European Strategy Weekly

EUROPEAN STRATEGY

EQUITY RESEARCH

Examining EM exposure (again)

October 9, 2011

Despite recent underperformance, we do not think it is a good idea for European portfolio managers to systematically seek out companies with exposure to emerging Economies.

Research analysts European Strategy Ian Scott - NIplc ian.scott@nomura.com +44 20 7102 2959 Inigo Fraser-Jenkins - NIplc inigo.fraser-jenkins@nomura.com +44 20 7102 4658 Shanthi Nair - NIplc shanthi.nair@nomura.com +44 20 7102 4518 Mark Diver - NIplc mark.diver@nomura.com +44 20 7102 2987 Saurabh Katiyar skatiyar@nomura.com +44 20 7102 9135 Rohit Thombre rohit.thombre@nomura.com +44 20 710 25461 Robertas Stancikas - NIplc Robertas.stancikas@nomura.com +44 20 7102 3127 Maureen Hughes - NIplc m.hughes@nomura.com +44 20 7102 4659

Since the end of August, European companies with large exposure to

emerging economies have underperformed the wider European market. This is the first time since 2008 that investor concerns about emerging markets (EM) have permeated through the European market. an 11% premium to the wider European market. relative to other European growth stocks.

Despite this underperformance, the EM-exposed companies still trade at Perhaps more interestingly, EM-exposed stocks have been re-rated In the past, these valuation premiums have been justified by better
earnings trends among the EM-exposed companies, but that is not the case at the moment. we are not persuaded to seek it out.

So although we would caution against a blanket sale of EM exposure,

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | European Strategy Weekly

October 9, 2011

We do not think it is a good idea to systematically seek out European companies with exposure to emerging Economies 1. We see nothing wrong with these companies per se, but as a group they continue to command a sizeable premium over the overall European market, as well as other growth stocks, while this premium does not appear to be justified at the moment by a superior earnings trend.
Fig. 1: Relative performance of European stocks with significant exposure to emerging economies and the relative performance of EM equity markets
130 120 110 100 90
Relative Performance of EM exposed European stocks Index, Jan 1, 2008 = 100

Ian Scott +44 20 7102 2959 Ian.scott@nomura.com

EM-exposed companies have started to underperform the wider European market

80 70

Emerging Markets performance relative to World

May-11

Nov-08

Nov-09

May-08

May-09

May-10

Source: FTSE, Nomura Strategy rresearch

Our EM exposure basket 2 detailed in the Appendix has underperformed the wider European market by 3% since 31 August. Although there have been periods since 2008 when local emerging market stocks have underperformed their global peers, this is the first time concerns about EM have permeated through the European market. This suggests that investors are more concerned about the fundamental outlook for emerging economies rather than the deleveraging of capital from local EM markets.
Fig. 2: Relative valuation* of Europes EM exposed companies** compared with the wider European market
Ratio

Nov-10

Sep-08

Sep-09

Sep-10

Mar-08

Mar-09

Mar-10

Sep-11

Jan-08

Jan-09

Jan-10

Mar-11

Jan-11

Jul-08

Jul-09

Jul-10

Jul-11

1.3 1.2 1.1 1.0 0.9 0.8 0.7

They continue to trade at a premium valuation compared with the rest of the European market

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

*Median forward P/E of stocks in the EM basket divided by European market 12-month forward P/E. ** See appendix for details Source: FTSE, IBES, Nomura Strategy research

In last weeks Global Strategy Weekly, we reiterated our preference for developed market equities within our Global Regional allocation: Still too soon to up Emerging Markets, Global Strategy Weekly, 2 October 2011. 2 First published in European Strategy weekly, Not all emerging market exposure is the same, 20 February 2009.

Jan-10

Jan-11

Nomura | European Strategy Weekly

October 9, 2011

The EM-exposed stocks currently trade on an 11% premium to the wider European market. This is 4% above the premium that has existed since 2003. So, although they have underperformed recently, they have not been through anything like to the deleveraging experienced during 2008.
Fig. 3: Relative valuation of Europes EM-exposed companies compared with other growth stocks*
1.2 1.1 1 0.9 0.8 0.7 0.6 0.5
Ratio

EM-exposed companies seem fully valued relative to other sources of growth unlike 2008 when EM exposure became very cheaply priced

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Jan-09

Oct-94

Oct-97

Oct-00

Oct-03

Oct-06

Oct-09

Apr-96

Apr-99

Apr-02

Apr-05

Apr-08

*Ratio of median forward P/E of EM exposed basket divided by median P/E of Nomuras European Composite Growth basket (see appendix for details). Source: IBES, FTSE, Nomura Strategy research

The EM-exposed companies trade on a similar multiple to other growth stocks in Europe. Again, there is a marked contrast to the 2008/09 period when the deleveraging of exposure to emerging market and emerging economy exposed companies brought a substantial de-rating relative to other growth stocks.
Fig. 4: Earnings revisions for Europes EM-exposed stocks
30 20 10 0 -10 -20 -30 -40
Net earnings revisions %, (up -down) / total, 3MMA

Apr-11

Jul-95

Jul-98

Jul-01

Jul-04

Jul-07

Jul-10

Earnings estimates are being cut for EM-exposed companies

Jan-1994

Jan-1995

Jan-1996

Jan-1997

Jan-1998

Jan-1999

Jan-2000

Jan-2001

Jan-2002

Jan-2003

Jan-2004

Jan-2005

Jan-2006

Jan-2007

Jan-2008

Jan-2009

Source: IBES, Nomura Strategy research

Moreover, earnings estimates are coming down for the group. Some 10% more estimates have been cut than raised in the past month, broadly in line with the wider European market.

Jan-2010

Jan-2011

Nomura | European Strategy Weekly

October 9, 2011

Fig. 5: Gap in earnings revisions between EM-exposed stocks and the wider European market* and the valuation premium for EM-exposed stocks
15 10 5 0 -5 -10 -15 Relative Earnings Revisions (LHS) Relative Valuation (RHS)
Gap in revisions balance Ratio of forward PEs

1.3 1.2 1.1 1 0.9 0.8 0.7 0.6 0.5

The premium valuation attached to EM-exposed stocks is not supported by superior EPS revisions

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Jan-09

Oct-94

Oct-97

Oct-00

Oct-03

Oct-06

Footnote: chart describes the gap in earnings revisions between stocks exposed to Emerging Markets and the rest of the European market (red line) and the ratio of the forward PE multiples for the EM exposed stocks compared with the wider European market (grey line). Source: IBES, FTSE, Nomura Strategy research

As Figure 5 shows, the premiums attached to the EM-exposed companies have been associated with their superior earnings revisions, with revisions now in line with the wider European market, the 11% premium is no longer as justifiable as it was, in our view. In summary, European companies with large exposure to emerging economies look expensive, but no longer have a sufficient differentiated earnings trend to command such a premium, in our view. So in line with our overall cautious stance toward the relative performance potential for emerging equity markets, we would not be seeking to systematically overweight European companies with significant exposure to emerging economies.

Oct-09

Apr-96

Apr-99

Apr-02

Apr-05

Apr-08

Apr-11

Jul-95

Jul-98

Jul-01

Jul-04

Jul-07

Jul-10

Nomura | European Strategy Weekly

October 9, 2011

Appendix
Fig. 6: Constituent stocks in Nomuras European Emerging Markets Exposure Basket (see NMRAEQEM <INDEX> on Bloomberg
Company Sector Company Sector

ANGLO AMERICAN PLC BAYER AG HOLCIM LIMITED LAFARGE XSTRATA PLC ABB LIMITED ATLAS COPCO AB COMPAGNIE FINANCIERE RICHEMONT S.A, LVMH RENAULT (REGIE NATIONALE DES USINES) SA SWATCH GROUP OF SWITZERLAND (THE) BRITISH AMERICAN TOBACCO P.L.C. COCA-COLA HELLENIC BOTTLING COMPANY S.A.
ANHEUSER-BUSCH INBEV

SABMILLER PLC
Source: Worldscope, Nomura Strategy research

Basic Industries Basic Industries Basic Industries Basic Industries Basic Industries Capital Goods Capital Goods Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Stables Consumer Stables Consumer Stables Consumer Stables

BG GROUP PLC SAIPEM SPA TECHNIP BANCO BILBAO VIZCAYA ARGENTARIA SA BANCO SANTANDER SA HSBC HOLDINGS PLC OLD MUTUAL PLC PRUDENTIAL PLC RAIFFEISEN INTERNATIONAL BANK STANDARD CHARTERED PLC UNICREDITO ITALIANO SPA TELEFONAKTIEBOLAGET LM ERICSSON PORTUGAL TELECOM SGPS SA TELEFONICA SA TELENOR GROUP ASA

Energy Energy Energy Financials Financials Financials Financials Financials Financials Financials Financials Technology Telecoms Telecoms Telecoms

Fig. 7: Current constituent stocks in Nomuras European High Composite Growth basket* (see NMRAGRWL <INDEX> on Bloomberg
Company ANTOFAGASTA PLC ANGLO AMERICAN PLC WOLSELEY PLC XSTRATA PLC SYNGENTA AG K+S AG NOVOZYMES A/S COMPAGNIE DE SAINT-GOBAIN S.A. EURASIAN NATURAL RESOURCES CORP. PLC ROLLS-ROYCE HOLDINGS PLC EUROPEAN AERONAUTIC DEFENCE & SPACE CO. EADS ATLAS COPCO AB ABB LTD. MAN SE SKF AB SAFRAN S.A. SANDVIK AB THYSSENKRUPP AG VOLVO AB SIEMENS AG ALFA LAVAL AB EXPERIAN PLC NEXT PLC BURBERRY GROUP PLC ADECCO S.A. ADIDAS AG BMW AG FIAT SPA CONTINENTAL AG Sector Basic Industries Basic Industries Basic Industries Basic Industries Basic Industries Basic Industries Basic Industries Basic Industries Basic Industries Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Capital Goods Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Company RENAULT S.A. SWATCH GROUP AG VOLKSWAGEN AG (PFD NON-VTG) RANDSTAD HOLDING N.V. HERMES INTERNATIONAL S.C.A. COMPAGNIE FINANCIERE RICHEMONT S.A. BUREAU VERITAS S.A. AMADEUS IT HOLDING S.A. BG GROUP PLC NORSK HYDRO ASA REPSOL YPF S.A. PETROFAC LTD. ROYAL BANK OF SCOTLAND GROUP PLC UNICREDIT S.P.A. DANSKE BANK A/S SWEDBANK AB ERSTE GROUP BANK AG ADMIRAL GROUP PLC SHIRE PLC COLOPLAST A/S FRESENIUS SE NOVO NORDISK A/S BRITISH SKY BROADCASTING GROUP PLC JCDECAUX S.A. EUTELSAT COMMUNICATIONS ASML HOLDING N.V. INFINEON TECHNOLOGIES AG TELENOR ASA Sector Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Consumer Cyclicals Energy Energy Energy Energy Financials Financials Financials Financials Financials Financials Healthcare Healthcare Healthcare Healthcare Media Media Media Technology Technology Telecoms

*Selected on three criteria: IBES mean consensus forecast long term earnings growth, IBES mean consensus growth between FY0 and FY3 and internal growth measured by ROE * (1-payment ratio). Source: IBES, Nomura Strategy research

Nomura | European Strategy Weekly

October 9, 2011

European recommended portfolio

Price (LC) Sector Basic Industries Capital Goods Stock CRH PLC RIO TINTO PLC GAMESA CORP TECNO KLOECKNER MEGGITT PLC THALES SA DEUTSCHE LUFTHANSA DEUTSCHE POST AMEC PLC BP PLC REPSOL TULLOW BNP PARIBAS CREDIT AGRICOLE LLOYDS NATIONAL BANK OF GREECE UBS AG UNICREDITO ITALIANO AEGON NV AVIVA PLC AXA LEGAL & GENERAL GROUP PLC ZURICH FINANCIAL SERVICES AG 3I GROUP PLC GT PORTLAND ESTATES ICAP PLC LAND SECURITIES PLC MERCK KGAA NOBEL BIOCARE HLDG NOVARTIS AG REED ELSEVIER WPP PLC CAPGEMINI SA ILIAD S.A. SAP AG STMICROELECTRONICS DEUTSCHE TELECOM TELENOR ASA NATIONAL GRID PLC Currency EUR GBP EUR EUR GBP EUR EUR EUR GBP GBP EUR GBP EUR EUR GBP EUR CHF EUR EUR GBP EUR GBP CHF GBP GBP GBP GBP EUR CHF CHF GBP GBP EUR EUR EUR EUR EUR NOK GBP 6 Oct 11 12.75 31.27 3.52 9.52 3.36 24.31 9.54 9.84 8.18 3.93 21.05 13.50 32.03 5.44 0.36 2.14 10.97 0.83 3.25 3.19 10.50 1.03 194.30 1.92 3.46 4.21 6.87 59.61 9.01 51.55 5.12 6.14 26.11 83.56 38.98 5.15 9.24 89.55 6.41 Mkt Cap US$m 12,090 70,819 1,167 1,273 4,011 2,594 2,927 11,904 4,171 113,848 34,428 18,769 44,746 7,003 22,157 2,740 45,231 16,057 8,306 14,052 32,637 9,278 31,141 2,846 1,665 4,239 8,228 5,161 1,217 139,156 9,567 11,876 5,421 2,452 48,032 4,711 40,527 12,666 35,093 Calendarised EPS y/e Dec1 2010a/e 0.8 7.2 0.3 1.2 0.3 -0.2 2.5 2.1 0.6 1.1 1.9 0.1 6.3 0.5 0.0 0.5 2.0 0.1 0.8 0.6 1.8 0.1 24.6 0.2 0.2 0.4 0.4 2.9 0.4 4.3 0.4 0.6 2.5 5.9 2.3 0.7 1.0 8.7 0.5 2011e 0.9 10.8 0.3 0.3 0.3 2.6 1.3 1.0 0.7 1.2 1.9 0.8 8.0 1.7 0.0 0.6 2.0 0.2 0.7 0.6 2.1 0.1 21.3 -0.2 0.1 0.4 0.4 4.3 0.7 4.7 0.5 0.6 2.4 5.4 2.6 0.9 1.0 7.4 0.5 2012e 1.0 12.3 0.5 0.7 0.3 3.0 1.7 1.3 0.8 1.2 2.3 1.1 9.0 2.2 0.1 1.0 2.5 0.2 0.7 0.7 2.3 0.2 24.2 0.3 0.1 0.5 0.4 4.6 0.8 4.9 0.5 0.6 2.7 5.2 3.0 1.2 1.0 7.8 0.5 Price/ earnings Dec 11 (x) 14.9 2.9 11.7 27.5 10.8 9.4 7.5 9.6 11.9 3.4 11.0 16.1 4.0 3.2 NM 3.5 5.6 5.1 5.0 5.3 5.1 7.2 9.1 NM 44.6 10.4 18.5 13.7 13.8 11.0 11.2 9.9 10.8 15.5 14.9 5.8 9.2 12.1 12.4 Date Added 9 Sep 11 11 Dec 09 13 Nov 09 9 Sep 11 3 Dec 10 8 Oct 10 9 Sep 11 9 Sep 11 3 Dec 10 22 May 09 4 Oct 10 4 Oct 10 16 Apr 10 12 Jun 11 2 Jul 10 11 Dec 09 17 Sep 10 16 Apr 10 9 Jan 09 31 Jul 09 9 Jan 09 11 Dec 09 11 Dec 09 8 Jul 11 3 Dec 10 3 Dec 10 3 Dec 10 4 Sep 09 3 Dec 10 9 Jan 09 4 Sep 09 3 Dec 10 22 Jul 11 23 Oct 09 23 Oct 09 9 Jan 09 4 Sep 09 8 May 09 4 Sep 09 Rel Perf. since Added 13 8 -72 -6 5 -2 -12 -1 -15 -34 18 12 -28 -32 -38 -85 -25 -51 -60 -5 -44 54 24 -17 10 -5 19 -6 -31 9 21 -7 -18 12 17 -8 9 106 33 Rel Perf. Over week 8 5 5 -6 0 -1 -6 -1 -5 -1 5 2 2 0 -2 -23 -5 0 2 1 1 3 -2 -1 -1 -2 5 -4 -6 0 1 -3 0 -4 1 3 4 -3 -1 Analyst Rating2 Not Rated Not Rated Not Rated Buy Buy Buy Neutral Buy Not Rated Not Rated Not Rated Not Rated Buy Neutral Neutral Neutral Buy Buy Buy Buy Buy Buy Buy Not Rated Not Rated Not Rated Not Rated Buy Buy Buy Buy Buy Not Rated Buy Buy Buy Buy Buy Neutral

Consumer Cyclicals Energy

Financials - Banks

Financials - Insurance

Financials - Other

Healthcare

Media Technology

Telecoms Utilities

Portfolio perf. (Euro Return, %)3 1 WK 1 MTH YTD 12 MTH 2010 2009 2008 4 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 0.3 4.5 -19.8 -17.7 5.3 49.4 -20.7 -4.5 20.9 21.7 7.7 22.5 -34.0 -21.2 14.7 67.4 26.4 43.2 35.7 17.8 Nomura Strategy Recommend Portfolio 0.7 3.7 -14.2 -9.6 11.7 33.2 -20.4 3.6 17.2 23.0 9.4 12.6 -31.7 -17.3 -2.9 25.4 18.6 40.5 24.7 11.2 FTSE-World Europe Index
1 2

EPS estimates are based on Nomura estimates (for stock s under coverage), IBES (for stock s not under coverage). Analyst rating refers to Nomura research department rating. 3 Return history presented as price return in euro terms from before 2006. Returns from 2007 to present are on a total return basis. 4 Ending 12 September 2008. Please turn to the back cover for an explanation of Nomura's rating system. Past performance should not and cannot be viewed as an indicator of future performance. Complete record available upon request. Source: IBES, IDC/Exshare, Factset, Nomura Strategy estimates

European recommended sector allocation

Benchmark Basic Industries Capital Goods 1 Consumer Cyclicals Consumer Staples Energy Financials of which: Banks Insurance Other Healthcare Media Technology Telecoms Utilities 11 7 9 14 11 20 12 5 2 11 2 3 7 5 Recommended Weighting 8 8 4 0 20 33 15 11 7 5 6 9 5 3 Recommendation Underweight Neutral Underweight Underweight Overweight Overweight Overweight Overweight Overweight Underweight Overweight Overweight Underweight Underweight

We recently increased our exposure selectively to areas within the cyclicals, which are valued at trough levels, like Building & Construction, Steel and Transport. However, we remain underweight the sector in aggregate. We recommend overweighting Oils and underweighting Basic Industries; demand for non-oil commodities has become more sensitive to prices, while Mining is also expensive relative to Oils. We underweight sectors that are vulnerable to a rise in bond yields and prefer sectors that should benefit from a reduction in the equity risk premium. We also overweight sectors that should benefit from increased capital spending. We overweight Financials as asset price reflation should provide support. We believe that valuations discount further capital raising; we think these concerns will be mitigated by rising asset values.

We also overweight Tech and Media, which should benefit from increased business spending. We have an underweight recommendation on Telecoms. We underweight Utilities and Healthcare.

Combination of Cyclical Consumer Goods and Cyclical Services excluding Media. Source: Nomura Strategy research

Nomura | European Strategy Weekly

October 9, 2011

European Index
Pan-European equity market forecasts for 2011
End 2011 Price Return (%)** End 2011
162 145 2850 6200 7500 3950 6200 355 10300 1100 19250

Current Level* FTSE Europe FTSE Europe ex UK EURO STOXX 50 FTSE 100 (UK) Dax 30 CAC 40 SMI AEX IBEX OMX MIB
129 114 2179 5102 5473 2974 5505 278 8477 900 14805

25 27 31 22 37 33 13 28 22 22 30

- We expect the European market to recover from current lows. - Equity valuations appear attractive to us, with embedded risk premiums at high
levels and we expect the earnings recovery to continue, though at a slower pace.

- We think the market has overreacted to concerns of slowing growth and

sentiment has moved to depressed levels.

- We think 2011 will see companies reinvest in their businesses, either through
organic investment or through M&A.

**Eur terms * As of 05-Oct-2011 We use the FTSE All World Developed index for Europe and Europe ex UK. Source: Nomura Strategy research

European earnings growth forecasts

2010 Europe ex UK UK
2 1

2011 11% 10% 11%

2012 14% 13% 14%

11% 17% 13%

Europe
* EPS growth
1 2

FTSE Europe ex UK FTSE 100

Source: Nomura Strategy research

Nomura | European Strategy Weekly

October 9, 2011

Investible themes
For details of the investible products based on these themes and how to trade them please contact the Quantitative Solutions Group on +44 (0) 20 7103 9988 or quant-eu@nomura.com. Our investible themes and style portfolios are listed on Bloomberg at NMRA<Go>. Bloomberg codes are listed, where applicable, with each theme below.

Our investible themes and style portfolios are listed on Bloomberg at NMRA<Go>. We show live tradable prices for these themes. Option 1 shows the long/short return of our key style portfolios, option 2 shows the returns of the top and bottom quartiles of the full range of styles and allows access to the constituents.

Investible themes are available under option 3 as shown below.

Source: Bloomberg

Nomura | European Strategy Weekly

October 9, 2011

Divestiture Basket
104.0 100.0 96.0 92.0 88.0 84.0 80.0 76.0 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Index

- Within overall M&A activity, we think divestitures deserve special attention.

We believe we could see divestitures and spin-offs increase during the rest of the year as companies seek to increase value for their shareholders.

- The basket consists of 19 European stocks that Nomura sector analysts

consider potential candidates for spin-offs and divestitures.

- See European Strategy Weekly, Unlocking the value in divestitures, 10 April

2011

Chart shows the performance of a basket of European stocks that are considered potential candidates for spin-offs and divestitures. The performance is shown on an equal-weighted USD total return basis relative to the market. Source: FTSE All World, Exshare, Nomura Strategy research

M&A Basket
133.0 128.0 123.0 118.0 113.0 108.0 103.0 98.0 93.0 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Index

- We expect M&A activity to pick up in 2011. It has been at a low ebb until
recently, yet corporates have large amounts of available cash.

- We identify companies that we think are potential targets to be bid for. For

more details of the basket please see Can Companies Provide the Catalyst? (III) 30 January 2011

Chart shows the performance of a basket of European stocks that we consider could be potential takeover targets based on a screening that takes into account valuation and the attractiveness of the companies as a strategic asset for potential buyers. The performance of the basket is shown relative to the FTSE ALL World Europe Index. The performance is shown on an equal-weighted USD total return basis. Source: FTSE All World, Worldscope, Exshare, Nomura Strategy research

Organic Growth Basket II

111.0 109.0 107.0 105.0 103.0 101.0 99.0 97.0 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Index

- We expect the market to reward companies that can invest in

profitable internal growth opportunities.

- We have refreshed the constituents of our original Organic Growth

basket, which we closed on 09/06/2011.

- To derive the basket, we look for European companies with ROCE

>10%, where capex / depreciation (2010) ratio is greater than 1.5 and where capex is expected to grow in the next few years. We also looked for expected EPS growth in the next three years in excess of 10% pa, giving a total of 51 constituents.

Chart shows the performance of a basket of European stocks that we consider could be potential takeover targets based on a screening that takes into account valuation and the attractiveness of the companies as a strategic asset for potential buyers. The performance of the basket is shown relative to the FTSE ALL World Europe (ex financials) Index. The performance is shown on an equal-weighted USD total return basis. Source: Nomura research, Bloomberg, FTSE All World, Exshare

Nomura | European Strategy Weekly

October 9, 2011

European Multifactor Model

108.0 106.0 104.0 102.0 100.0 98.0 96.0 94.0 92.0 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Index

- A quant-driven model that selects attractive and unattractive stocks each

quarter.

- Uses a broad range of factors with regressions used to assign coefficients to

factors based on the efficacy of factors in each sector.

- Incorporates a non-linear interaction term that captures the level of

agreement between value and momentum.

- See European Multifactor Model , 3 November 2008.

Chart shows the performance of our long-short European multifactor stock selection model. The performance is on a USD total return basis with a five-day implementation lag at each quarter end. Sectors are equally weighted and stocks equally weighted within sectors. The Portfolios have been rebalanced quarterly.

Source: FTSE, Worldscope, IBES, Exshare, Nomura Strategy research

European Style Selector

125 120 115 110 105 100 95 90 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Index

- A quant-driven model that selects attractive and unattractive styles each

quarter.

- Uses the valuation of style factors and the recent momentum of style factors
to rank styles each month.

- See European Style Selector , 5 June 2009.

Chart shows the relative performance of attractive relative to unattractive styles according to our style selector model with styles rebalanced each month.

Source: FTSE World, Worldscope, IDC/Exshare, Nomura Strategy research

Closed trades
Trade On
Emerging Market Exposed Basket Government Spending basket Organic Growth Basket I European Q-GAARP Basket Capital Structure Arbitrage Basket Dividend Theme Basket Source: Nomura Strategy research NMRAEQEM NMRAFISC 20/02/2009 23/01/2009 06/12/2010 08/01/2010 09/10/2009 19/02/2010

Trade Off
31/07/2009 15/01/2010 09/06/2011 03/12/2010 03/12/2010 03/12/2010

Return
27.60% 37.80% -0.30% -5.33% -6.24% -6.63% Return relative to FTSE World European index in USD Return relative to FTSE World European index in USD Return relative to FTSE World European index in USD Return relative to FTSE World European ex Financials index in USD Long/Short

10

Nomura | European Strategy Weekly

October 9, 2011

European valuation and profitability

12 month Forward P/E1
Current Values Basic Industries Capital Goods Consumer Cyclicals Consumer Staples Energy 2 Financials of which: Banks Insurance Healthcare Technology Media Telecoms Utilities Market Eur ex UK 8.8 9.0 9.2 13.4 7.0 5.9 5.6 5.8 10.7 11.9 8.1 9.2 9.4 8.6 UK 5.4 8.7 10.7 12.3 7.0 7.2 6.8 7.1 9.6 18.0 10.7 9.6 11.6 8.4 Europe 7.1 9.0 9.5 12.9 7.0 6.3 6.0 6.1 10.4 12.7 9.1 9.4 9.9 8.5 EEMEA 7.8 8.0 10.0 15.1 4.1 7.7 7.3 9.6 7.6 13.6 15.3 8.9 6.7 6.6 Post 1990 Average Basic Industries Capital Goods Consumer Cyclicals Consumer Staples Energy Financials2 of which: Banks Insurance Healthcare Technology Media Telecoms Utilities Market Eur ex UK 12.9 15.7 15.4 16.9 13.9 13.1 11.7 16.5 18.2 21.7 18.0 19.8 14.5 14.3 UK 12.0 11.7 12.6 12.8 14.3 12.3 11.5 15.1 17.2 18.6 18.8 16.1 10.2 12.7 Europe 12.5 14.3 14.0 14.7 14.1 12.8 11.5 15.7 17.8 20.8 18.2 17.0 11.8 13.6 EEMEA5 11.1 7.8 9.0 10.9 7.6 9.0 9.2 8.6 18.9 13.9 41.6 14.2 11.6 9.7

Enterprise Value / Sales

Current Values Basic Industries Capital Goods Consumer Cyclicals Consumer Staples Energy 2 Financials of which: Banks Insurance Healthcare Technology Media Telecoms Utilities Market ex Financials Eur ex UK UK 1.0 1.5 0.8 0.9 0.9 0.9 1.2 1.5 0.7 0.6 NA NA NA NA NA NA 2.6 2.7 0.9 2.3 1.3 1.5 1.8 2.1 1.0 1.5 1.1 1.1 Europe 1.1 0.8 0.9 1.3 0.6 NA NA NA 2.6 1.0 1.4 1.9 1.1 1.1 EEMEA 2.0 0.7 0.8 0.9 0.8 NA NA NA 2.2 2.2 3.8 1.7 1.2 1.1 Post 1990 Average Basic Industries Capital Goods Consumer Cyclicals Consumer Staples Energy Financials2 of which: Banks Insurance Healthcare Technology Media Telecoms Utilities Market ex Financials Eur ex UK UK 1.0 1.5 0.8 0.9 0.8 1.1 1.1 1.3 1.0 1.1 NA NA NA NA NA NA 3.1 3.6 1.9 1.7 1.7 2.2 2.5 2.6 1.8 1.7 1.1 1.4 Europe 1.2 0.8 0.9 1.2 1.1 NA NA NA 3.3 1.9 1.9 2.4 1.7 1.2 EEMEA5 2.1 0.8 0.7 0.6 1.2 NA NA NA 4.1 1.9 1.8 2.8 1.8 1.3

Enterprise Value / EBITDA

Current Values Basic Industries Capital Goods Consumer Cyclicals Consumer Staples Energy 2 Financials of which: Banks Insurance Healthcare Technology Media Telecoms Utilities Market ex Financials Eur ex UK 6.2 5.9 5.5 8.5 2.9 NA NA NA 8.8 5.6 5.7 5.0 5.1 5.7 UK 4.3 4.0 7.8 9.6 4.4 NA NA NA 5.8 13.9 8.6 5.5 7.9 5.7 Europe 5.4 5.7 5.8 8.9 3.6 NA NA NA 7.7 6.4 6.5 5.2 5.6 5.7 EEMEA 6.6 6.1 8.3 10.1 3.3 NA NA NA 7.7 12.0 13.5 4.5 4.3 5.0 Post 1990 Average Basic Industries Capital Goods Consumer Cyclicals Consumer Staples Energy Financials2 of which: Banks Insurance Healthcare Technology Media Telecoms Utilities Market ex Financials Eur ex UK 6.1 6.8 6.7 8.7 5.3 NA NA NA 11.4 12.0 8.1 5.5 7.0 6.9 UK 7.5 7.1 8.5 8.6 7.1 NA NA NA 12.0 11.5 10.6 6.9 6.5 7.7 Europe 6.5 6.8 7.1 8.6 6.0 NA NA NA 11.6 11.7 8.9 5.9 6.7 7.1 EEMEA5 7.5 5.7 6.3 6.6 5.1 NA NA NA 16.2 11.1 8.7 7.6 6.5 6.3

1 2

Ratos r l ear ngs bef e goodw ilam oriaton i efect ni or l ts i Fi nanci s excl ng RealEsat al udi te 5 Pos 2000 aver t age f EEM EA r on or egi

Source: FTSE, Worldscope, IBES, Nomura Strategy research

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October 9, 2011

European valuation and profitability

Return on Capital Employed4 (ROE4 Financials)
Current Values Basic Industries Capital Goods Consumer Cyclicals Consumer Staples Energy 1,2 Financials 2 of which: Banks 2 Insurance Healthcare Technology Media Telecoms Utilities Market ex Financials Eur ex UK 7.3 9.0 6.8 10.5 12.1 9.3 8.4 11.9 14.9 13.0 14.8 10.2 7.4 9.5 UK Europe EEMEA 15.7 9.9 13.1 15.2 9.7 7.8 13.2 7.8 13.8 13.4 11.6 19.1 7.1 9.4 12.6 8.5 9.1 17.1 7.1 8.1 17.1 13.2 12.1 21.1 25.7 17.7 15.1 13.7 13.2 8.8 13.4 13.9 14.4 13.4 11.7 13.9 10.2 7.9 4.6 12.6 10.5 12.5 Post 1990 Average Basic Industries Capital Goods Consumer Cyclicals Consumer Staples Energy Financials1,2 of which: Banks2 Insurance2 Healthcare Technology Media Telecoms Utilities Market ex Financials Eur ex UK 9.1 8.2 6.5 11.8 12.6 9.7 9.3 11.4 13.4 10.6 12.1 8.8 7.8 9.0 UK Europe EEMEA5 11.7 9.8 14.7 10.4 8.6 8.6 9.3 7.1 15.8 12.4 12.0 19.4 12.5 12.6 17.7 11.9 10.2 15.6 14.6 10.4 15.9 11.4 11.4 19.9 26.7 17.0 14.0 12.8 11.1 9.0 16.1 13.8 13.4 9.4 9.3 13.4 9.0 8.1 5.9 11.4 9.6 13.8

Enterprise Value / Capital Employed (P/BV Financials)

Current Values Basic Industries Capital Goods Consumer Cyclicals Consumer Staples Energy 1,3 Financials 3 of which: Banks 3 Insurance Healthcare Technology Media Telecoms Utilities Market ex Financials Eur ex UK UK Europe EEMEA 1.1 1.2 1.1 1.7 1.1 1.7 1.2 0.9 1.0 1.6 1.1 1.6 1.8 2.1 1.9 3.2 1.0 1.2 1.1 0.8 0.6 0.7 0.6 1.3 0.5 0.7 0.5 1.3 0.7 0.9 0.8 1.4 1.9 2.9 2.1 1.4 1.3 2.6 1.4 1.4 1.2 1.5 1.3 2.2 1.2 1.0 1.2 1.5 0.8 1.4 0.9 0.7 1.2 1.5 1.3 1.1 Post 1990 Average Eur ex UK Basic Industries Capital Goods Consumer Cyclicals Consumer Staples Energy Financials1,3 of which: Banks3 Insurance3 Healthcare Technology Media Telecoms Utilities Market ex Financials
1.3 1.3 1.2 2.1 1.6 1.8 1.6 2.7 2.6 3.0 2.1 1.4 1.3 1.5

UK
1.6 1.5 1.6 2.0 2.0 1.8 2.0 2.0 5.5 14.4 2.8 1.5 1.2 1.8

Europe
1.4 1.3 1.2 2.0 1.8 1.8 1.7 2.5 3.4 2.9 2.4 1.4 1.2 1.6

EEMEA5
1.9 1.0 1.7 2.2 1.3 1.9 2.1 1.5 2.9 1.7 1.8 2.3 0.9 1.5

1 2 3 4 5

Fi nanci s excl ng RealEsat al udi te Ret n on equiy us f Fi ur t ed or nanci s al. Prce t book val us f Fi i o ue ed or nanci s al. RO E and RoC E cal at pr goodw iland pr exceptonal. cul ed e l e i s Pos 2000 aver t age f EEM EA r on or egi

Source: FTSE, Worldscope, IBES, Nomura Strategy research

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October 9, 2011

Appendix A-1
Analyst Certification
I, Ian Scott, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

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Important Disclosures
Online availability of research and additional conflict-of-interest disclosures
Nomura Equity Research is available on nomuranow.com, Bloomberg, Capital IQ, Factset, Reuters and ThomsonOne. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://go.nomuranow.com/research/globalresearchportal or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport-eu@nomura.com for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector.

Distribution of ratings (US)

The distribution of all ratings published by Nomura US Equity Research is as follows: 39% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 8% of companies with this rating are investment banking clients of the Nomura Group*. 54% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 3% of companies with this rating are investment banking clients of the Nomura Group*. 7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 September 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Distribution of ratings (Global)

The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*. 41% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 50% of companies with this rating are investment banking clients of the Nomura Group*. 10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 20% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 September 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009
STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company.

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Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008)
STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008
STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

Target Price
A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

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Disclaimers
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