say that I have at Asset Management and Private Banking HOLT takes in making its calculations. projected the sales and margins of a who use the valuation platform, as doesHaving a ready-to-use model is an advan-company for the next five years and then Investment Banking. Credit Suisse is in a tage, of course, but, on the other hand, have HOLT make its calculations based class of its own in this regard; no other this also requires a certain level of trust on on my estimates. The system will calculate investment bank has access to HOLT. To my the part of the users. The positive expe-the annual CFROI and the estimated knowledge, there are no comparable riences we have made with HOLT certainly growth of invested capital so far into the software programs on the market that are outweigh these points, however. The future until they have reached the histor-as sophisticated and ingenious as of the software becomes apparent ical real average rates of 6% (CFROI) and What are the benefits for privatethe more a user relies on it. Users % (growth of invested capital), which clients then?are more comfortable with their company corresponds to the average rates achieved Robin Seydoux: The main benefit, of valuations and can ask company manage-in the USA over the past 40 to 50 years. course, should be a better investment ment more revealing questions when Looking at the curves that are produced return! In addition, HOLT can strengthen they can run through various scenarios of by the model, we can see the variousa clients confidence in the services their own and see the resulting outcomes. life cycles that a company goes through Credit Suisse offers. After all, the soft-Another advantage with this program over time. Knowing which life cycle a ware is a guarantee that the fundamental is that all users within the bank are, so to company is in helps you to better anticipate valuation and analysis of the companies speak, using the same language. The its future strategies. Lets take Nestl Credit Suisse covers are backed up by model itself is not so much a topic of as an example. This is a food company a highly advanced and reliable system that discussion as are the inputs that are used that is still producing high returns, but the helps the bank to make sound investment in producing individual scenarios. These growth potential in its core business is decisions. Thanks to this tool, Credit discussions are more objective, then, and limited. This gives it two possibilities: Suisse Research staff can also focus more sometimes more intense. Which ultimately either it grows through acquisitions or it on the important things in their line of work, enhances productivity and the quality funnels excess cash back to shareholders the inputs, without having to first fiddle of our projections. through share buyback with a model that might produce Can HOLT also be used to evaluateunreliable results. This means they have unlisted companies?more time to think about a companys Robin Seydoux is a Director Robin Seydoux: That is not a major strategy and valuation instead of worrying and Head of European Funda-function of HOLT, but it is theoretically about numbers and number Research at Private possible. The relevant data for the What in-house experiences have beenBanking. He was one of the past five years needs to be entered into made with HOLT so far?early adopters of HOLT within the system manually, and then the Robin Seydoux: There was some Credit Suisse Equity Research and respon- program can calculate future to use the software at first. sible for its rollout within Private : Martin Stollenwerk
GLOBAL INVESTOR Services58AuthorsMaria Dolores LamasLars KalbreierHerv PrettreEtrita IbrociDr. Jeremy J. FieldHead of Financial Products &Head of Global Equities andHead of Commodities and Trading StrategistCredit Analyst, Investment AdvisoryAlternatives ResearchEquities Trading ResearchPages 1017HG Sovereigns, Covered Bonds,Page 7Pages 1017Pages 1017AgenciesPages 1921, 2225Dr. Karsten LinowskyJuan BricencoMarkus MchlerEric GllerBettina SimioniFixed Income Strategist, RatesCredit Analyst,Equity Sector Analyst,Equity Sector Analyst,Global Real Estate AnalystStrategy, Duration, IL BondsEmerging MarketsAutomotive, Capital Goods,Insurance, Real EstatePages 2629Pages 1921Pages 2225TransportPages 2629Pages 2629, 3031Zoltan SzelyesRobinOlivier P. Mller SeydouxArjuna MahendranMaggie YeoGlobal Real Estate AnalystHead of European EquEquity Sector Analyst,Head of Asian ResearchJapan Equities Analyst ityPages 2629SectorItalian/Nordic Banks, ResearchPages 3337Pages 3337Pages 3031, 5657Consumer StaplesPages 3031, 5255Christine SchmidPeter von MoosUwe NeumannDr. Dominik C. MllerDr. Thomas C. KaufmannEquity Sector Analyst, Junior Research AnalystEquity Sector Analyst, Equity Sector Analyst,Equity Sector Analyst, FinancialsPages 3841Techno logy, TelecommunicationsTechnol ogy and NanotechnologyHealthcare and Nanotechnology Pages 3841, 5255Pages 4346Pages 4751Pages 4751Photos: Martin Stollenwerk, Johannes Kroemer, Cdric Widmer, Ying Yi
GLOBAL INVESTOR Services59Global ResearchEquity Research AsiaGiles Keating, Managing Director, Head of Research Angelina Chang, Assistant Vice President, for Private Banking and Asset Management ..................................+41 44 332 22 33Australia Equities and Commodities .................................................+65 6212 60 71Dylan Cheang, Greater China and Korea Equities US Researchand Asset Allocation Analyst ..........................................................+65 6212 60 72Philipp Lisibach, Director, Head of US Equity Research .................+1 212 317 67 05Irene Chow, Vice President, Greater China Equity Strategist ............+852 2841 40 36David A. Williamson, Director, Consumer Discretionary, Timothy Fung, Vice President, Greater China Equity Strategist .........+852 2841 48 12Consumer Staples ......................................................................+1 212 317 67 01Marc-Antoine Haudenschild, Vice President, Tania Dimitrova, Assistant Vice President,Japan Equity Strategist ..................................................................+65 6212 60 89Pharmaceuticals, Specialty Healthcare, Med Tech .........................+1 212 317 67 15Soek Ching Kum, Vice President,Etrita Ibroci, Director, Trading Strategy and Research ....................+1 212 317 67 04Southeast Asia Equity Strategist .....................................................+65 6212 60 65Gregory Siegel, Vice President, Financials ....................................+1 212 317 67 06Maggie Yeo, Japan Equities Analyst ................................................+65 6212 60 70Steven Soranno, Vice President, Chester Liaw, Trainee Analyst .........................................................+65 6212 60 67Information Technology and Telecom ............................................+1 212 317 67 02Fixed Income and ForexEquity ResearchWinston Chan, Equities Analyst ....................................................+852 3407 82 85Lars Kalbreier, Managing Director, Wing-Son Cheng, Director, Emerging Market Bonds .......................+852 2841 48 16 Head of Global Equities & Alternatives Research ............................+41 44 333 23 94Charlie Lay, Vice President, Forex Strategy .....................................+65 6212 60 66Shivani Tharmaratnam, Assistant Vice President, FX Analyst .............+65 6212 64 82Fundamental AnalysisRobin Seydoux, Director, Head of European Equity Sector Research, Technical AnalysisLuxury Goods, Steel and Services. ...............................................+41 44 333 37 39Rolf P. Bertschi, Managing Director, Head of Global Technical Beat Alpiger, Vice President, Chemicals, Utilities ..........................+41 44 334 56 24Research, Global Technical Investment Strategy ............................+41 44 333 24 05Dr. Mara Custer Sigrist, Director, Beat Grunder, Assistant Vice President, Pharmaceuticals, Biotechnology and Medical Technology ...............+41 44 332 11 27Swiss and Asian/Pacific Equities and Commodities .......................+41 44 333 53 58Dr. Carri Duncan, Pharmaceuticals, Sigisbert Koch, Vice President, Biotechnology and Medical Technology ........................................+41 44 334 56 37European Equities (excl. Switzerland) and Fixed Income .................+41 44 333 94 64Daniel Fabry, Equity Sector Research ...........................................+41 44 334 56 50Mensur Pocinci, Vice President, American Equities and Forex ........+41 44 333 20 69Andr Frick, Assistant Vice President, Peter Schabus, Vice President,Global Energy, European Basic Resources ....................................+41 44 334 66 71Asian/Pacific Equities and Fixed Income ......................................+41 44 333 22 60Eric T. Gller, Vice President, Insurance, Real Estate .....................+41 44 332 90 59Ulrich Kaiser, Vice President, Fixed IncomeIT Hardware, IT Services and Software, Media ..............................+41 44 334 56 49Dr. Nannette Hechler-Faydherbe, Managing Director, Dr. Thomas C. Kaufmann, Healthcare and Nanotechnology ............+41 44 334 88 38Head of Global Fixed Income and Credit Research .........................+41 44 333 17 06Markus Mchler, Vice President, Tekla Kopcsai, Fixed Income and Credit Research..........................+41 44 334 56 67Automotive, Capital Goods, Transport ...........................................+41 44 334 56 41Global Credit ResearchDr. Dominik Christoph Mller, Technology and Nanotechnology .......+41 44 334 56 44Wolfgang Wiehe, Vice President, Olivier P. Mller, Vice President, Head of Global Credit Research ...................................................+41 44 333 44 31Italian and Nordic Banks, Consumer Staples .................................+41 44 333 01 46Juan Briceno, Vice President, Emerging Markets ...........................+41 44 332 92 83Uwe Neumann, Vice President, Dr. Jeremy J. Field, Vice President, Technology, Telecommunications..................................................+41 44 334 56 45HG Sovereigns, Covered Bonds, Agencies ....................................+41 44 334 56 29Pascal Rohner, Equity Sector Research ........................................+41 44 334 56 88Stephen Garibaldi, Vice President, Industrials, Telecoms ................+41 44 333 29 77Christine Schmid, Director, Banking .............................................+41 44 334 56 43Sylvie Golay, Assistant Vice President, Alternative Investment Research & Portfolio AnalyticsCredit Strategy, Telecoms ...........................................................+41 44 333 57 68Cdric Spahr, Vice President, Elena Guglielmin, Vice President, Banks ......................................+41 44 333 57 67Head of Alternative Investment Research & Portfolio Analytics ........+41 44 333 96 48Cristian Maggio, Emerging Markets ..............................................+41 44 332 90 93Reto Meneghetti, Christian Pfund, Energy ..............................................................+41 44 333 57 97Alternative Investment Research & Portfolio Analytics .....................+41 44 334 12 93Pauline Lambert, Vice President, Eliane Tanner, Insurance, Pharmaceuticals, Consumer Products, Retail ................+41 44 334 00 86Alternative Investment Research & Portfolio Analytics .....................+41 44 334 56 39Swiss Credit ResearchCommodities and Equities, Trading ResearchJohn M. Feigl, CFA, Director, Herv Prettre, Director, Head of Swiss Credit Research ....................................................+41 44 333 13 70Head of Commodities and Equities Trading Research .....................+41 44 334 88 57Alexandra Bossert, CFA, Vice President, Financials,Miroslav Durana, Vice President, Trading Research .......................+41 44 335 10 66Public Issuers, Retail ..................................................................+41 44 333 13 79Roger Signer, Commodities and Equities Trading,Michael Ghler, Assistant Vice President, Consumer, Industrials, Construction & Building Materials .................................................+41 44 335 72 98Capital Goods, Services, Utilities .................................................+41 44 333 51 84Adrian Zrcher, Vice President, Trading Research ..........................+41 44 333 61 46Rates ResearchStefan Novak, Vice President, Head of Market Analytics Equity ......+41 44 333 84 74Dr. Karsten Linowsky, Assistant Vice President,Asia ResearchRates Strategy, Duration, IL Bonds ..............................................+41 44 333 24 15Arjuna Mahendran, Director, Head of Asian Research .......................+65 6212 67 27Michael Markovic, Vice President, Rates Strategy, FI Derivatives ....+41 44 333 52 33Cheuk Wan Fan, Director, Global Economics and Forex ResearchHead of Asian Equity Research .....................................................+852 2841 48 41Dr. Anja Hochberg, Director, Head of Global Economics and Forex Research .............................+41 44 333 52 06Fabian Heller, Swiss Economy .....................................................+41 44 332 90 61Thomas Herrmann, Assistant Vice President, Global Economy .......+41 44 333 50 62Marcus Hettinger, Director, Global Forex Strategy .........................+41 44 333 13 63Martin McMahon, Short-term Forex Analysis .................................+41 44 334 56 91Tobias Merath, Assistant Vice President, Commodities ...................+41 44 333 13 62Sven Schubert, Emerging Markets Forex Analysis..........................+41 44 333 52 28Bettina Simioni, Global Real Estate Analysis .................................+41 44 332 78 49Zoltan Szelyes, Assistant Vice President,Global Real Estate Analysis, Econometric Modeling .......................+41 44 334 83 22
GLOBAL INVESTOR Disclaimer60CompanyRatingDate (since)CompanyRatingDate (since)Disclosure appendixHALYK BANK (HSBK LI)BUY 28/03/2007BUY 19/04/2005HIESTAND HLDG NBUY11/04/2007PANALPINA WELTTRA NBUY19/04/2007(HIEN SW)(PWTN SW)Analyst certificationHOLD12/06/2006HOLD 16/03/2007The analysts identified in this report hereby certify that views about the companies and IBM (IBM US)HOLD18/04/2007HOLD 28/02/2007their securities discussed in this report accurately reflect their personal views about all of BUY 05/03/2007BUY10/08/2006the subject companies and securities. The analysts also certify that no part of their com-HOLD 10/07/2006HOLD 04/01/2006pensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this 27/04/2005PETROBRAS ADR (PBR US)BUY 15/02/2007HOLD 17/03/2005BUY 13/07/2006Important disclosuresBUY 21/05/2004BUY28/02/2006Credit Suisse policy is to publish research reports, as it deems appropriate, based on HOLD 21/04/2004BUY 18/10/2005developments with the subject company, the sector or the market that may have a mate-KAZKOMMERTSBANKBUY 23/03/2007PETRO-CANADA (PCA CN)BUY09/06/2006rial impact on the research views or opinions stated herein. Credit Suisse policy is only to (KKB LI)publish invePROLOGIS-SBI (PLD US)BUY 26/03/2007stment research that is impartial, independent, clear, fair and not HLDG NBUY 01/09/2006Q-CELLS (QCE GR Equity)BUY 05/02/2007For more detail, please refer to the information on independence of financial research, (KOMN SW)HOLD 12/12/2006which can be found at: KONINKLIJKE KPN NVHOLD 31/10/2006ROSNEFT (ROSN LI)BUY 05/01/2007(KPN NA)BUY 24/08/2005SHARP CORP OSAKABUY 06/02/2007 JP)HOLD 01/11/2004HOLD 24/01/2007The analyst(s) responsible for preparing this research report received compensation that BUY 29/01/2004HOLD 14/12/2005is based upon various factors including Credit Suisse total revenues, a portion of which KUEHNE+NAGEL INT NHOLD 14/03/2007BUY 17/08/2005are generated by Credit Suisse Investment Banking business.(KNIN SW)HOLD 14/10/2005HOLD 25/07/2005KYOCERA (6971 JP)BUY23/08/2006TALLINK GROUP LTDHOLD 24/01/2007The Credit Suisse Code of Conduct to which all employees are obliged to adhere, is (TAL1T ET)HOLD 07/03/2006accessible via the website at: BUY 04/10/2005UBS N (UBSN VX)BUY 04/01/2007 26/07/2005HOLD 31/10/2006BUY20/04/2005BUY 01/11/2005SELL 27/01/2005HOLD09/08/2005BUY 17/05/2004VERIZON COMM (VZ US)HOLD 30/10/2006LUKOIL SP ADR (LKOD LI)BUY30/05/2006BUY 17/03/2006Equity rating history as of 23/04/2007 BUY 19/01/2006HOLD 13/01/2005CompanyRatingDate (since)CompanyRatingDate (since)BUY26/05/2005BUY 27/07/. MLLER-MAERSKHOLD 01/03/2007HOLD02/09/2005(MAERSKB DC)BUY 07/05/2004YAHOO (YHOO US)BUY 18/01/2006BUY 13/04/2005BUY06/02/2004HOLD 21/11/2005ADVA OPTICAL NETWORBUY 04/04/2007DEUTSCHE TELEKOM NHOLD 21/03/2007(ADV GR)(DTE GR)NIPPON TEL&TELHOLD 24/01/2007BUY 19/03/2004HOLD 14/08/2006(9432 JP)HOLD 24/06/2005AFG ARBONIA (AFG SW)HOLD 21/03/2007BUY 07/03/2006BUY 14/10/2005HOLD 19/08/2005ALCATEL-LUCENTBUY 24/10/2006BUY25/08/2004(CGE FP)HOLD24/03/2006HOLD 06/01/2004Fundamental and/or long-term research reports are not regularly produced for (AMDOCS, CIENA, HALYK BANK, KAZKOMMERTSBANK, PROLOGIS-SBI, TALLINK GROUP LTD, BUY 04/01/2005BUY29/09/2003ADVA OPTICAL NETWOR). Credit Suisse reserves the right to terminate coverage at short HOLD 09/01/2004FRANCE TELECOMHOLD 27/07/2006notice. Please contact your Relationship Manager for the specific risks of investing in secu-(FTE FP)SELL 12/09/2003BUY16/02/2006rities of these (DOX US)BUY 05/04/2007HOLD 19/12/2005Credit Suisse has managed or co-managed a public offering of securities for the subject HOLD28/09/2006REST 27/10/2005issuer (CISCO SYSTEMS, DEUTSCHE BANK R, DEUTSCHE TELEKOM N, FRANCE TELE-COM, GEBERIT N, GOLDMAN SACHS GROUP, GOOGLE-A, HALYK BANK, IBM, KONIN-BUY23/03/2006HOLD 19/07/2005KLIJKE KPN NV, LUKOIL SP ADR, NIPPON TEL&TEL, PANALPINA WELTTRA N, PETRO-BT GROUP (BT/A LN)HOLD 04/04/2007BUY 11/06/2004CANADA, PETROBRAS ADR, ROSNEFT, UBS N, VERIZON COMM) within the past three SELL 09/11/2006HOLD23/02/ 08/07/2004BUY29/09/2003Credit Suisse has managed or co-managed a public offering of securities for the subject BUY 02/12/2003GEBERIT N (GEBN SW)BUY 18/01/2007issuer (DEUTSCHE BANK R, GOLDMAN SACHS GROUP, HALYK BANK, IBM, KONINKLI-CALJKE KPN NV, LUKOIL SP ADR, ROSNEFT, VERIZON COMM) within the past 12 HLDG NBUY 28/03/2007HOLD04/05/2006(CALN SW)Credit Suisse has received investment banking related compensation from the subject BUY25/04/2006issuer (ALCATEL-LUCENT, AMDOCS, AFG ARBONIA, BT GROUP, CISCO SYSTEMS, CAP GEMINI (CAP FP)BUY 20/03/2007BUY 21/04/2006DEUTSCHE BANK R, DEUTSCHE POST N, DEUTSCHE TELEKOM N, FRANCE TELECOM, BUY 26/07/2006HOLD 18/06/2004GEORG FISCHER SH N, GOLDMAN SACHS GROUP, GOOGLE-A, HALYK BANK, IBM, HOLD24/02/2006HOLD06/04/2004KONINKLIJKE KPN NV, LUKOIL SP ADR, NIPPON TEL&TEL, PANALPINA WELTTRA N, BUY29/09/2005BUY 20/01/2004PETROBRAS ADR, ROSNEFT, UBS N, VERIZON COMM) within the past 12 Suisse expects to receive or intends to seek investment banking related compensa-HOLD06/05/2004HOLD 03/11/2003tion from the subject issuer (. MLLER-MAERSK, ALCATEL-LUCENT, AMDOCS, AFG BUY05/09/2003GEORG FISCHER SH NBUY 07/01/2005ARBONIA, BT GROUP, CIENA, CAP GEMINI, CISCO SYSTEMS, DEUTSCHE BANK R, (FI/N SW)CIENA (CIEN US)BUY 28/03/2007DEUTSCHE POST N, DEUTSCHE TELEKOM N, FRANCE TELECOM, GEORG FISCHER CISCO SYSTEMSBUY08/02/2006GOLDMAN SACHS GROUPBUY 13/03/2007SH N, GOLDMAN SACHS GROUP, GOOGLE-A, HALYK BANK, IBM, KONINKLIJKE KPN (CSCO US)()HOLD 10/11/2005HOLD 02/02/2007NV, KUEHNE+NAGEL INT N, KYOCERA, LUKOIL SP ADR, NIPPON TEL&TEL, PANALPINA WELTTRA N, PETRO-CANADA, PETROBRAS ADR, PROLOGIS-SBI, Q-CELLS, ROSNEFT, BUY 15/07/2004HOLD 13/05/2005SHARP CORP OSAKA, UBS N, VERIZON COMM, YAHOO) within the next three 18/03/2005As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in DEUTSCHE BANK RBUY 01/09/2006GOOGLE-A (GOOG)BUY 28/02/2007the securities of the subject issuer (CIENA, CISCO SYSTEMS, GOOGLE-A, IBM, KYOCERA, (DBK GR)HOLD02/02/2006HOLD 14/12/2006NIPPON TEL&TEL, SHARP CORP OSAKA, YAHOO).BUY03/02/2005BUY 27/02/2006Credit Suisse holds a trading position in the subject issuer (. MLLER-MAERSK, ALCATEL-LUCENT, AMDOCS, AFG ARBONIA, BT GROUP, CIENA, CAP GEMINI, CISCO DEUTSCHE POST NBUY19/04/2007HOLD 21/11/2005(DPW GR)SYSTEMS, DEUTSCHE BANK R, DEUTSCHE POST N, DEUTSCHE TELEKOM N, FRANCE HOLD 14/08/2006BUY02/02/2005TELECOM, GEBERIT N, GEORG FISCHER SH N, GOLDMAN SACHS GROUP, GOOGLE-A, BUY 10/01/2006HOLD 01/10/2004HALYK BANK, HIESTAND HLDG N, IBM, KONINKLIJKE KPN NV, KAZKOMMERTSBANK,
GLOBAL INVESTOR Disclaimer61KOMAX HLDG N, KUEHNE+NAGEL INT N, KYOCERA, LUKOIL SP ADR, NIPPON Guide to analysisTEL&TEL, PANALPINA WELTTRA N, PETRO-CANADA, PETRO-CANADA, PETROBRAS ADR, PROLOGIS-SBI, Q-CELLS, ROSNEFT, SHARP CORP OSAKA, UBS N, VERIZON COMM, YAHOO, TALLINK GROUP LTD, CALIDA HLDG N, ADVA OPTICAL NETWOR).Equity rating allocation as of 23/04/2007As at the end of the preceding month, Credit Suisse beneficially owned 1% or more of a class of common equity securities of (CAP GEMINI, DEUTSCHE BANK R, KYOCERA, Q-CELLS, OverallInvestment banking interests onlyUBS N). %%%%Swiss American Securities Inc. %%Swiss American Securities Inc. or its affiliates has managed or co-managed a public offer-ing of securities for the subject issuer (DEUTSCHE BANK R, GOLDMAN SACHS GROUP, %%HALYK BANK, IBM, KONINKLIJKE KPN NV, LUKOIL SP ADR, ROSNEFT, VERIZON COMM) within the past 12 American Securities Inc. or its affiliates has received investment banking related Relative performancecompensation from the subject issuer (ALCATEL-LUCENT, AMDOCS, AFG ARBONIA, BT At the stock level, the selection takes into account the relative attractiveness of individu-GROUP, CISCO SYSTEMS, DEUTSCHE BANK R, DEUTSCHE POST N, DEUTSCHE al shares versus the sector, market position, growth prospects, balance-sheet structure TELEKOM N, FRANCE TELECOM, GEORG FISCHER SH N, GOLDMAN SACHS GROUP, and valuation. The sector and country recommendations are overweight, neutral, and GOOGLE-A, HALYK BANK, IBM, KONINKLIJKE KPN NV, LUKOIL SP ADR, NIPPON underweight and are assigned according to relative performance against the respective TEL&TEL, PANALPINA WELTTRA N, PETROBRAS ADR, ROSNEFT, UBS N, VERIZON regional and global benchmark ) within the past 12 months. Swiss American Securities Inc. or its affiliates expects to receive or intends to seek invest-Absolute performancement banking related compensation from the subject issuer (. MLLER-MAERSK, The stock recommendations are BUY, HOLD and SELL and are dependent on the expect-ALCATEL-LUCENT, AMDOCS, AFG ARBONIA, BT GROUP, CIENA, CAP GEMINI, CISCO ed absolute performance of the individual stocks, generally on a 6 12 months horizon SYSTEMS, DEUTSCHE BANK R, DEUTSCHE POST N, DEUTSCHE TELEKOM N, FRANCE based on the following criteria:TELECOM, GEORG FISCHER SH N, GOLDMAN SACHS GROUP, GOOGLE-A, HALYK BANK, IBM, KONINKLIJKE KPN NV, KUEHNE+NAGEL INT N, KYOCERA, LUKOIL SP ADR, NIPPON TEL&TEL, PANALPINA WELTTRA N, PETRO-CANADA, PETROBRASBUY10% or greater increase in absolute share price ADR, PROLOGIS-SBI, Q-CELLS, ROSNEFT, SHARP CORP OSAKA, UBS N, VERIZON COMM, HOLDvariation between 10% and +10% in absolute share priceYAHOO) within the next three % or more decrease in absolute share priceAs of the date of this report, Swiss American Securities Inc. acts as a market maker or RESTRICTEDIn certain circumstances, internal and external regulations exclude liquidity provider in the equity securities of the subject issuer (ALCATEL-LUCENT, AMDOCS, certain types of communications, including . an investment DEUTSCHE BANK R, DEUTSCHE TELEKOM N, FRANCE TELECOM, GOLDMAN SACHS recommendat ion during the course of Credit Suisse engagement GROUP, IBM, NIPPON TEL&TEL, PETRO-CANADA, PETROBRAS ADR, PROLOGIS-SBI, in an investment banking N, VERIZON COMM).TERMINATEDResearch coverage has been at the end of the preceding month, Swiss American Securities Inc. or its affiliates beneficially owned 1% or more of a class of common equity securities of (CAP GEMINI, DEUTSCHE BANK R, KYOCERA, Q-CELLS, UBS N).Corporate and emerging market bond recommendationsSwiss American Securities Inc. or its affiliates holds a trading position in the subject The recommendations are based fundamentally on forecasts for total returns versus the issuer (. MLLER-MAERSK, ALCATEL-LUCENT, AMDOCS, AFG ARBONIA, BT GROUP, respective benchmark on a 3 6-month horizon and are defined as follows:CIENA, CAP GEMINI, CISCO SYSTEMS, DEUTSCHE BANK R, DEUTSCHE POST N, DEUTSCHE TELEKOM N, FRANCE TELECOM, GEBERIT N, GEORG FISCHER SH N, GOLDMAN SACHS GROUP, GOOGLE-A, HALYK BANK, HIESTAND HLDG N, IBM, BUYExpectation that the bond issue will be a top performer in its segmentKONINKLIJKE KPN NV, KAZKOMMERTSBANK, KOMAX HLDG N, KUEHNE+NAGEL INT HOLDExpectation that the bond issue will return average performance N, KYOCERA, LUKOIL SP ADR, NIPPON TEL&TEL, PANALPINA WELTTRA N, PETRO-in its segmentCANADA, PETROBRAS ADR, PROLOGIS-SBI, Q-CELLS, ROSNEFT, SHARP CORP OSAKA, UBS N, VERIZON COMM, YAHOO, TALLINK GROUP LTD, CALIDA HLDG N, SELLExpectation that the bond issue will be among the poor performer ADVA OPTICAL NETWOR).in its segmentRESTRICTEDIn certain circumstances, internal and external regulations exclude Additional disclosures for the following jurisdictionscertain types of communications, including . an investment Dubai: Related financial products or services are only available to wholesale customers recommendat ion during the course of Credit Suisse engagement with liquid assets of over USD 1 million who have sufficient financial experience and under-in an investment banking to participate in financial markets in a wholesale jurisdiction and satisfy the regulatory criteria to be a client. 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United Kingdom: For fixed income disclosure information AAObligors capacity to meet its financial commitments is very strongfor clients of Credit Suisse (UK) Limited and Credit Suisse Securities (Europe) Limited, AObligors capacity to meet its financial commitments is strongplease call +41 44 333 33 capacity to meet its financial commitments is adequate, but adverse economic/operating/financial circumstances are more For further information, including disclosures with respect to any other issuers, please likely to lead to a weakened capacity to meet its obligationsrefer to the Credit Suisse Global Research Disclosure site at:BBObligations have speculative characteristics and are subject to credit risk due to adverse economic/operating/financial circumstanc es resulting in inadequate debt-servicing capacityFor the AA, A, BBB, BB categories, creditworthiness is further detailed with a scale of High, Mid, or Low, with High being the strongest sub-category rating. 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ImprintPublisherCredit Suisse, Global . Box 300, CH-8070 ZurichDirector: Giles KeatingEditorUlrich KaiserEditorial deadline11 April 2007OrganizationKatharina SchlatterConcept, design and layoutArnold Design AG, Uerikon-ZurichMichael Suter, Charis Arnold, Urs ArnoldMonika Isenring (project management)TypesettingArnold Design AG, Uerikon-Zurich (G/E)gdz AG, Zurich (F/ES/I)ComposingAtelier Rainer Eggenberger, ZurichPrinterFeldegg AG, Zollikerberg (G/E)Stmp i AG, Bern (F/ES/I)TranslationsStefan Bersal (G), Regula Zweifel (G) Andreas Weber (G), ManRey (G) Alleva bersetzungen, Baar (I) UGZ, Zurich (F/ES)Language editorsRoss Hewitt (E), Sarah Jackson Meroni (E),Francis Piotrowski (E)Katharina Schlatter (G)UGZ, Zurich (F/ES)Alleva bersetzungen, Baar (I)Copy editingtext control, Zurich (G/E)UGZ, Zurich (F/ES)Alleva bersetzungen, Baar (I)Copies of this publication may be ordered via your customer advisor; employees contact Netshop publication is available on the Internet at: access for employees of Credit Suisse: research support is provided by Credit Suisses global network of representative of ces.
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