From 'hope' to 'growth'
We expect 2010 to mark the transition from a ‘hope’ driven to a ‘growth’ driven market phase, in which earnings will take over the
baton from valuation expansion as the key driver of returns. We forecast net income pre exceptionals for the DJ STOXX to grow by 38% in 2010 and by 28% in 2011. Valuation has moderated but remains attractive, with a 2010E P/E of 11.4x and 2011E P/E of 8.9x our top-down earnings and an ERP of 5.5. Our Economists forecast global GDP growth of 4.4% and 4.5% in 2010 and 2011 respectively, with a disproportionate contribution from emerging economies. This, coupled with an extended period of very low interest rates, is likely to be supportive for risky assets. We forecast 300 for the DJ Stoxx 600 (over 25% total return from current levels) by end-2010 with a strong 1Q, a likely ‘flat and skinny’ phase perhaps through 2Q and 3Q, and a strong 4Q.

Dispersion and differentiation
We believe the ability to generate sustainable growth rather than pure cyclicality will be key to performance at both the sector and company level. We therefore have a less clear cyclical/defensive split in our sector recommendations and favour our dispersion basket, which is designed to capture this switch from beta to alpha. We also favour companies with high exposure to growth in BRICs economies and those with high current yields and the capacity to grow dividends.

Table of contents
A quick Q&A summary ..........................................................3
From hope to growth .............................................................5
The prospects for margins and profits .................................15
Demand and supply ..............................................................21
What can go wrong? .............................................................27
Key themes for 2010 – Differentiation based on growth .......32
Disclosures ............................................................................41