EEMEA_EQUITY_STRATEGY-2013-02-01.ppt

holt%upside,60,40,imperial,tiger brands,30 january 2013 eemea/south africa equity research investment strategy eemea equity strategy,research analysts alexander redman 44 20 7883 6896 arun sai 44 20 7883 0002 ,strategy south africa consumer versus resources: has the trade reached its conclusion? figure 1: south african resources and consumer sectors holt upside versus market implied five-year forward cfroi less five-year median delivered cfroi,100,holt warranted,gold,market implied fy5 cfroi less 5-year delivered median cfroi,upside with un- 80 demanding market implied cfroi,fields aquarius platinum sasol,lewis group,anglogold ashanti,-4resources,anglo american,richemont,-25consumer,20,bhp,steinhoff,jd group foschini,0 -20,naspers,exxaro pioneer food impala platinum shoprite spar group bat truworths anglo american platinum,avi oceana,sabmiller mr. price,woolworths,-40 -60,massmart,pick n pay,holt warranted downside with demanding market implied cfroi,-8,-6,-4,-2,0,2,4,6,8,10,12,14,source: credit suisse holt, credit suisse research we believe the two key current issues for investors in south african equities are firstly, if the rand has further to weaken, and secondly, whether the long- running consumer versus resources trade has finally reached its conclusion. consumer relative to resources in south africa has been one of the longest- running successful sector pair trades within the emerging emea region in recent years, yielding 378% of relative price performance since the summer of 2008. however, this pair trade has given back 3ppt of performance in favour of resources year to date. we believe the trade continues to unwind. we set out seven reasons which support a continued reversal of this trade: (i) emerging market cyclicals appear ripe for a bounce relative to defensives; (ii) the chinese growth reacceleration is supportive for net commodity exporters; (iii) the strength of south african consumer fundamentals has deteriorated; (iv) the market is implying very demanding growth expectations for the sa consumer sector; (v) relative valuations for the sa consumer versus resources appear very stretched; (vi) consumer sector earnings are showing signs of disappointing; and (vii) resource names appear attractively positioned relative to consumers on credit suisse holt metrics. within the resource space our top picks include anglogold ashanti, exxaro resources and lonmin. we continue to recommend only selected sa consumer plays: steinhoff, foschini group, pick n pay and lewis group. disclosure appendix contains analyst certifications and the status of non us analysts. for other important disclosures, visit /researchdisclosures or call +1 (877) 291-2683 us disclosure: credit suisse does and seeks to do business with companies covered in its research reports. as a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision.,credit suisse securities research & analytics,beyond information client-driven solutions, insights, and access,2,30 january 2013 sa consumer versus resources: has the trade reached its conclusion? we believe the two key issues for investors in south african equities to tackle in early 2013 are firstly, if the rand has further to weaken, and secondly, whether the long-running consumer versus resources trade has finally reached its conclusion. for the first issue, calling the rand correctly is critical for three key reasons: (i) the rand contributes more to changes in dollar total return than the equity market; (ii) rand movements dictate sector selection within a south african equities portfolio; and (iii) the currency is reflected (strength for strength) in domestic consumer sentiment. we set out our case for continued vulnerability for the south african currency in our 2013 emerging emea equities outlook, dated 13 december 2012. for the second issue we note that the south african consumer relative to resources has been one of the longest-running successful sector pair trades within the emerging emea region in recent years, yielding 378% of relative price performance since the onset of the global financial crisis in the summer of 2008. this has proved the most profitable consumer relative to resources pair trade in any of the larger emerging markets over the duration. however, year to date this pair trade has given back 3ppt in relative performance in favour of resources. we set out seven reasons which support a continued reversal of this trade: 1. emerging market cyclicals appear ripe for a bounce relative to defensives 2. the chinese growth reacceleration is supportive for net commodity exporters 3. the strength of south african consumer fundamentals has deteriorated 4. market implying very demanding growth expectations for the sa consumer sector 5. relative valuations for the sa consumer versus resources appear very stretched 6. consumer sector earnings are showing signs of disappointing 7. resource names appear attractively positioned relative to consumers on holt,figure 2: market relative performance of larger south african sectors 260,figure 3: consumer* relative to resources us$ index performance for the relevant major emerging markets,240 220 200,cons discretion cons staples,500 400,s africa brazil,180 160,300,india,140 120 100,financials telcoms,200,chile s korea mexico,80 60,other industrials energy,100,russia china,40 jul 08,jul 09,jul 10,jul 11,jul 12,materials,0 jul 08,jul 09,jul 10,jul 11,jul 12,source: msci, credit suisse research,note: * staples and discretionary. materials and energy,source: msci, credit suisse research eemea equity strategy,creditsuisseestimates,8.0,20,-2.5,3,30 january 2013 1. emerging market cyclicals appear ripe for a bounce relative to defensives given our view that 1.4% in late july 2012 did mark the record low in us 10-year treasury yields, it appears that the trade for defensives outperformance relative to the msci emerging markets benchmark is therefore looking stretched (credit suisse forecasts average 1q13 ust yields of 2.25% versus the current 1.95%). furthermore, cyclicals remain close to the ex-global financial crisis record price book discount of 23% (the december 2008 trough discount was 30%).,figure 4: emerging market defensives relative performance versus us 10-year treasury yield,figure 5: emerging market cyclicals relative to defensives performance versus price to book (+/-1s.d.),200,0.0,120,1.80,180,r-squared = 0.76,1.3,110,1.65,100,1.50,160,2.7,90,1.35,140 120 100,4.0 5.3 6.7,80 70 60 50,1.20 1.05 0.90 0.75,80 jan 95,jan 98 jan 01 jan 04 jan 07 jan 10 jan 13 msci emf defensives/emf (us$, rebased to 100 on 1/1/95),40 jan 96,jan 99 jan 02 jan 05 jan 08 jan 11 msci emf cyclicals/defensives (us$, lhs),0.60 jan 14,us 10y bond yield (%, inverted, rhs) defensives: consumer staples, healthcare, utilities source: msci, credit suisse research,msci emf cyclicals/defensives pbr (x, rhs) cyclicals: consumer discretionary, industrials, it, materials. defensives: consumer staples, healthcare, utilities.,source: msci, credit suisse research moreover, a recovery to trend (circa 5%) global ip growth on credit suisse estimates is consistent with a recovery in cyclicals relative performance versus defensives and rising global excess liquidity is supportive of materials forward earnings multiple expansion.,figure 6: global industrial production growth versus emerging markets cyclicals relative to defensives year- on-year performance,figure 7: global excess liquidity* versus emerging markets materials relative to market pe ratio,110,em cyclicals rel defensives, yoy %,12.5,18,200,global ip yoy %, rhs,15,180,100,10.0,12,160,90 80 70 60 50 jan 97 jan 99 jan 01 jan 03 jan 05 jan 07 jan 09 jan 11 jan 13,7.5 5.0 2.5 0.0,9 6 3 0 -3 -6 -9 jan 96,global excess liquidity (%, pushed forward 10m) emf materials relative to market pe ratio (%, rhs) jan 99 jan 02 jan 05 jan 08 jan 11 jan 14,140 120 100 80 60 40,cyclicals: consumer discretionary, industrials, it, materials. defensives: consumer staples, healthcare, utilities. source: msci, thomson reuters, credit suisse estimates eemea equity strategy,*note: excess liquidity defined by narrow money supply growth less nominal industrial production growth source: msci, thomson reuters, credit suisse research,creditsuisseforecast,68,4,30 january 2013 2. the chinese growth reacceleration is supportive for net commodity exporters the recovery in chinese electricity generation growth and continued uptick in the latest december manufacturing pmi output survey are both indicative of a mild reacceleration in chinese gdp. credit suisse is forecasting 2013e and 2014e gdp growth in china of 8.0% and 8.2%, respectively, following 7.7% in 2012.,figure 8: china electricity production versus gdp growth china real gdp growth (lhs),figure 9: china manufacturing pmi output versus gdp growth china real gdp growth (lhs),16% 14% 12% 10% 8% 6%,china electricity production, yoy %, 3mma,33% 26% 20% 13% 6% 0%,16% 14% 12% 10% 8% 6%,china manufacturing pmi: output (3m lead),63 58 53 48 43,4%,jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14,-7%,4%,jan jan 05 06,jan 07,jan jan 08 09,jan 10,jan jan 11 12,jan 13,jan jan 14 15,38,source: national bureau of statistics, oxford economics, credit,source: markit economics, credit suisse estimates,suisse research the reacceleration in chinese fixed asset investment new projects started over the past twelve months to 37% year-on-year is consistent with a pick up and subsequent stabilisation in monthly new society wide financing to a level averaging rmb1.3trn over the past ten months. momentum in emea metals and mining relative performance versus regional equities has turned positive and we think has much further to run before recoupling with its eight year historical association with chinese commercial property transactions which are now at their highest year-on-year growth rate since october 2011.,figure 10: china fixed asset investment new projects started versus society wide financing (3-month moving average),figure 11: china commercial property transactions versus msci emea metals & mining relative to msci emea,100 80 60 40 20 0 -20,2400 2000 1600 1200 800 400 0,100 80 60 40 20 0 -20 -40,54 42 30 18 6 -6 -18 -30,-40,-400,jan 05 jan 06 jan 07 jan 08 jan 09 jan 10 jan 11 jan 12 jan 13,jan 06 jan 07 jan 08 jan 09 jan 10 jan 11 jan 12 jan 13 china society wide financing (rmb bn, 3mma, rhs) fixed inv: projects started (yoy%chg 3mma, lagged by 3m, lhs) source: national bureau of statistics of china, peoples bank of china, credit suisse research eemea equity strategy,china: commercial property transactions (msq floor space, yoy % chg, 3mma, pushed forward 2 months, lhs) msci emea metals & mining / msci emea (us$, yoy % chg, rhs) source: china national bureau of statistics, msci, credit suisse research,5,30 january 2013 chinese steel production year-on-year growth (now the strongest since september 2011) has risen in conjunction with residential real estate new development floor space sold. also supportive of emerging markets metals and mining sector relative performance is the credit suisse forecast for stability in chinese house pricesup by 5% in 1h2013 in the large cities (see china property sector: sales momentum versus housing price risk, jinsong du, 21 january 2013).,figure 12: china: residential new floor space sold versus steel production,figure 13: real china house prices versus msci emf metals & mining relative to msci emf,60% 50% 40% 30% 20% 10% 0%,china real estate dev. floor space sold (12mmav, yoy % chg) china steel production (yoy % chg),122 120 118 116 114 112 110 108 106,188 180 172 164 156 148 140 132 124,-10%,104 102,china: house prices (real, index rebased, lhs) msci emf metals & mining /,116 108,-20%,jan 02,jan 03,jan 04,jan 05,jan 06,jan 07,jan 08,jan 09,jan 10,jan 11,jan 12,jan 13,msci emf (us$, rebased, rhs) 100 jul 05 jul 06 jul 07 jul 08 jul 09 jul 10 jul 11 jul 12,100,source: china national bureau of statistics, world steel association, credit suisse research,source: china national bureau of statistics, msci, credit suisse research,supportive of the energy space within resources are chinese crude oil imports at 5.6mmbbl/day (as of december) running above the long-run trend and close to the record high. china now accounts for the single largest share of global oil demand growthof the 0.60mmbbl/day additional global oil demand in 2011, china accounted for 0.51mmbbl/day in demand growth. however, the above supports have yet to be reflected in any material boost to south african mining volumes which have been dampened by industrial action throughout 2012.,figure 14: china crude oil imports (3mma) versus brent spot crude oil price,figure 15: south africa mining production versus us ism manufacturing,9,china crude oil imports (mmbbl/day, 3mav., lhs),162,12,65,brent crude oil price (us$/bbl, rhs),8,linear (china oil imports (mmbbl/day, 3mav., lhs),144,8,60,7,126,6 5 4 3,108 90 72 54,4 0 -4 -8,55 50 45 40,2 1 0,36 18 0,-12 -16,sa mining production (vol index, 3mma yoy%chg) us ism manufacturing,35 30,jan 96 jan 98 jan 00 jan 02 jan 04 jan 06 jan 08 jan 10 jan 12 source: china national bureau of statistics, thomson reuters, credit suisse research eemea equity strategy,jan 92 jan 95 jan 98 jan 01 jan 04 jan 07 jan 10 jan 13 source: company data, credit suisse estimates,70,20,66,9,6,6,30 january 2013 3. the strength of south african consumer fundamentals has deteriorated the following ten key issues have eroded the consumer outlook in south africa: (i) the pmi manufacturing output survey is indicating a somewhat worrisome profile for momentum of overall south african economic activity: a level of 45.5 (the three month moving averagesmoothed owing to the volatile series) is consistent with gdp growth of just 1% versus the credit suisse forecast for 2013e of 3.1%. on 24 january the south african reserve bank lowered their 2013e gdp growth forecast to 2.6% from 2.9%. similarly, the latest december headline manufacturing pmi survey is consistent with year- on-year industrial production growth in negative territory, i.e. closer to -3% than the november reported +3%.,figure 16: south africa real gdp yoy versus manufacturing pmi output index,figure 17: south africa industrial production versus manufacturing pmi,south africa manufacturing pmi output index (3mma) south africa real gdp, yoy % chg (rhs),9%,south africa industrial production (yoy % chg, lhs) south africa manufacturing pmi (rhs),65 60 55 50 45 40 35 30,7% 6% 4% 3% 1% -1% -2% -4%,15 10 5 0 -5 -10 -15 -20,jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan jan,62 58 54 50 46 42 38 34,jan 00 jan 02 jan 04 jan 06 jan 08 jan 10 jan 12 jan 14 source: markit, thomson reuters, credit suisse research,99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 source: markit, thomson reuters, credit suisse research,(ii) according to the quarterly ifo world economic survey, south african lack of confidence in their governments economic policy has deteriorated steadily since the latter years of the mbeki administration, now reaching the lowest point since de klerk. figure 18: ifo world economic survey south africa: lack of confidence in government economic policy low confidence 8 7 south africa: lack of confidence in government economic policy 5 4 3 2,de klerk,mandela,mbeki,zuma,1 high confidence 0,jan 91,jan 94,jan 97,jan 00,jan 03,jan 06,jan 09,jan 12,source: ifo world economic survey, credit suisse research (iii) the official unemployment rate remains stubbornly high at 25.5%. furthermore, the bureau for economic research/oecd business tendency surveys for future employment eemea equity strategy,7,6,5,4,7,30 january 2013 in the manufacturing and construction industries have trended further into negative territory over the past two quarters; the outlook for the retail trade sector alone remains positive (as of 4q2012).,figure 19: south africa unemployment rate 26,figure 20: sa business tendency survey: future employment (retail trade, manufacturing, construction and composite) 40,30 25 20,24 23 22,10 0 -10 -20 -30,retail trade composite manufacturing construction,21 20 q1 q3 q1 q3 q1 q3 q1 q3 q1 q3 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 source: statistics south africa, credit suisse research,-40 -50 -60 jan 98 jan 01 jan 04 jan 07 jan 10 jan 13 source: bureau for economic research, credit suisse research,(iv) the rate of growth in per capita real disposable income for south africa has continued to slow to 2.8% from 4.6% a year ago. (v) moreover, we believe it is unlikely that discretionary consumption will benefit from any further decline in the household debt financing cost to income ratio. in our view the 50bps sarb rate cut on 20 july 2012 (which lowered the household debt financing cost to income ratio to 6.5%, a 25-year low) was the final step in easing policy and our south african economist, carlos teixeira, forecasts the next move is tightening by 100bps in 2014. on 24 january the monetary policy committee reiterated that the risks to inflation were on the upside and revised their average headline cpi inflation forecast for 2013e higher to 5.8% (towards the upper end of the inflation target band) from 5.5% previously.,figure 21: sa: real disposable income growth (rand, %),figure 22: south africa: household savings ratio versus household debt financing cost to income ratio (%),3,250 3,000 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0,average monthly disposable income (per capita, rand, nominal, lhs) per capita real disposable income growth (yoy % chg, rhs),