Summary – Searching for the bottom
European equities appear cheap on nearly all valuation measures as neither realized profits
nor future profits expected by the consensus have strongly declined so far. Nearly 40pp of
the 50% decline of European equities since their peak in June 2007 are driven by contracting
multiples rather than earnings.
The economic outlook remains dire, in our view. Our economists have further reduced their
growth forecast for 2009. They now expect a major recession for the world economy in 2009,
with growth in industrialised countries expected to fall to -2.0% and global growth to 0.2%.
Global inflation should drop to 1.9% in 2009. On the back of fiscal policy stimuli, growth is
expected to rebound in the second half of 2009 with 2010 global growth forecast at 2.6%.
Our economists though argue that the fiscal expansion is unlikely to turn into a self-sustained
expansion and that we may see a multiple-dip recession stretching over several years.
We believe for equity markets it will be crucial whether global growth stabilises in 2009 or
not. However deep the recession is in 2009, equity markets should perform positively if
global growth looks like it is heading towards some acceleration in 2010. We believe this is
even the case if growth remains sluggish thereafter, as expected in the baseline scenario.
The risk scenario is that global growth does not trough in 2009, e.g. if neither aggressive
monetary easing nor aggressive fiscal stimulus triggers growth in end demand. In this case
we see further downside risk for equity markets.
In the baseline scenario, we expect European earnings to decline by 20% in both 2008 and
2009. We are projecting EBITDA margins to contract by 1.2pp and 2.5pp in 2008 and 2009,
respectively, substantially more than currently factored in by analysts. Below the EBITDA line,
we expect the rising cost of interest bearing debt, goodwill impairment, pension funding
gaps and rising working capital to weigh on profits and/or cash flows. However, in our
opinion, the market has already priced in more than this forthcoming profit/cash flow
deterioration. So while the market clearly looks more expensive on our top-down numbers, it
still offers 15-30% upside potential until end-09. Also supported by our other models, our
Stoxx 600 end-09 target is 250 in the baseline case.
For the market to start a lasting rebound, we see the following pre-requisites: (1) slowing
pace of earnings estimate downgrades; (2) improvement in lending conditions; (3)
improvement in consumer confidence; and, (4) improvement of our proprietary Macro
Support Ratio. We do not expect a lasting rebound before the end of Q4 reporting.
With regard to investment themes, we continue to favour large caps over small caps. We
also believe that Growth will continue to outperform Value. A defensive bias into 2009
remains the right positioning, in our view. However, with the market close to the bottom in
our baseline scenario and given that defensives appear over-owned and no longer offer value
relative to cyclicals, we continue to scale back our defensive overweight position. We note
that sector differentiation on our models has declined substantially, as risky sectors with low
momentum start to look cheap and vice versa. This suggests reduced active sector weights,
as does our view that the market might be nearing a turning point.
We reduce our Oil & Gas O/w from 150bp to 100bp and cut exposure to corporate capex
further by doubling the U/w in Technology to 100bp and cutting Industrial G&S from Neutral
to a small U/w. Instead, we add weight to sectors that rank well on our models, look underowned
and could benefit from the fiscal stimulus packages. We halve the U/w in
Construction, move Retail from Neutral to a small O/w and halve the U/w in Autos to 100bp.
Overall, our key O/w positions are Telecoms, Health Care, Oil & Gas and Insurance. Basic
Resources and Retail are small O/w. Our key U/w positions are Technology, Food &
Beverage and Industrials. Personal & Household Goods and Real Estate are small U/w.

Sector Strategy in two minutes
STOXX sectors Our sector stance
Basic Resources
Global recession fears have triggered a big decline in commodity prices and the sell-off of the
sector. Low profitability could lead to production cuts. BHP has scrapped its hostile bid on Rio.
Sector is neutral on the models, our analysts are cautious and we halve the O/w. Basic
Materials Chemicals
Chemicals customers reduce production and de-stock inventories aggressively and so BASF
has announced large production cuts. Q4’08 and Q1’09 could see the worst rate of yoy decline
in this cycle for Chemicals. Models are Neutral and we stay Neutral.
Autos & Parts
Consumer sentiment at record lows burdens big ticket purchases. High inventory levels force
some Auto companies to production cuts to 20% to 30% for Q4. Models are negative, but
valuation excluding the distortion by VW looks attractive and we halve our U/w.
Food & Beverage
Strong outperformer YTD and defensiveness is underpinned by comments from Nestle and
Unilever. Some beverage companies are higher risk. Sector is Neutral on our models. We keep
our preference for other defensive sectors and stay U/w.
Consumer
Goods
Personal &
Household Goods
Global recession, falling equity markets and consumer sentiment at record lows weighs on the
sector. Models are slightly negative and we keep our small U/w and continue to prefer the
defensive names. But our analysts also see value in some Luxury Goods stocks.
Media
The recession will lead to cuts in marketing budgets 2009 and late-cycle agencies, Broadcasters
and Newspaper publishers should suffer. We prefer the more defensive sub-sectors and stay
Neutral, backed by positive model rankings.
Retail
Consumer sentiment has fallen to a 14-year low in the Eurozone; UK and Spain are much
weaker. The Eurozone PMI Retail index has hit an all-time low and Christmas shopping will
likely be poor. But much seems priced in and models look attractive; we move to a small O/w.
Consumer
Services
Travel & Leisure
Sector suffers from weak consumer sentiment and looks weak on most of our models. Higher
financing costs and the risk of pension gaps are negatives. We stay neutral for now and prefer
the more defensive names.
Banks
We stay Neutral, as suggested by our models. The sector looks cheap on many measures.
However, EPS momentum is weak and the current macro backdrop (where lending is likely to
remain suppressed if deflationary fears persist and corporate bankruptcies are likely to rise)
suggest that Banks could be under pressure.
Financial Services
We are trimming our exposure to Fin Svs. The latter is suffering from substantial earnings
downgrades and looks expensive, and we think that it is a less attractive beta exposure.
Insurance
We are adding some weight to the sector. According to our models, it continues to look
most appealing among the Financials. In addition to looking relatively cheaper, Insurance
has decent momentum and offers less risky beta, in our view.
Financials
Real Estate
We stay Underweight Real Estate. Our models continue to be bearish towards the sector.
In particular, it looks relatively expensive. However, EPS momentum is holding up better
than for other Financials.
Healthcare
We stay O/w amid the weak macro backdrop, resilient EPS momentum and the sector’s
cash-rich status. However, Health Care has had a very strong run and is losing valuation
appeal and now looks the most over-owned sector in Europe, limiting potential upside.
Construction &
Materials
Construction sentiment declined strongly throughout Europe. Higher refinancing costs and
Goodwill write downs are risks. But sector could benefit from the huge stimulus packages and
infrastructure investments and interest rate cuts by Central banks. We reduce the U/w to 50 bp.
Industrials Industrial
Goods & Services
For Capital Goods our analysts expect the worst recession since 1945 due to the speed of
descent and its globally synchronised nature. PMI New order index declined to an all-time low.
Valuation looks attractive, but models are cautious and we move to a small U/w.
Oil & Gas
We are trimming our O/w to the sector. It remains defensive and inexpensive, but
earnings momentum is waning and it is becoming over-owned. Yet, among the
commodity sectors, we still prefer Oil & Gas to Utilities and Materials.
Technology
The sector’s EPS momentum is worsening rapidly and with the scope for companies to
reduce IT budgets, we have turned more cautious on capex. Also, we do not expect much
dollar appreciation going forward (important for Semis), hence we are increasing our U/w.
Telecoms
Second best performer over three months. Supportive are defensive cash flows, increased
focus towards capital protection (like announced by Vodafone) and strong, stable dividends.
Models are modestly positive and we stay O/w -- for now.
Utilities
We stay Neutral. The sector’s defensive nature, superior EPS momentum and investor
under-ownership are all positive aspects. Yet, Utilities remain expensive and are highly
geared, which could make it vulnerable as the market focuses on the rising cost of debt.

Country Strategy in two minutes
Country Our country stance
Austria
Austria is the weakest performer among the European countries with -67% YTD and recent earnings downgrades
were particularly high. Austria has a high number of financial companies and high exposure to Eastern Europe.
However, on the scorecard Austria has kept its positive score and remains in the upper half. Valuation is a positive
whereas technicals and the PMI are negative. Austria has approved a Euro 2 bn stimulus package (0.5% of GDP) to
support the home economy, especially small and mid caps and infrastructure.
Benelux
Benelux has remained in the negative territory on our scorecard. Interestingly, the traditional valuation measures are
positive for the region, but the CROCI valuation is extremely negative and technicals are also more on the negative
side. The Netherlands are among the weakest countries on our VMR scorecard. The large listed Dutch companies
are very global whereas the Belgian companies are much more home-based. The Netherlands have approved a
stimulus package of Euro6bn (1% of GDP) to support the economy.
France
The French market has outperformed the pan-European average since the start of 2008. This month we have become
more positive on France. On the one hand, this is consistent with our preference for large caps over small caps. On the
other hand, French stocks score high on our metrics. They exhibit superior momentum – in terms of both earnings and
technicals, they look attractive from the perspective of valuation as well as from the perspective of their sector
composition.
Germany
Germany remains at the lower end of our country scorecard. CROCI Valuation and sectors implied score are
particularly negative. The Auto industry is in the center of the crisis and Germany is the country by far most
dependant upon the Auto sector. Also the important Capital Goods should suffer. Strong exports to emerging
markets had been supportive in the last years and these exports should slow significantly now. A stimulus package
of Euro12bn (0.5% of GDP) has been approved. Our Dax target for end 2009 in the base scenario is 5900.
Greece
We are currently Underweight the Greek market. Greece looks attractively valued according to our models – whether from
the perspective of CROCI, traditional multiples and our analysts’ bottom-up estimates. However, momentum is weak and
Greece currently exhibits the second-worst technical score within our universe. Our caution is also based on the structure
of the Greek market, which is predominantly populated by small and mid-caps, which in our view are set to underperform
large caps at least in early 2009.
Iberia
Spanish equities have outperformed the pan-European average year-to-date. Looking ahead, we stay Underweight.
We believe that Spanish companies are more likely to be negatively impacted by the rising cost of debt financing
since they are highly geared. Also, our models suggest that Spain currently has a weak technical score and remains
expensive according to the VMR model.
Ireland
In line with the conclusion of our models, we are also U/w Ireland within Europe. This market does not look expensive
according to our models, having substantially underperformed since the start of 2008. Momentum, however, is very
weak. Ireland currently has the weakest technical score in Europe and below-average earnings momentum. In addition,
Irish companies, being highly geared, are more vulnerable to a rise in debt-financing costs. As the market remains focused
in the rising cost of credit, we believe that this could hurt the Irish market to a large extent.
Italy
Our models remain positive towards Italian stocks and we maintain our Overweight stance. Most of our weight is
among the Financials, Oil & Gas and Telecoms sectors. The major appealing factor for Italy is valuation. However,
earnings momentum is below the pan-European market average. We also note that Italian companies are likely to
be more vulnerable to rising debt-financing costs.
Nordic
The Nordic region has remained neutral on our scorecard. Traditional valuation and FX potential look positive, but
CROCI looks more cautious and bottom-up target prices are negative. YTD Norway, Finland and Sweden have
underperformed Europe whereas Denmark has outperformed. Denmark has approved a stimulus package of
Euro2bn (0.9% of GDP). Low debt levels of the companies is also positive.
Switzerland
Switzerland is the best-performing European country at -29% YTD (in Euro). This was supported by a high
healthcare weight. The country is still at the bottom end of the country scorecard, but has improved its score
significantly over the last month. The valuation scores are now less negative, traditional as well as CROCI. The
listed companies have a high global exposure, but also a high weight in defensive sectors. Low debt levels of the
companies is also positive. Our index target for the SMI in the base scenario is 7000 for end 2009.
UK
We maintain our preference for the UK relative to the Eurozone, hence stay Overweight UK equities in our pan-
European portfolio. First, the UK looks cheap on our models. Second, the market’s sector structure looks appealing.
Also, momentum looks reasonable. While the earnings momentum is below the pan-European market average, UK
stocks exhibit an above-average technical score. Within the UK, our exposure is mostly among the defensive
sectors.

Index
Summary View.................................................................................................................................... 1
Sector Strategy in two minutes ......................................................................................................... 2
Portfolio Sector Weightings ............................................................................................................... 3
Country Strategy in two minutes ...................................................................................................... 4
Portfolio Country Weightings............................................................................................................. 5
Sector Scorecard ................................................................................................................................ 6
Global economic forecast ................................................................................................................... 7
Section 1 – Outlook ............................................................................................................................. 9
Section 2 – Economic Themes.......................................................................................................... 31
2.1 Where are we in the global cycle?................................................................................................. 32
2.2 Where are we in the regional cycle? – US…………………………………………………………… 34
2.3 Where are we in the regional cycle? – Euroland ........................................................................... 36
2.4 Where are we in the regional cycle? – UK..................................................................................... 38
Section 3 – Earnings Trends and Market Valuation....................................................................... 41
3.1 Macro Support Ratios .................................................................................................................... 42
3.2 Earnings Trends ............................................................................................................................. 44
3.3 Market Valuation ............................................................................................................................ 46
3.4 Supply & Demand......................................................................................................................... 48
3.5 Investor Positioning ....................................................................................................................... 50
3.6 Directors’ Dealings ........................................................................................................................ 52
3.7 Small Caps vs. Large Caps ............................................................................................................ 54
3.8 Growth vs. Value........................................................................................................................... 56
3.9 Country Strategy ............................................................................................................................ 58
Section 4 – Sector Strategy .............................................................................................................. 63
4.1 Outlook for Basic Resources ......................................................................................................... 64
4.2 Outlook for Oil & Gas,.................................................................................................................... 66
4.3 Outlook for Consumer Goods & Services ..................................................................................... 68
4.4 Outlook for Utilities and Healthcare............................................................................................... 70
4.5 Outlook for Financials .................................................................................................................... 72
4.6 Outlook for Teletechs .................................................................................................................... 74
Section 5 – Screening for attractive European companies ........................................................... 77
Section 6 – VMR Scorecards............................................................................................................. 85
Section 7 – Running the Numbers and CROCI Data (Current) ..................................................... 93
7.1 Europe......................................................................................................................................... 94
7.2 UK................................................................................................................................................ 96
7.3 Europe ex-UK ............................................................................................................................... 98
7.4 USA .......................................................................................................................................... 100
7.5 Automobiles & Parts.................................................................................................................. 102
7.6 Basic Resources ........................................................................................................................ 104
7.7 Chemicals.................................................................................................................................. 106
7.8 Construction & Materials ........................................................................................................... 108
7.9 Food & Beverage ....................................................................................................................... 110
7.10 Health Care ............................................................................................................................... 112
7.11 Industrial Goods & Services....................................................................................................... 114
7.12 Media ........................................................................................................................................ 116
7.13 Oil & Gas................................................................................................................................... 118
7.14 Personal & Household Goods.................................................................................................... 120
7.15 Retail ......................................................................................................................................... 122
7.16 Technology................................................................................................................................ 124
7.17 Telecommunications................................................................................................................. 126
7.18 Travel & Leisure ........................................................................................................................ 128
7.19 Utilities ...................................................................................................................................... 130
7.20 Banks ........................................................................................................................................ 132
Section 8 – Universe of European Big Caps.................................................................................. 133