Europe

Global Investor 1.14, August 2014
Expert know-how for Credit Suisse investment clients
Europe
From crisis to opportunity
Oliver Adler Charting a sustainable path to European reform and recovery.
Lorenzo Bini Smaghi
animal spirits. Harold James How to ensure truly effective capital markets
across borders? Think boldly. Joe Prendergast
The milk is in the coffee and cannot now be practically separated.

Important disclosures are found in the Disclosure appendix.
Credit Suisse does and seeks to do business with companies covered in its research

GLOBAL INVESTOR 1.14 — 03
Photos: Martin Stollenwerk, Chou Chiang
Responsible for coordinating the focus
themes in this issue:
Nilanjan Das, CFA, is Research Editor
of Global Investor and Head of Global
Research KPO. He leads a crossasset
research team covering global
equities, bonds, currencies, economic
and thematic research. He joined
Credit Suisse in 2009, bringing 15 years
of research and banking experience,
including positions at J. P. Morgan Global
Research and ICICI Bank. He is a
postgraduate from the Indian Institute
of Management Bangalore.
Dan Scott is a research analyst with over
ten years of capital market experience.
Dan is in charge of key Investment
Strategy & Research initiatives including
the Credit Suisse Top Investment Ideas,
Dividend Strategies, the Top 30
(a managed portfolio that reflects Credit
Suisse’s equity strategy), the M&A15
(a list of equities set to benefit from
M&A activity), and is the metals and
mining sector specialist.
The Eurozone economy has now emerged from the recession that
followed the 2012 crisis. The pace of growth is still slow, but prospects
for future acceleration are underpinned by ongoing monetary easing
by the European Central Bank, a winding-down of earlier fiscal austerity
and the gradual realization of gains from structural reforms that
are transforming the labor cost competitiveness of Spain and other
countries. Though recent European elections showed some dissatisfaction
with the Eurozone, the results do not fundamentally call the
project into question. Given its size, we expect a gradually strengthening
Europe to play a crucial role in the global economic recovery.
In this issue of Global Investor, we explore the impact of Europe’s
improving macroeconomic outlook sector by sector. Broadly speaking,
in equities we anticipate an acceleration in earnings growth through
the end of the year. The automotive sector is a good example. We
examine why it is that German car companies are outperforming their
French counterparts. The pharmaceutical and technology sectors
represent another area of European strength, with leaders ranging
from business software to semiconductors. In telecoms, the EU’s
“single market” initiative promises to promote investment in future
technologies through consolidation. Residential real estate prices in
Spain show some signs of bottoming, but have not yet turned decisively;
the French market remains weak, while Germany’s is strong.
Energy is a particularly hot topic for Europe, as higher prices have
the potential to derail the recovery. Finally, disruptive innovation
brought about by financial technology start-ups is shaking up traditional
banking. How can banks compete in this brave new world?
The issue begins with an overview of the state of the “European”
project and the reforms needed to sustain it. In a separate, witty “chat”
with the euro, our Head of Financial Markets Analysis discusses the
currency’s origins and how likely it is to weather further crises. An
interview with Lorenzo Bini Smaghi, former member of the Governing
Board of the European Central Bank, sheds further light on the challenges
to full European integration. Finally, Harold James, a noted
financial historian based at Princeton, puts the case for an effective
fiscal apparatus for Europe, as well as possible pathways to growth.
Giles Keating, Head of Research and Deputy Global CIO

GLOBAL INVESTOR 1.14 — 04
Reform agenda
Toward a less imperfect
monetary union
The Eurozone lacked robust institutions to deal with the fallout from the Greek debt default and the
financial contagion that followed. In response to the crisis, the establishment of such institutions
has begun in earnest. However, the reform and economic recovery process of some of the member
states is far from complete.
TEXT OLIVER ADLER
Head of Economic Research
Long before concrete plans for European Economic and
Monetary Union (EMU) were developed in the mid-1990s, the
concept of a single currency had been perceived by many
as a means to boost not just economic, but above all political
convergence in Europe. Indeed, it proved easier to reach agreement
on the high-level principle of a common currency than on the “nittygritty”
measures and reforms that would ultimately be needed to make
it work – such as the integration and coordination of banking regulation
and common fiscal policy. Consequently, the euro was launched
in 2002 without most of this crucial institutional structure. Some saw
this as a potentially fatal omission, while others viewed it as a gap
that could not have been filled beforehand, but which participants
would be able to tackle later to keep the euro together.
In the first years of its existence, the serious “design flaws” of the
monetary union were well disguised: Germany had entered the union
with an overvalued exchange rate, and the “periphery” generally with
undervalued exchange rates. While Germany struggled to regain competitiveness,
the periphery economies were boosted. The economic
upswing in the south, combined with their seemingly cheap assets,
attracted enormous capital inflows not just from Germany, but from
other surplus countries and regions as well.
Credit expansion further boosted economic growth in the periphery,
but also drove up wages and prices, and generated asset bubbles
of varying dimensions – the Spanish and Irish housing boom being the
most dramatic. By the time the global financial crisis hit, the periphery
had become uncompetitive as well as over-levered, and thus highly
vulnerable to economic or financial shocks. The event that triggered
the EMU crisis was the insolvency of the Greek government in early
2010. It not only proved to investors that the rules for enforcing fiscal
discipline (the infamous “Maastricht criteria”) had failed, but also revealed
the severe lack of stabilizing institutions in EMU.
The history of the EMU crisis depicted on pages 6 to 7 is thus one
of a prolonged struggle between member states over how to construct
the missing institutions, what powers to give them and how to fund
them. This process was uneven, but the outcome, in our view, is a
more complete – though still imperfect – monetary union and thus
2014
EU Countries with euro
effectively a major step toward a political union. Contrary to the
predictions of many skeptics, the institutions of EMU have been
strengthened rather than weakened by the crisis.
As we show on the following pages, however, progress in individual
member states is far more “patchy.” Some countries, such as
Spain, have made considerable strides in reforming their labor markets
and their fiscal institutions. Others, notably Italy, and also France,
have a much longer way to go. Meanwhile, a still partly dysfunctional
and far from integrated Eurozone banking system and capital market
remains a hindrance to a vigorous and synchronous economic recovery.
That said, the ascendance of the common central bank and financial
regulator should continue to drive this integration process, while also
EEA

GLOBAL INVESTOR 1.14 — 05
THE CRISIS
4
SPAIN
GERMANY
EUROZONE
FRANCE
ITALY
GREECE
2007
2011
2014
2
0
Debt less than
60% of GDP
and budget
below
% of GDP
The crisis in the Eurozone is often regarded as
primarily resulting from imbalances in the member
is only part of the story. In fact, most governments,
with the exception of Greece, were running
government, in particular, generated a surplus in
2007
of EMU countries was no worse than that of other
advanced economies, such as the UK, not to men-
in the wake of the crisis itself. The true story of the
EMU
–2
–4
–6
–8
–10
–12
Source: EU Commission, Datastream, Credit Suisse
0 40 80 120 160 200
… but rather a balance of payments crisis
Current account balances of selected Eurozone members
300
200
100
0
–100
–200
–300
Germany France Spain Greece Eurozone
Source: Datastream, Credit Suisse
1997 1999 2001 2003 2005 2007 2009 2011 2013
With devaluation and currency risk apparently
removed due to the creation of the single
accelerated sharply from the mid-2000s on
Accelerating import growth
needed to be funded internationally. Given
higher yields on government bonds and other
investments, attracting the funds was quite
easy. Low global interest rates, promulgated
by the Federal Reserve’s easy monetary
stance, added to the attractiveness of this
trade, while savings surpluses in Germany
and emerging markets were seeking an
outlet and better returns.
its peak in 2008. As the global recession hit
and the general deleveraging process set in,
contraction only started about a year after the
Greek blowup. Private funds dried up as fears
via the central banks’ Target2 system made
up for some of the remaining shortfall. In
addition, demand for external capital dropped
sharply in response to the crisis and recession
itself.
In the meantime, the periphery has
started to generate surpluses, i.e. it has begun
to export capital. This is, in part, due
to the improved competitiveness and trade
surpluses, but also results from ongoing
private sector deleveraging in the periphery.
Unless domestic demand picks up much
more decisively, the Eurozone as a whole will
continue to generate surpluses and export
capital to the rest of the world, and contribute
to what former Fed Chairman Ben Bernanke
has called the global “savings glut.”
Real estate bubbles,
busts and stabilization
Economic boom, falling interest rates, easy lending
estate bubbles within the Eurozone. Not all countries were
affected similarly. Neither the German nor the French
Spain, Ireland or the Netherlands. Tougher regulators
gage rates decline. The latest data also show a slight
100
90
80
70
60
50
40
30
Source: Bloomberg, Datastream, Credit Suisse
–10 –8 –6 –4 –2 0 2 4 6 8

GLOBAL INVESTOR 1.14 — 06
50
Ten
45
40
5
0
25
20
15
Lehman Brothers
Mario Draghi, 26 July 2012
“
will do
what is
needed …”
Fitch downgrades
Greece from
A to BBB+.
10 May 2010
EU
agree on a temporary
EUR 500 bn facility
stability, the European
Financial Stability
Facility (EFSF), and
on the creation of
a permanent successor
to it, the European
Stability Mechanism
(ESM). The IMF commits
another EUR 250 bn.
The ECB unveils its
Securities Markets
Programme (SMP).
Ireland is bailed out by
the EU and IMF.
6 April 2011
Portugal asks for
an EU bailout.
10
5
GREECE
ITALY
PORTUGAL
SPAIN
19 October 2009
The newly elected
Greek government announces
a budget
shortfall of 12.7%
of GDP, more than
twice what was
initially expected.
0
Source: Bloomberg, Credit Suisse
SEP 0 JAN 09 JAN 10 JAN 11

GLOBAL INVESTOR 1.14 — 07
The ECB launches
ing
operation (LTRO),
providing unlimited
credit to banks.
9 March 2012
Greece reaches
an agreement with
investors to restructure
EUR 200 bn of
its debt.
9 June 2012
Spain requests support
from the EU to support
its banking sector.
26 July 2012
ECB President Mario
Draghi pledges to
“do whatever it takes”
to save the euro
currency.
José Manuel Barroso, 7 January 201
“
can say that the
threat against
the euro has
essentially been
The European Stability
Mechanism (ESM),
situated in Luxembourg,
is formally launched.
Latvia joins
the Eurozone.
The European
Parliament approves
the Single Supervisory
Mechanism (SSM)
for banks.
19 September 2011
S&P downgrades
Italy’s debt from
A+ to A–.
José Manuel Barroso
declares the euro
crisis is over.
7 February 2014
The German
Constitutional Court
expresses reservations
on the ECB’s
bond-buying
program OMT but
delegates judgment
to the European
Court of Justice.
JAN 12 JAN 14
5 June 2014
The ECB
launches socalled
targeted
long-term
operations
(TLTROs) to
boost bank
lending to small
and mediumsized
companies.
Photos: AFP/Getty Images, Getty Images, NY Daily News/Getty Images, Bloomberg/Getty Images

GLOBAL INVESTOR 1.14 —
ADJUSTMENT REFORM AND RECOVERY
As noted above, the competitiveness of the periphery countries had
cy’s
existence. Labor costs had shot up substantially, and productivity
growth had not kept up with costs. As a result, unit labor costs
among the EMU countries drifted apart: between 2000 and 2008,
French, Italian and Spanish unit labor costs had risen relative to
Germany’s by 20%, 30% and 35%, respectively. The consequence
was that these economies were affected far more severely by the
global downturn in 2008– 09
within the Eurozone had not yet really erupted. When they did after
2010
was accentuated. Between the trough in the global economy in mid-
2009 and mid-2013, the gap in overall production levels between,
for example, Spain and Germany had widened by a stunning 35%
. In the less cyclical (but far larger) services sectors,
the divergence was less pronounced and therefore the divergence
in per capita income between the north and south over the course of
the crisis was not quite as dramatic. Yet, the massive gap in industrial
production which opened over these years is one measure of
the fact that the economic dominance of Germany within EMU has
been enormously accentuated by the crisis. Even though most
countries have seen more or less clear signs of economic recovery
since mid-2013, this gap will take years to close, if at all.
Industrial production
120
110
100
90
80
70
Source: Datastream, Credit Suisse
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Germany France Italy Spain Greece Portugal Netherlands
Eurozone
EMU countries
crisis led to a disruption and fragmentation of
Common standards and regulation, com mon
would not lead to renewed fragmentation.
Agreement in principle to push ahead with
The ECB’s new building in Frankfurt is currently under construction.
SSMECB
SRM
deposit insurance scheme that would pool
runs do not occur. The SSM is to control and
enforce adherence to rules, regulations and
SRM is to ensure
own feet are wound down in a timely way and
said, the SRM
EUR 50 billion at its disposal for the recapital
ESM
SRM. It was also
moral hazard, it could lead to further delays
for EMU
accelerate the cleanup. In the long run,
economic growth.

GLOBAL INVESTOR 1.14 — 09
CONCLUSIONS
in response to crisis
The Eurozone crisis has clearly triggered
a series of reform efforts in
many countries. For one, the countries
that were rescued by the Troika (European
Union, International Monetary
Fund and ECB) had to submit to significant
reform programs in the context
of the bailout agreements. In other
countries, notably Italy, market pressures
and the associated fear of being
subjected to such a formal program
led governments to adopt some
reforms. Finally, the slump in the
economy as well as weak poll results
have added to reform pressure in
countries such as France. In the end,
the “proof of the pudding” as regards
the reach and effectiveness of reforms
will be economic performance.
To assess where countries stand on
reforms, we have devised a reform
“heat map” It compares
indicators devised by the OECD and
the World Bank which measure the
overall ease of doing business as well
as the restrictiveness of both labor
and product market regulation. Additionally,
we included a direct and
tion,
i. e. the underlying primary
balance and the retirement age.
What is apparent from the picture is
that none of the peripheral economies
has gone as far with reform efforts
and market liberalization as, say,
Margaret Thatcher did in the UK or
Estonia implemented after its
post-2008 crisis.
Reform map
Ease of
doing business
regulation
Employment
protection
Minimum wage
ment underlying
primary balances
retirement age
Greece
Ireland
Portugal
Spain
Italy
Estonia
Czech Republic
Hungary
Poland
France
Germany
United Kingdom
Reforms
complete/
Reforms
initiated/
under way
Reforms
ECB will remain the central anchor of stability
Photos: Helmut Vogler/Fotolia, petra b./Fotolia
The SRM and the ESM are the two new
Eurozone-wide financial organizations that
have the mandate to prevent or rapidly
resolve financial crises like the one we have
witnessed over the past years (in contrast,
the European Bank for Reconstruction and
Development and the European Investment
Bank have the function to foster long-term
investment in Europe). The ESM and SRM
can thus be thought of as a form of fiscal
stabilizer. However, in contrast to how such
stabilizers function within national borders,
they do not fulfill their role automatically.
Taxes, be they assessed on income or
expenditures, act to stabilize the business
cycle as taxes charged are reduced when
incomes decline in a downturn, and vice
versa. The same goes for fiscal stabilizers
on the expenditure side, such as unemployment
insurance. Eurozone-wide tax or
expenditure schemes would act to reduce
the divergence of business cycles within
the zone as a whole, which would, for
example, arise as a result of countryspecific
economic disturbances. However,
such common schemes would of course
also imply substantial transfers between
member states. It seems quite unlikely
for the foreseeable future that solidarity
among EMU countries will develop sufficiently
to allow for the introduction of
such schemes. This, in turn, implies that
the ECB will need to continue playing the
dominant role in maintaining stability
within the Eurozone. That said, opposition
to tools such as the so-called Outright
Monetary Transactions program of the
ECB will likely restrain the ECB in its
actions to some extent.

GLOBAL INVESTOR 1.14 — 10
How much growth ahead?
The economic outlook for the Eurozone has clearly improved since
mid-2013, and we expect the economic recovery to gradually strengthen
over the coming years, absent major external shocks. That said,
the outlook for both medium- and longer-term growth remains somewhat
subdued. Over the medium term, a still very weak banking system
is likely to hold back the upturn. With banks still tending to reduce
exposure, and regulators pushing them to raise capital, lending to
the all-important small and medium-sized enterprise (SME) sector is
likely to pick up quite slowly. Loan growth was still negative at the
start of 2014 in countries such as Italy and Spain This may
in part be due to weak demand, and also a result of capital market
finance replacing bank loans. At the same time, interest rates charged
on SME loans are declining only very slowly in the periphery. It remains
to be seen to what extent the measures announced by the ECB in
May, in particular the launch of so-called TLTROs (targeted long-term
% YoY
40
30
20
10
0
–10
–20
–30
2006 2007 2008 2009 2010 2011 2012 2013 2014
Germany France Italy Spain Eurozone
Source: Datastream, Credit Suisse
Pronouncing the verdict on the European Stability Mechanism, 2014.
refinancing operations, i.e. preferential loans to banks to boost their
lending to private sector companies), will aid the recovery. A more
forceful policy stance by the ECB that pushes down interest rates
along the entire yield curve may still be needed.
Second, demographics suggest that the outlook for growth is
rather subdued over the longer term. While projections for population
growth are less dire than in Japan, not least because of still strong
immigration in Europe, demographics will not be a growth driver.
Third, as noted, productivity and employment-enhancing reform efforts
remain patchy in many Eurozone economies. Finally, high government
debt combined with high household debt in some countries (such as
Spain) implies that both the government and private citizens will need
to maintain high savings rates for a prolonged period of time. High
savings would, of course, provide an ever greater pool of investable
funds. So, the ultimate question is whether entrepreneurial spirit
returns to Europe in a meaningful way. Clearly, greater stability in the
monetary union is a prerequisite for higher investment spending, but
it remains to be seen to what extent private investors will pick up the
baton. Given the weakness of both private and especially public sector
investment since the start of the crisis, significant and profitable
investment opportunities would certainly appear to exist. In the following
sections, our research analysts provide bottom-up insights
Photo: Kai Pfaffenbach/Reuters
EUROPE
FROM CRISIS TO OPPORTUNITY

GLOBAL INVESTOR 1.14 — 11
Contents
Global Investor 1.14
12
Doing what it takes
Europe has strengthened after every crisis.
Lorenzo Bini Smaghi talks reform, fiscal
discipline – and his guarded optimism.
15
Room to rise
The gradual macroeconomic recovery
should give European equities further
upward potential, says Michael Gähler.
18
Banking today
The banking sector was hit hard by the
Christine Schmid,
there’s a paradigm shift to contend with.
22
German cars in top gear
Audi, BMW and Mercedes-Benz are on a
roll. But, as Reto Hess explains, French
automakers don’t have the same cachet.
24
Boom, bust, recovery
Dominik Garcia and Philip Kaufmann
point out that European real estate
markets may be on the rise.
26
A culture of innovation
According to Thomas C. Kaufmann and
Ulrich Kaiser, Europe scores well when it
comes to investing in its future – be it
through venture capital, R&D or education.
30
Airports – gates to the world
Airport usage is set to take off in Europe
over the next 15 years. Reto Hess, Romano
Monsch and Stefanie Kluge look at who’ll
likely benefit, and who might not.
32
Crisis and convergence
As the worst of the euro crisis begins
to wane, Harold James examines the
need for a coherent European response.
36
Corporates to loosen
their purse strings
Economic trends are improving.
Michael Weber reports that companies
seem ready to pursue growth.
40
Money talks
The euro seldom gives interviews.
Joe Prendergast “chats” with the single
currency about its past, present and future.
42
Has Spanish competitiveness
become more German?
Spain is taking the bull by the horns.
Björn Eberhardt and Javier J. Lodeiro
highlight how labor reforms are working.
44
Spain’s new businesses:
Small, but fierce
Spanish SMEs are flourishing as the
economic recovery progresses. Avelina
Frías looks at two success stories.
52
The scope of energy security
in Europe
Europe’s heavy energy dependence gives
some cause for concern. Markus Stierli
explores the continent’s various options.
56
European telecom sector ready
to deploy cash
Some 70 telecoms service 28 countries in
Europe. Uwe Neumann reports on the
move from fragmentation to consolidation.
59
Ratings and risks
What exactly is an asset worth? Antonios
Koutsoukis and James Gavin explain
how it’s done, and why it’s no easy task.
Disclaimer > Page 65

GLOBAL INVESTOR 1.14 — 12
Photo: Hollandse Hoogte/laif
Reform agenda
Doing what
it takes

GLOBAL INVESTOR 1.14 — 13 >
Europe has strengthened after every crisis and become
more competitive, observes Lorenzo Bini Smaghi. Moreover,
the incentive to move forward is high. But many challenges
lie along the path to full integration. Their solution is complicated
by complacency resulting from the improved economic
situation and reform fatigue, both at the level of the euro
area and within the member states.
INTERVIEW BY OLIVER ADLER
Head of Economic Research
Lorenzo Bini Smaghi
takes stock of the
current state of affairs
relating to the Economic
and Monetary
Union (EMU), economic
reform and
fiscal discipline,
and shares his insights
on reviving growth
with in the Eurozone.
Oliver Adler: Six years on from the
collapse of Lehman Brothers, almost two
years from Mr. Draghi’s “We will do what
is needed,” and with periphery bond
yields back to precrisis levels, how do you
assess the chances for continuing sta bilization,
or conversely, the risks of a
resurgence of the financial crisis within
the monetary union?
Lorenzo Bini Smaghi: Financial markets
are always ahead, but this time they may
have moved from being overly pessimistic
about the ability of the euro area to overcome
the crisis to now being overly optimistic.
Some imbalances have been corrected,
but not all. Growth is still sluggish in the
periphery, and public debt has not yet started
to fall relative to GDP. Several countries
have yet to implement structural reforms
to strengthen their growth potential and
improve competitiveness. In addition, there
are several sources of external fragility,
particularly in emerging markets, and a
resurgence of financial tensions cannot be
excluded. There is still a long way to go
before we can safely say that we are out
of the crisis.
What is the outlook for political cooperation
and ongoing reform within the European
Union, especially in view of the outcome of
the European elections?
Lorenzo Bini Smaghi: There is a risk of
complacency insofar as the improved
financial environment relieves the pressure
on politicians. There is reform fatigue with
respect to the completion of the institutional
framework of the euro area and economic
reforms in the member states. I don’t
think that some euro skeptics being elected
in the new European Parliament is necessarily
negative, to the extent that it should
urge the pro-European parties to get
their act together and push more forcefully
toward greater integration. The first battle
for Parliament will be the choice of the next
European Commission president.
What is the state of institutional reforms
at the EMU level? What are the main reform
achievements? What more is needed?
Lorenzo Bini Smaghi: The impact of
banking union, in particular the single
supervisor, is in my view a key change –
not just economically, but especially in
political terms. It will drastically change
the financial environment in the euro
area. However, more needs to be done to
ensure that there is a credible backstop
in case of systemic crisis. We also need
to strengthen the safety net for countries
under going macroeconomic adjustment
be cause such adjustment takes time, with
high unemployment in several countries.
The pro-cyclical component of macro
policies must be reduced if adjustment is
to succeed.
Do you worry about the comingling
of monetary policy and regulatory powers
within the European Central Bank?
Lorenzo Bini Smaghi: I do not. The
s eparation between supervisory powers
and monetary policy has, in fact, been
a handicap during the crisis, because the
ECB could not assess independently
whether the banking system was sound
in the various countries. If the central
bank is independent, there is no risk that
monetary policy will be polluted by the
exercise of supervisory powers by the
same institution.
Is fiscal union critical to achieving a stable
monetary union?
Lorenzo Bini Smaghi: I am not convinced
that we need a fully fledged fiscal union
like in the USA, but we certainly need

GLOBAL INVESTOR 1.14 — 14
a strong safety net in case of asymmetric
shocks. I mentioned earlier that countries
must continue implementing reforms,
for instance in the labor market, which will
inevitably take time before they produce
their effects. This adjustment should be
reinforced through some form of transfers,
but only on the condition that the adjustment
takes place.
Will the fiscal stability and growth pact
remain key elements of the EMU? Can
these rules be enforced absent a deeper
political union?
Lorenzo Bini Smaghi: Political union is
the result of the implementation of common
rules, with exceptions and interpretations.
This was the case in 2003, for instance,
when more leeway was given to Germany
and France. It was a political decision.
Also, the recent decision to give more
leeway to France and Spain was a political
decision. The decision-making process
might not be effective and democratic,
as the European Parliament is not involved,
for instance, but the decision itself is
highly political because it impacts the fiscal
policy of the member states.
What is the state of economic reform in
the various member countries of the EMU?
Which elements of reform are key to a revival
of growth? Is the German model the one
that needs to be applied across the EMU?
Lorenzo Bini Smaghi: Some countries
have implemented important reforms, while
others are just starting. I don’t think that
we all need to be Germans. But for sure we
have to avoid the accumulation of excess
private and public debt, which ultimately
means that remunerations must grow in line
with productivity. These constraints must
be entrenched in the functioning of the
economic and social system, which is the
case in countries like Germany, but not
yet in other countries.
In particular, how do you assess the outlook
for your home country Italy?
Lorenzo Bini Smaghi: Italy has started
to implement reforms of the institutional
system, in particular the electoral law
and the bicameral parliamentary system,
which are very inefficient. It’s a good
starting point. But other reforms need to
follow, affecting the labor market, bureaucracy,
the judicial system, education,
taxation. It’s a long agenda.
You seem to favor a policy of quantitative
easing by the ECB to combat the risk of
deflation. What form should it take? How
“I am not
convinced that
we need a
like in the
USA
certainly need
a strong
safety net in
case of
asymmetric
shocks.”
LORENZO BINI SMAGHI
LORENZO BINI SMAGHI
at Harvard University’s Weatherhead Center
for International Affairs. He has a PhD in
Economics from the University of Chicago.
European Central Bank.
would you respond to critics who argue that
this would further undermine the no-bailout
principle and generate moral hazard by
weakening the need for fiscal discipline?
Lorenzo Bini Smaghi: There is now no
room left for interest rate cuts, while longterm
refinancing operations have been
stretched to four years and targeted to
financing SMEs (small and medium-sized
enterprises). The next step will have
to be asset purchases, either private – but
there may not be enough of these assets –
or government bonds, which is QE.
The ECB and others are suggesting that
a key to reviving growth in the Eurozone is
to create an integrated capital market.
Lorenzo Bini Smaghi: I fully agree,
but it’s not easy. Revitalizing a market is
complex. We need public institutions that
can act as brokers, or a group of private
institutions willing to create an initial
mass of trans actions that can generate
the incentive to further integrate markets.
Regulation is also needed to encourage
investment diversification, especially in
stocks (rather than in bonds).
Where do you see Europe, and in particular
the EMU, ten years from now?
Lorenzo Bini Smaghi: Europe has
strengthened after each crisis, and become
more competitive. I tend to be more optimistic
over the medium term than the very
short term, where I see reform fatigue.
The more Europe integrates, the greater
is the cost of disintegrating it, and thus
the higher the incentive to move forward.
It will take time, but, after all, it took
the USA over a century to create its own
fed eral central bank.
What role will, and can, the euro play
as a global reserve currency?
Lorenzo Bini Smaghi: The euro is
already a reserve currency, and we can see
the effects in the recent portfolio rebalancing
at the global level. This is a burden over
the short term because it keeps the value
of the euro higher.
Will a “two-speed” Europe persist? And
can it endure? In particular, how do you see
the relationship between the EMU and
Britain evolving?
Lorenzo Bini Smaghi: It is increasingly
difficult to be outside the euro but in the
EU. The euro is the core of further integration,
as we have seen with the banking
union and the fiscal compact. The position
of the in-betweens is getting weaker and

GLOBAL INVESTOR 1.14 —15
Earnings in Europe
160
140
Room
to rise
European equities have further upside potential. A major driver
for the coming quarters will be earnings growth as European
companies benefit from the gradual macroeconomic recovery.
120
Index (1 January 2007 = 100 )
100
80
60
40
MSCI USA total return
MSCI Europe total return
2007 2008 2009 2010
2011
2012 2013 2014
01_Total return MSCI Europe vs. MSCI USA, in local currency
This chart highlights the underperformance of the MSCI Europe versus the MSCI USA during the sovereign debt crisis. While both indices were
able to regain part of their lost valuation between 2009 and mid-2011, the European began to underperform their US peers thereafter. Since 2012,
European equities have started to perform well again, but still have room to recover further. Source: Datastream, Credit Suisse / IDC

GLOBAL INVESTOR 1.14 —16
We believe that the macroeconomic
contraction in the Eurozone
has bottomed out and
should see further stabilization
over the next few quarters. Headwinds from
austerity measures are easing, while the long
period of low capital spending should allow
for investments to catch up. Macroeconomic
data in the Eurozone already reveals that consumer
sentiment and investment spending
have improved. Also, the recent easing actions
by the European Central Bank (ECB) signal
a dovish stance and will diminish funding
costs for banks, while reducing further appreciation
pressure on the euro.
European equities have re-rated
02_The phases of a valuation cycle
A valuation cycle can be divided into four phases that are characterized by how earnings develop
against multiples. Source: Credit Suisse
Multiple
expansion
Multiple
contraction
Optimism – P/E expands:
Price increases sharply,
Pessimism – P/E falls:
Price falls, earnings
Fantasy – P/E expands:
Price increases strongly,
earnings grow
but at a slower pace
Reality – P/E falls:
earnings recover
Stock markets in Europe have not remained
unaffected by the improving economic conditions.
Lagging the recovery in the USA, they
have started to perform well since early 2012,
and we expect them to continue deliv ering
solid returns (see Figure 1). The strong performance
has been driven by an expansion
of valuation multiples, while earnings have
still been muted (see Figure 3). This is consistent
with the “optimism” phase of the valuation
cycle (see Figure 2). Although earn ings
growth has been lackluster, investors have
been willing to pay for expected future
earnings growth, thus pushing up valuation
multiples.
Markets entering the reality phase
In our view, markets are now at the stage
where the valuation expansion has to be
backed by actual earnings growth (the “reality”
phase) – making earnings growth the key
driv er for further higher equity levels.
Following a long period of negative earnings
revisions for the MSCI Europe, we are
more constructive on earnings growth. Indeed,
there are several factors at play that
should support earnings. Among these, we
03_Twelve-month forward
P/E MSCI Europe
This chart puts the current valuation of the MSCI
Europe into perspective with its history. Multiples
have recovered from their lows in 2011 and are
now slightly above their long-term historical
average. However, there is still some scope for
multiples to rise further even as we view earnings
growth as the main driver for performance at
this stage. Source: Datastream, Credit Suisse / IDC
04_EMU manufacturing PMI
vs. 12-month forward earnings
MSCI Europe
This chart indicates how earnings follow the
development of PMIs with a certain time lag.
There is some correlation, but since 2013 it broke
down as the earnings growth did not catch up
with the PMI expansion. Given the recent widening
of the two lines, we view this as an indication
that earnings growth will pick up again.
Source: Bloomberg, Datastream, Credit Suisse / IDC
12-month forward P/E
24
22
20
18
16
14
12
10
8
6
Index
60
55
50
45
40
35
30
% YoY
50
40
30
20
10
0
–10
–20
–30
–40
–50
1988 1992 1996 2000 2004 2008
2012
2006 2008 2010 2012 2014
MSCI Europe
Average
+1 standard deviation
–1 standard deviation
EMU manufacturing PMI (l.h.s.)
MSCI Europe – 12M forward earnings (r.h.s.)

GLOBAL INVESTOR 1.14 —17
view the following as most important: first,
the macroeconomic recovery bodes well for
earnings growth. Figure 4 depicts the relationship
between the Eurozone manufactur ing
PMI (Purchasing Managers’ Index) and the
yearly change in 12-month forward earn ings
of the MSCI Europe. We see the recent
widening as an indication of earnings growth
ahead. Second, net profit margins in Europe
have lagged behind the recovery experienced
in the USA and we expect European firms to
catch up following cost-cutting and lower
financing costs, which supports the bottom
line (see Figure 5). Third, the recent mone tary
stimulus by the ECB should help to limit further
appreciation pressure on the euro, which
has challenged European corporates with a
strong export base outside the euro area.
Sectors exposed to macro improvement
Not all sectors are geared to the recovering
economic situation in the Eurozone to the
same extent. For instance, the impact on
energy and healthcare earnings should be
rather limited. In contrast, bank earnings depend
directly on the macro environment they
operate in. Improving economic growth is positively
correlated with bank earnings given
increasing lending volumes, but also rising
interest rates. While the impact of the recent
easing measures – including negative de posit
rates and targeted LTROs (long-term
refinanc ing operations) – on lending growth
should be limited, these measures are nevertheless
positive for banks as their funding
costs and costs of equity decline. Moreover,
the ongoing asset quality review by the ECB
might be a positive catalyst for banks as it
will increase transparency and reduce uncertainty
once the results are published in Q4
2014. Banks have to rebuild client and investor
trust – the stress test is one support. More
importantly, however, banks need to adapt to
the new competitive environment, facing potentially
disruptive innovators. For more details
on financials, please refer to page 18.
Likewise, industrials are sensitive to an
economic recovery and face structural changes
as well. We believe growth in industrial
production and related operating expenses
is the first major revenue driver. While we
are not yet in the sweet spot for capital investments
(capacity utilization above 80%),
we expect capex to continue growing gradually.
On the structural side, the strong trend
toward increased automation should impact
the industrials segment. For more details on
industrials, please refer to page 22.
In the telecom sector, a decline in negative
structural effects together with a more business-friendly
regulatory environment bodes
well for a recovery of the sector. Reve nues
were pressured amid the shift from high-margin
text messaging toward mobile Internet,
the effect of which is now easing. The improving
regulation is being driven by efforts to
facilitate a single market and remove barriers
for consolidation. We think this should further
support M&A activity in the sector and result
in an oligopolistic market structure similar to
the USA. Over time, this easing competitive
environment should lead to both rising prices
and improving margins. For more details on
telecoms, please refer to page 56.
Michael Gähler
Co-Head Global Equity & Credit Research
+41 44 333 51 84
michael.gaehler@credit-suisse.com
Roman Ochsner
Junior Research Analyst
+41 44 332 03 72
roman.ochsner@credit-suisse.com
05_Net profit margin ex.
financials, USA vs. Europe
Net profit margins in both the USA and Europe have
exhibited some volatility historically. Although they
tend to be higher in the USA than in Europe, the
currently large spread leaves scope for a recovery.
In the USA, they have rapidly expanded since 2010
and stayed at high levels since, but in Europe,
margins have only recently started to stabilize.
Better margins are a key support of earnings
growth in Europe. Source: Datastream, Credit Suisse / IDC
in %
9
8
7
6
5
4
3
2
1
0
2000 2002 2004 2006 2008 2010 2012 2014
USA
Europe
We expect European equity
markets to further outperform
on the back of an improving
macroeconomic outlook
and earnings growth, which
should compensate for a
slowdown in multiple expansion.
This is consistent with
the current phase of the
valuation cycle, where earnings
growth is essential
to bring equities to higher
levels. Compared to the
USA, where the economic
recovery has been faster,
we view the earnings growth
potential of European
equities as more attractive.
Earnings should be well
supported by monetary
stimulus, a potentially weaker
euro and net profit margins
that have more room to rise
than in the USA.

GLOBAL INVESTOR 1.14 — 18
Banking today
Even as banking continues to cope with the aftermath of the financial crisis, completely new competition
is arising. Disruptive innovation through FinTech start-ups questions the banks’ value chain.
Christine Schmid
Co-Head Global Equity & Credit Research
+41 44 334 56 43
christine.schmid@credit-suisse.com
Key figures of European banks
2013 2009 2007
MARKET CAPITALIZATION NET INCOME EQUITY RoE
in % in billion in billion in %
100
EUR 1,748.48 bn
20
EUR 349.00 bn
62
EUR 1,083.72 bn
From 2007 until the trough in 2009,
banks lost a staggering 80% of their
market capitalization and only recovered
to just over 60% as of end-2013.
106
48
16
2013 profitability was
impacted by the cleanup
mode that banks were
in, anticipating the asset
quality review and
European Central Bank
stress test.
702
801
1,063
The impact of Basel III
regulation is that equity
has risen by 51%. Thus
high return on equity
(RoE) numbers are more
difficult to achieve.
15.1
6.0
1.5
With an RoE of 1.5%
(down 90% in recent
years), banks seem to
have become utilities.
The low RoE is partially
due to low profitability
but also higher equity.
Photos: Getty Images Europe, Ulrik Tofte/Getty Images, Steven Puetzer/Getty Images, Andrzej Podulka/Getty Images
Source: Credit Suisse coverage, company data

GLOBAL INVESTOR 1.14 — 19
The last seven years have been a rollercoaster
ride for European banks, driven by
the aftermath of the financial crisis, stricter
regulatory rules and, last but not least, the
Eurozone breakup concerns. From end-2007
until 9 March 2009, European banks lost a
staggering 80% of their market capitalization.
Remarkably, it recovered to reach roughly
60% of its original size by 2014. But in terms
of relative market weight and importance,
the banking sector never recouped. Down
from 20% market weight in 2007, its share
remained at 13%. This could change if the
European economy recovers. Banks are a
direct proxy for indicating expected eco nomic
development. But economic development
also depends highly on banks and their
lending capacity. In Europe, where the capital
market is less mature, bank lending constitutes
roughly 70% of company financing; for
small and medium-sized enterprises (SMEs)
100%. Thus, no longerterm
economic recovery can occur without
expanding lending in Europe, where up to 70%
of the jobs are provided by SMEs. But banks
are still in deleveraging mode (see Figure 1),
shrinking their balance sheets to meet stricter
capital and leverage ratio requirements.
The aggregated equity position of European
banks has increased by 51% since 2007
as a reflection of stricter capital rules. The
equity position, and with it the capital ratio,
has constantly improved over the last few
years, but the balance sheet size has remained
largely unchanged. Driven by European
Central Bank (ECB) liquidity measures,
the banks engaged in sovereign debt carry
trades. With zero risk weight imposed by
regulators on sovereign debt, the capital ratio
was not affected. The 2014 ECB stress test
seeks to change this delusive incentive.
2014 lost in transition?
2014 is a transition year for European banks
as the ECB conducts a harmonized asset
quality review and subsequent stress tests
later this year. In anticipation of these events,
various banks have raised capital, revalued
their assets and continued to divest assets.
This illustrates how, even seven years after
the financial crisis, European banks still lack
a proper capital level under more severe
economic conditions.
Capital market and securitization gaining
importance
Tight capitalization and ongoing regulatory
pressure are limiting bank lending and the
economy. The Eurozone urgently needs to
revive securitization as well as develop its
capital market facilities to foster economic
growth. At the same time, banks will go
through a phase of radical changes – be it
their business models, their value chain or the
channels used.
Banks offer high potential going forward,
but only if they adjust their business
models and communication channels
Banking is the global industry expected to
change most in the coming years as a result
of client demand and cost pressure combined
with technological development. Despite cost
constraints and regulatory pressure, European
banks need to find ways to serve their
01_European economic growth
difficult to achieve as
no support from lending
Lending in Europe is in negative territory as banks
continue to deleverage, driven by the pending asset
quality review and stress test by the European
Central Bank. Simplified rules for securitization
as well as concerted actions to support
capital market growth are needed to foster
economic growth. Source: Datastream, Credit Suisse/IDC
% YoY
15
10
5
0
–5
–10
2000 2002 2004 2006 2008 2010 2012 2014
USA
Eurozone
FinTech
According to Cisco, the number
of mobile-connected devices will
exceed the world population by
the end of 2014. This rapid pace of
accelerating technology interaction
affects both our daily lives and,
increasingly, the financial industry.
The term “FinTech” addresses this
convergence of financial services
with technology. Big Data analytics,
cloud computing, mobile solutions
and social media have also become
essential in banking. This is driven
by changing customer behavior
as well as by new profit pools and
the entry of new digital competitors
such as retailers, mobile phone
operators, IT giants and start-ups.
32%
of banking revenues
at risk from
new digital competitors
by 2020
They challenge existing business
models and have the potential
to disrupt the industry. In a world
of growing regulatory requirements
that must be implemented constantly,
we think it is crucial that
banks develop innovative technology
to deal with these new challengers,
while also improving efficiency.
Financial centers have also recognized
the benefits of closer
interaction between banks and
start-ups. Over the last three years,
New York and London have adopted
so-called FinTech innovation labs
that aim to facilitate their collaboration.
This is a good opportunity
to foster innovation among banks
while providing IT entrepreneurs
with contacts in the financial
industry. In our view, other financial
centers are likely to pick up similar
projects to strengthen their banks’
competitiveness.

GLOBAL INVESTOR 1.14 — 20
Five years left
for banks
Build
02_The Internet of Things
The number of devices per person connected
to the Internet will surge further. The Internet
of Things is one of the main drivers, e.g.,
through wearables such as the Google Glass
and smartphones.
Source: Ericsson, Cisco VNI Mobile 2012, Credit Suisse Megatrends,
April 2014
BANKS
Buy/joint venture
Cloud computing and mobile
solutions are already essential
technologies for banks.
To compete, they will have
to develop new channels.
Joint ventures
represent an alternative
response to “convergent
disruption”
(the threat to
banks from
all sides).
IT GIANTS
IT giants and start-ups challenge
existing banking business models
and could transform the banking
industry as we know it.
START-UPS/
FINTECH
2005
0.3
devices
2020
7
devices
Banks are increasingly competing with start-ups in the FinTech
area as well as existing IT giants. The financial sector has focused
on surviving, followed by regulatory implementation, and less on
innovation. Meanwhile, however, a whole new competitive landscape
has emerged, disrupting parts of the financial value chain or
whole banking businesses. Banks have three options to react:
building new platforms and offers, acquiring start-ups or engaging
in joint ventures. The build approach is often chosen in retail
banking, based on already existing platforms. BNP Paribas,
for example, decided to launch a pure Internet channel called
HelloBank in various European countries in 2013. In contrast, BBVA
(Banco Bilbao Vizcaya Argentaria) engaged in acquisitions through
the start-ups Wizzo in Spain and Simple in the USA. Simple’s
success is based on an easy-to-use budget application that
combines the current account balance with upcoming payments
such as rent, healthcare or food costs for the rest of the month.
The application helps clients to avoid overdrafts and to save. The
third approach is engaging in joint ventures. Santander and Caixa
Bank, for example, are working closely together with Telefónica
are Yaap Shopping and Yaap Money. Yaap goes beyond banking.
03_Adoption cycle halved
in last 25 years
The adoption cycle of new technological developments
has halved. Mobile phones – in particular
smartphones – offer full access to the Internet
and thus change the way business is done. The
remittance business and mobile payments were
just the beginning, in our view. Today’s wealth
management and corporate banking will be
challenged going forward. Source: World Bank, Credit Suisse
Years
150
125
100
75
50
25
0
Railroads
Telephone
Radio
Television
Personal computers
Internet
Years between invention and 80% diffusion
Mobile
phones
1750–1900 1900–1950 1950–1975 1975–2000

GLOBAL INVESTOR 1.14 — 21
Photos: Accenture, bioraven/Shutterstock
Banking 2020
Today, every business is a digital business. To meet the challenges
posed by emerging trends from outside the traditional banking
sector, banks must rethink their operating models. Therein lies
opportunity, says Accenture’s Alexander Kettenbach.
INTERVIEW BY CHRISTINE SCHMID
Co-Head Global Equity & Credit Research
Christine Schmid: According to the Millennial
Disruption Index, most people would rather
visit their dentist than listen to what banks
are saying. What is wrong with banks?
Alexander Kettenbach: Nothing is wrong
with banks per se. But banks are perceived
as only defending their fee-based business
models, when they should be meeting the
needs of Customer 3.0. Today’s banking
clients seek highly individualized interactions
and a greater range of services. Starbucks,
Google or Alibaba – new competitors to the
banking sector. Who would have expected
that five years ago? Alibaba became a
USD 16 billion lender in less than three years.
How do you expect these new technologies
to develop and to be leveraged?
Alexander Kettenbach: As we stated in
our “Technology Vision,” it is time for the
CIO’s organization to decide the role it will
play in the emerging digital business. Banks
must not accept that retailers or telecommunication
companies know more about their
clients than banks do. For example, in February
2014 Banco Bilbao Vizcaya Argentaria
acquired Simple, a banking start-up that
eschews fees and offers its customers datarich
analysis of their transactions.
The risk of disruption is high in the banking
industry. Why?
Alexander Kettenbach: What makes the
environment in banking especially challenging
is a phenomenon we call convergent
disruption: banks are impacted from all sides.
Examples include new competition and
innovative ways to do business from outside
the industry – think of Fruitfulll (formerly
Crowd Mortgage) or Zopa, both peer-topeer
lenders – changes to legal structures
and operating models, and the digital
shift that redefines the interaction between
customers and service providers. Our
analysis shows that full-service banks,
“A fundamental
issue in the long term
is the question of
rules there will
be for Europe.”
ALEXANDER KETTENBACH
Managing Director at Accenture AG
Head of Management Consulting Financial
Services in ASG
as a homogeneous segment, could lose
about 36% of their market share by 2020
if they retain their traditional ways.
In which areas must banks prepare for
new incumbents?
Alexander Kettenbach: Areas in which
there is ongoing convergence with banks.
Think of Google offering mobile payments
through its Google Wallet. Our analysis
shows that up to 25% of payment revenues
could be taken over by alternative providers.
At what point do the activities of these tech
giants cross over from being complementary
to banks to becoming competitive with them?
Alexander Kettenbach: This has already
happened. PayPal has been a licensed bank
in Europe since 2007. Facebook, which
has more than 250 million users in Europe,
may soon be authorized by the Central Bank
of Ireland to handle payments across the
European Union. Regulations will provide
banks with some protection, but not for long.
How should banks be positioned strategically
to meet these trends?
Alexander Kettenbach: First, driving
efficiency by simplifying the current structure.
That is “today’s baseline.” Second,
to meet the “2020 baseline,” banks must be
agile and able to manage change quickly.
Third, banks should differentiate themselves
through continuous innovation. Banks
currently innovate, but not on a consistent
basis across the organization.
What is the optimal innovation model
for a bank?
Alexander Kettenbach: Being an Everyday
Bank. These innovative banks will be
more customer-centric and organize their
business around client segments rather
than around products. Imagine you want to
buy a new car: the Everyday Bank will not
only recommend specific models that fit
your family situation and help you save on
fuel costs, it will also directly suggest a
payment plan tailored to you and bundle in
a car insurance.
EU banks currently offer around 10% RoE.
How do they get to the targeted 15%,
or even 25%?
Alexander Kettenbach: Banks that can
match the agility and innovation potential of
other industries could consistently reap pretax
RoE levels as high as 15%–20% by 2020.
This assumption already considers the higher
equity requirements for Swiss banks that
will come into effect in 2018. That represents
a huge jump over the average 11% pre-tax
RoE the largest banks in North America
managed at the end of 2012. This can be
achieved by increasing employee productivity,
improving customer relationships, reducing
cost-to-serve, managing risks, and
innovating both products and technology.
What makes you believe banks will overcome
and outlive these challenging times?
Alexander Kettenbach: The last decade
was for start-ups to dominate digital. The
coming decade will see the emergence of
traditional companies as digital giants. With
the rich customer transaction data banks
possess, they are uniquely positioned to
create digital ecosystems, assembling existing
partners and other key players, creating
digital connections and establishing equitable
value sharing. Such banks will reinvent
themselves as value aggregators, advice
providers and access facilitators. Entry
barriers into other industries are low and
open as potential areas for growth. That

GLOBAL INVESTOR 1.14 — 22
German cars
in top gear
see “made in Germany.” While currently the
production of most German car models is
global, the flagship cars A8, the cars of BMW’s
7 Series and Mercedes-Benz S-Class –
the most profitable cars for their manufacturers
– are all made in Germany. However, the
French automobile industry remains trapped
to some extent in the mid-sized and compactcar
segment, where competition is high and
basing production in Western Europe often
makes the cars too expensive to export to
other regions.
While Germany, which is considered to be the
birthplace of the modern automobile, is still
admired for its successful automobile industry,
the French car industry has lost some
of its past glory. The car industry is economically
important for both countries. In 2010, it
accounted for 749,000 and 225,000 direct
jobs in Germany and France, respectively.
However, the development of the industry
in the two countries could not be more different.
According to PricewaterhouseCoopers
(PWC), production volumes in Germany rose
from 4.1 million autos in 1990 to 5.4 million
in 2010, while falling from 2.6 million to 2.2
million autos in France. And the outlook is
even more pronounced: while PWC forecasts
German domestic production to grow to 6.3
million by 2019 – an increase of more than
50% from the 1990 level – it assumes production
in France will remain at the current
level. This implies a decline of 15% relative
to the 1990 production volume. But why the
large difference?
High demand for cars made in Germany
Demand for German cars is high in almost
every part of the world. This is mainly a result
of the strong premium brand image. People
are keen to buy German cars and are ready
to pay a high price – particularly when they
China: High growth for German carmakers
With the success of their brands, German
carmakers have also been able to grow their
exports strongly – particularly outside of
Europe. According to the German Association
of the Automotive Industry (VDA), German
exports amounted to 4.2 million passenger
cars in 2013, which is 77% of total German
production. While Europe still accounts for
59% of exports, the European premium market
has been much more resilient (see BMW
example in Figure 1), while companies like PSA
Peugeot Citroën have suffered much more in
the weak European market (see Figure 2).
Moreover, German manufacturers benefited

GLOBAL INVESTOR 1.14 — 23
from their biggest export market, the USA,
where 656,000 cars made in Germany were
imported in 2013. After having fallen to a
trough of 10 million cars in 2009, the US market
recovered strongly to 15.5 million units in
2013. The French manufacturers have almost
no sales in the USA.
Despite a rapid increase in domestic
production, German cars exported to China
remained at a high level of 243,000 units in
2013, similar to Germany’s biggest European
export market France (252,000 cars), according
to VDA data. While Chinese demand for
apparel, jewelry and handbags from Chanel,
Cartier and other French luxury brands remains
high, they prefer German cars. Indeed,
sales in China currently account for between
15% and 35% of total car sales for German
manufacturers. While French carmakers also
enjoy strong growth of French cars produced
in China, the profit contribution is much lower.
Profitability is very different for German and
French carmakers: the operating profit for the
global automobile business is a low to midthousand
euro amount per car for the German
carmaker, while Renault earns only a low
triple-digit amount per car and Peugeot is
loss-making. The cost difference is difficult
to measure, as it includes global operations
and a different product mix. We assume
production is efficient in both the German
carmakers’ domestic and international operations.
Nevertheless, compared to the EU
automotive industry average, labor productivity
is 20% higher for Germany, but only around
10% higher in France according to a study
from Group Alpha and Alphametrics for the
European Commission published in 2008.
And according to the Ernst & Young European
Automotive Survey 2013, Germany was
ranked at the top with regard to productivity,
while France was only ranked eighth. However,
we believe it is not the cost, but the
popularity of German cars that is important.
First, Germany can sell its cars for a much
higher price and, second, high demand results
in high factory utilization. And this may well
continue.
Reto Hess
Auto & Capital Goods Research
reto.hess@credit-suisse.com
+41 44 334 56 24
01_BMW global sales split
While European sales were stable, growth was
strong in China and the USA. Hence, the company
achieved record sales results. Source: BMW, Credit Suisse
2,000,000
1,500,000
1,000,000
500,000
0
06
07
08
Rest of the World (RoW) China (from 2009)
Asia ex-China Americas Europe
02_Peugeot global sales split
Peugeot sales have been down since 2006
as weak sales in Western Europe have been only
partially offset by growth in other parts of the
world. Source: Peugeot, Credit Suisse
4,000,000
3,000,000
2,000,000
1,000,000
0
06
07
08
09
09
RoW China Latin America Russia
Western Europe
10
10
11
11
12
12
13
13
Photo: MyKarre.com

GLOBAL INVESTOR 1.14 — 24
Boom,
bust,
recovery
2008
The impressive skyline of Madrid, where the upward trend in the real estate market is indicative
of the recovery now under way in the European periphery.

GLOBAL INVESTOR 1.14 — 25
01_Stylized real estate cycle
and corresponding returns of
direct real estate investments
in the UK
Source: Datastream, Bloomberg, Credit Suisse / IDC
Average annualized returns since Dec 1986, %
20
15
10
5
0
Economic cycle
UK IPD retail UK IPD offices
UK IPD industrial
-
19851991.
1995. In 1996
2008
2008
37
-
Recovery in the European periphery
EUR 11
2013
Q4 2013
-
26
-
-
18%2013.
Investors should not wait too long
-
-
UK -
-
-
Dominik Garcia
+41 44 334 25 38
Philippe Kaufmann
+41 44 334 32 89
02_Recovery in the periphery;
Germany sound and France
potentially already in contraction
Source: Credit Suisse
Spain, Ireland, Hungary, the Netherlands lead the way
03_Office markets at different
stages in the real estate
recovery cycle
Source: PMA, Credit Suisse
Prime office vacancy rate, %
25
20
15
10
5
0
04_Peripheral residential real
estate markets need more time
2013
2008
Source: Datastream, Bloomberg, Credit Suisse / IDC
House price indices (Q1 2002 = 100)
200
180
160
140
120
100
2004 2006 2008 2010 2012 2014
Madrid Barcelona Dublin Amsterdam
Rotterdam Budapest Frankfurt
2002 2004 2006 2008 2010 2012 2014
UK Spain France Italy Germany

GLOBAL INVESTOR 1.14 — 26
A culture
of innovation
Innovative Europe
The Global Innovation Index is published on an annual basis.
It is a composite indicator that ranks countries in terms
of their environment for innovation and their innovation outputs.
Source: The Global Innovation Index 2013 (INSEAD, WIPO, Johnson Cornell University)
Rank (2013) Country Rank (2007)
1 Switzerland 6
2 Sweden 12
3 United Kingdom 3
4 Netherlands 9
5 USA 1
6 Finland 13
7 Singapore 7
8 Hong Kong 10
9 Denmark 11
10 Ireland 21
Fostering an innovation culture is far from trivial, as success depends on a multitude of factors.
These include – among other things – a commitment to sustained investments in research
and development (both from the government as well as from the corporate sector), access to
a skilled/well-trained workforce, the presence of world-class universities, a dynamic investment
community and the protec tion of intellectual property. In addition, clusters of universities
and businesses that enable efficient technology transfer and interdisciplinary exchange are
clearly beneficial. At the individual company level, luck has proven to be an important element
in many cases. Whatever the reasons, success begets success, creating a virtuous circle
as it attracts top talent and further investments.

GLOBAL INVESTOR 1.14 — 27
Global venture capital
investments 2006–13
Europe’s venture capital investments are eclipsed by the amount
spent in the USA. While they have recovered from depressed levels
in 2009, they are still somewhat below precrisis levels.
Source: Ernst & Young, Global Venture Capital Insights and Trends 2014
Venture capital
investments by sector
The lion’s share of venture capital in Europe is being invested
in sectors such as life sciences, computer and consumer electronics
as well as communications.
Source: OECD, Entrepreneurship at a Glance 2013
USD bn
60
50
40
30
20
10
0
21.8%
12.5%
18.2%
28.4%
19.0%
2006 2007 2008 2009 2010 2011 2012 2013
USA Europe
China India Israel
Life sciences Computer and consumer electronics
Communications Industrial/energy Other
Top 10 universities by subject
While US universities clearly dominate global rankings, smaller universities should not be underestimated,
as they can be just as powerful in specialized niches.
Source: QS World University Rankings 2013/14
Engineering and technology Life sciences and medicine Natural sciences
Rank Institution Location Institution Location Institution Location
1
Massachusetts Institute
of Technology USA Harvard University USA University of Cambridge UK
2 Stanford University USA University of Oxford UK Massachusetts Institute of Technology USA
3 University of Cambridge UK University of Cambridge UK University of California, Berkeley USA
4 University of California, Berkeley USA Johns Hopkins University USA Stanford University USA
5 ETH Zurich Switzerland Stanford University USA Harvard University USA
6 Imperial College London UK Massachusetts Institute of Technology USA ETH Zurich Switzerland
7 National University of Singapore Singapore University of California, San Francisco USA California Institute of Technology USA
8 EPF Lausanne Switzerland University of California, Los Angeles USA University of Oxford UK
9 University of Oxford UK Yale University USA Imperial College London UK
10 California Institute of Technology USA Karolinska Institutet Sweden Princeton University USA
The USA and China comfortably lead when it comes to the number of scientific publications.
More importantly, however, European publications have a high impact as measured by citations.
4,260
%
20
Source: OECD Science, Technology and Industry Scoreboard 2013
2,000
15
1,500
10
1,000
5
500
0
0
US CN UK DE JP FR CA IT ES IN AU KR NL BR RU CH PL SE TR BE
Percentage of top-cited publications (l.h.s.)
Number of publications (r.h.s.)

GLOBAL INVESTOR 1.14 — 28
Switzerland:
A pharmaceutical powerhouse
In a science-driven industry such as the pharmaceutical industry, a commitment to sustained
R&D investment is a crucial factor in order to attract the best scientists, in our view. This is not only
important to increase the success of developing drugs in-house, but also when it comes to judging
the merits of in-licensing opportunities. Switzerland has a long history of expertise in chemical/
pharmaceutical sciences and is home to two of the world’s top pharma companies.
Roche has a unique combination
of pharma and diagnostics
Roche is the world’s leader in oncology and
in vitro diagnostics. With its acquisition of
Genentech, the company has secured access
to some of the world’s leading scientists and
most promising pipeline assets. Owing to
Roche’s unique combination of a pharma and
a diagnostics business under one roof, it is
well-positioned in the development of targeted
and personalized treatments. Here it
becomes more and more important to understand
the molecular signatures of diseases in
order to stratify patients into well-defined
patient pools, thereby increasing the clarity
of the signals in clinical trials and ultimately
increasing the chances of success.
Novartis follows a strategy of focused
Novartis has leading positions in all three of
its divisions. It is number two worldwide in
oncology (behind Roche) and generics (behind
Teva) and, with Alcon, it owns the world’s
leading ophthalmology business. With its own
unique combination of businesses, Novartis
covers a broad spectrum of healthcare demand
with innovative products, as well as
low-cost alternatives in the form of generics.
Key strengths of the company, in our view,
include the benefits of having an independent
research organization (Novartis Institutes for
BioMedical Research), as well as the complementary
know-how in product innovation
(pharma) and process innovation (generics).
Top 10 corporate R&D spenders
Pharmaceutical companies are among the biggest spenders on R&D worldwide.
Roche and Novartis lead their peers on this metric.
Top 10 pharmaceutical
companies by size of pipeline
A company’s pipeline is its source of future revenue growth. Again, Roche and Novartis are
leaders in terms of number of pipeline drugs, a large proportion of which originate in-house.
Rank Company
Source: Citeline Pharma R&D Annual Review 2014, Bloomberg, Credit Suisse
Headquarters
Source: Bloomberg, Credit Suisse
R&D spending
(bn USD)
1 Volkswagen Germany Automotive 13.5
Rank Short name Headquarters Industry
2 Samsung South Korea Computing and electronics 13.5
3 Intel USA Computing and electronics 10.6
4 Microsoft USA Software and Internet 10.4
5 Roche Switzerland Healthcare 10.0
6 Novartis Switzerland Healthcare 9.9
7 Toyota Japan Automotive 9.1
8 Johnson & Johnson USA Healthcare 8.2
9 Google USA Software and Internet 8.0
10 Merck & Co. USA Healthcare 7.5
No. of drugs
in pipeline 2014
% of originated
drugs (2013)
R&D expenditure
2013A (bn USD)
1 GlaxoSmithKline UK 261 57% 6.1
2 Roche Switzerland 248 79% 10.0
3 Novartis Switzerland 223 73% 9.9
4 Pfizer USA 205 67% 6.7
5 AstraZeneca UK 197 70% 4.8
6 Merck & Co. USA 186 56% 7.5
7 Sanofi France 180 45% 6.3
8 Johnson & Johnson USA 164 52% 8.2
9 Bristol-Myers Squibb USA 133 74% 3.7
10 Takeda Japan 132 50% 3.5

GLOBAL INVESTOR 1.14 — 29
European
technology:
Small but powerful
Although the European technology sector trails
that of the USA by a wide range in terms of
market capitalization, it still contains companies
that are setting the bar for specific industry
trends. Long after Nokia lost its role as the
leading mobile phone producer worldwide, ARM
Holdings and ASML stepped in to fill the gap.
Nowadays, both companies have become
quasi-standards in the semiconductor industry.
ASML, based in Veldhoven, the Netherlands, was founded in 1984
as a joint venture between Advanced Semiconductor Materials International
(ASMI) and Philips. The company provides lithography tools
used for the production of integrated circuits (ICs), such as CPUs,
dynamic random access memory and flash memory. With these
machines, patterns are optically imaged onto a silicon wafer covered
with a film of light-sensitive material (photoresist). As a start-up,
ASML faced strong competition from more than ten established players.
In the meantime, ASML offers the best lithography tools for the
semiconductor industry, and holds about 87% of the market. The
further development of lithography, especially the extreme-ultraviolet
(EUV) technique used for the production of chips with a feature size
of ten nanometers and below, is crucial for the semiconductor industry
to keep Moore’s law (i.e. that computer processor speeds will
double every two years) alive. To achieve this goal, the company
operates partnership programs with Intel, Samsung and TSMC, thus
highlighting ASML’s pivotal role in the industry. These three companies
provide additional R&D financing and own stakes (15%, 5% and 3%,
respectively) in ASML.
ASML’s market share speaks for itself
Over the years ASML has established itself as the leading provider of
semiconductor lithography tools. This market has become a quasi-duopoly.
Source: Gartner, Credit Suisse estimates
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000 2002 2004 2006 2008 2010 2012
Ultratech
Silicon Valley Group
Nikon
Canon
ASML
ARM “inside” handheld devices
The ARM chip architecture has become the driving force for the success of
handheld devices. The company is benefiting from strong growth in handheld
devices and its quasi-monopoly status. Source: ARM Holdings
2008 2009 2010 2011 2012 2013
Smartphones 81% 85% 92% 89% 88% 87%
Low-end voice phones 93% 93% 95% 93% 96% 95%
Portable media players 67% 72% 73% 82% 88% 86%
Tablets NA NA 90% 88% 86% 84%
Digital cameras 72% 60% 80% 86% 78% 78%
ARM architecture driving the success of handheld devices
In the 1980s, Acorn Computers decided to design its own highperformance
32-bit RISC (reduced instruction set computing) chip,
the ARM processor. In 1990, Cambridge-based ARM was founded
as a joint venture between Apple, Acorn and VLSI Technology, when
Apple was developing a PDA called Newton and looking for a lowpower
processor to run it. Although the Newton was not a great
success, ARM decided to pursue what we now call an IP business
model. As such, the ARM processor has been licensed to many
semiconductor companies for an up-front license fee and then
royalties on production. This incentivized ARM to help its partner
access high-volume shipments as quickly as possible. ARM’s IP or
architecture is now the standard used in mobile products, especially
smartphones such as the iPhone and Samsung Galaxy, and
tablets like the iPad. About 98% of the more than two billion mobile
phones sold each year use at least one processor (chip) based on
an ARM design.
Thomas C. Kaufmann
Pharmaceuticals Research
+41 44 334 88 38
thomas.c.kaufmann@credit-suisse.com
Ulrich Kaiser
Technology & Media Research
+41 44 334 56 49
ulrich.kaiser@credit-suisse.com

GLOBAL INVESTOR 1.14 — 30
Airports –
gates to the world
In a globalized world, accessibility is a key
location factor. Airlines are one means
of transport, and airports are the gates.
According to Airports Council International
(ACI), over 1.4 billion passengers use airports
in Europe. And this figure is likely to increase
given that, as Airbus’s “Global Market
Forecast” predicts, air transport (measured
in revenue passenger kilometers) will grow
at a rate of 4% per annum in advanced
economies between 2013 and 2032. Indeed,
ACI forecasts that airport users in Europe will almost double by 2030 to around 2.7 billion. This
sponds with the results of the 2014 Credit Suisse Emerging Consumer Survey, which forecasts that
international holiday traveling in emerging markets is likely to increase from its current low level
of about 10%, driven by growing household incomes. This growth creates opportunities for airports.
Reto Hess
Auto & Capital Goods Research
+41 44 334 56 24
reto.hess@credit-suisse.com
Romano Monsch
Consumer Staples Research
+41 44 332 90 59
romano.monsch@credit-suisse.com
Stefanie Kluge
Consumer Discretionary & Retail & Industrials Research
+41 44 332 03 74
stefanie.kluge@credit-suisse.com
01_Split of revenues
at Paris airports
While half of Paris airport revenues still come
from the aviation business, it only earns about
12% of operating income. On the other hand,
retail and services has the highest profitability of
all businesses, earning two-thirds of the group
operating income with only 29% of sales. Retail
and services revenues grew by 5.1% in 2013
driven by retail, which increased sales by 8.7%.
Within retail, airside shops account for 70%
of revenues. Source: Aéroports de Paris, Credit Suisse
9%
9%
29%
Aviation Retail and services
Real estate Other
53%
Airports set to benefit from
rising number of air travelers
We believe that the increase in passenger traffic
offers airports the potential to diversify their
revenues away from pure aviation income toward
non-aviation income such as retail sales. Nonaviation
income already contributes a significant
part of overall revenues. In the case of the Paris
airports, non-aviation sales accounted for almost
half of 2013 revenues. Retail was the secondlargest
contributor, accounting for 12% of group
sales. Retail sales are likely to increase further
over the coming years due to high growth in longhaul
traffic, as these passengers are the most
profitable customers for airport retailers. In addition,
retail sales should benefit as airports are
expanding their commercial space. The different
shopping behavior of the broad internationally
diversified customer base is also key to increasing
income from retail activities. We expect particularly
strong demand from emerging market
passengers. For example, BRIC destinations
(Brazil, Russia, India and China) only represented
4.6% of traffic at the Paris airports, but 20% of
sales per departing passenger in airside shops,
and 40% of airside shop sales growth in 2013.
If airport providers are able to further develop
attractive and efficient retail concepts – landside
and airside – the retail business could become
an even more important profit driver in the future.
02_Gulf carrier share of
Europe-originating seats
in 2004–14
Despite high air traffic demand, European
legacy carriers are under pressure from increased
capacity on international routes from Gulf carriers.
This could continue to weigh on profitability.
Source: Company data, Credit Suisse
%
20
18
16
14
12
10
8
6
4
2
0
04 05 06 07 08 09 10 11 12 13 14

GLOBAL INVESTOR 1.14 — 31
Investments in airport efficiency likely
to increase
Owing to the strong growth in expected air traffic demand, additional
investments in new airport capacity will be needed to provide adequate
infrastructure. However, these investments may be prevented by regulation
and resistance from residents. Further, due to the recent downturn,
airports are planning to increase capacity by only 17% between 2012
and 2035 according to Eurocontrol’s 2013 “Challenges of Growth” survey,
and only four of the 108 airports surveyed plan to build a new runway.
This is most likely not enough to meet growing demand. Nevertheless,
we assume airports will invest more in capacity, security and efficiency
to deal with higher passenger numbers. According to Siemens, airport
pro ductivity depends on throughput time – increasing flight frequencies,
higher passenger throughput, more baggage and freight. Companies
that offer solutions to improve infrastructure, information and logistics
should benefit greatly from air traffic growth, in our view.
Competition in European airline sector
likely to remain tough
airlines remains cautious. The International Air Transport Asso ciation’s
“Financial Forecast March 2014” predicts an EBIT margin of only 1.9%
in 2014 compared to 1.1% in 2013, mainly due to intense competition.
On the one hand, low-cost carriers have expanded their fleets. According
to the European Low Fares Airlines Association’s “Airline Members
Statistics,” low-cost carriers transported 216 million passengers and
operated 4,526 flights in 2013 compared to 106 million and 2,331 in 2006,
respectively. On the other hand, competition from airlines in the Middle
East is likely to increase on international routes from Europe to Asia Pacific.
Over the next six years, we expect annual fleet growth of between 5%
and 14% for Middle Eastern airlines and that part of this higher capacity
could be used on European routes. Hence, airline competition in the
European market is most likely to remain difficult. Therefore, contrary
to airports and airport infrastructure suppliers, the outlook for European
airlines is much less attractive, in our view.
03_Passengers at Frankfurt Airport
Passenger growth at Frankfurt Airport has been strong
as airfare prices have declined and capacities have
increased. Assuming annual passenger growth of 4%
(in line with Airbus’s air traffic growth forecast for
Europe) and assuming no capacity constraints,
passengers using Frankfurt Airport would grow to
over 100 million by 2032. Source: Fraport AG, Credit Suisse
1980
17,664,171
2013
58,042,554
122,286,907
2032 (est.)
04_Average spending per departing
passenger in Frankfurt
Average spending per departing passenger has increased
by 62% at Frankfurt Airport. We expect further growth
in spending from growth in air traffic, particularly driven
by emerging market long-haul traffic and an increase
in commercial space at airports. Source: Fraport AG, Credit Suisse
05_European air traffic forecasts
Air passenger traffic in Europe is expected to grow
by 4% p.a. between 2013 and 2032. This should
result in air traffic more than doubling during this time.
We think the strong growth is mainly driven by growing
demand in emerging markets, particularly in China,
due to a growing middle class. Source: Airbus, Credit Suisse
2004–13
+62%
Intra-Western Europe
Western Europe – USA
Western Europe – Asia
Western Europe – Middle East
Western Europe – South America
Western Europe – China
%
6
5
4
3 2 1 0

GLOBAL INVESTOR 1.14 — 32
Future of Europe
Crisis and
convergence
The acute phase of the euro crisis may be passing, but European monetary union remains a
work in progress. According to Harold James, establishing an effective fiscal apparatus and
a supervisory framework for banking is yet to be achieved. In an interview, James examines these
issues as well as how to secure growth, on which the future of monetary union depends.
Photos: https://www.ecb.europa.eu/euro/html/hires.en.html

GLOBAL INVESTOR 1.14 — 33
INTERVIEW BY OLIVER ADLER
Head of Economic Research
Oliver Adler: We’re here to talk about
Europe’s financial crisis. But as frequently
happens, geopolitical issues recently
grabbed the headlines. Could we start with
that ? Specifically, what does a financial
historian have to say about the origins of
the Ukraine crisis?
Harold James: The context is the
epoch al shift in the financial history of the
recent period. After 2008, many people
started to challenge the idea of globalization.
In particular, the big powers outside
the USA began to think of alternatives.
For example, after 2008 China realized
that it needed a financial system more oriented
to Chinese requirements. Internationalizing
the renminbi was part of that. There
was a similar effect in Russia that didn’t
get noticed so much because the general
supposition was that Russia was no longer
a big geopol itical player. But, in fact, the
2008 Georgian crisis now seems to me
to be when this idea of asserting a much
more powerful influence in Eurasia emerged
clearly as an element of Russian thinking.
Playing that out is what produced the
current crisis in Ukraine.
What has been the effect of the crisis
on the position of Europe?
Harold James: It has really highlighted
the need for a coherent European response.
In that sense, it has put some momentum
back into the European project. Polish
nationalist politicians, for instance, who
used to be very anti-EU, now recognize the
importance of a coordinated effort. And the
Ukraine question will press Europe to think
more about other aspects of integration,
in particular energy policy, which has been
badly neglected in past years.
Which brings us back to European monetary
union. German-French cooperation has
obviously been a key driver of most of
Europe’s steps to integration. But in the last
few years, this alliance has been pretty
fragile. Will that continue to be an issue?
Harold James: In the 1990s, there was
a genuinely French input into the discussion
as well as German input. I think the dissatisfaction
with the last three or four years
“A fundamental
issue in
the long term
is the question
of what kind
there will be
for Europe.”
HAROLD JAMES
HAROLD JAMES
historians in the world. He received his PhD
from Cambridge University in 1982 and
joined Princeton University in 1986. His most
recent book is “Making the European Monetary
Union” (2012). His awards include the
Helmut Schmidt Prize in German- American
Economic History.
has been the feeling that it’s been a oneway
process. Unless the German-French
relationship can be repaired, it’s difficult to
think of ways in which Europe can advance
coherently. I do see some signs that the
relationship is improving, not just atmospherically
but also regarding basic policy
principles.
Meaning?
Harold James: A fundamental issue in
the long term is the question of what kind
of fiscal rules there will be for Europe.
So far, fiscal rules are associated very much
with Germany and budgetary austerity, and
with the export of deflation. That’s not a
concept that fits well into the French world
view. An alternative French model that has
some appeal in Italy, and in Greece and
Spain as well, envisions the state taking a
more active role. Now there may be some
convergence in approach. For example, the
fundamental idea of the much talked about
book by Thomas Piketty – “Capital in the
Twenty-First Century” – is that to address
the issue of increasing social inequality,
you need a wealth tax. That kind of concept
has already been floated in Germany in a
very different context as a way of dealing
with the debt problems of southern European
countries. I see the potential for a kind
of intellectual convergence about the desirability
of what you might call Piketty-ism
between France and Germany.
Historically, the French at least thought
of the euro as a potential competitor to the
dollar and perhaps also playing a political
role. Are we back on track for the euro
to become a contender to the dollar and
then maybe in future to the renminbi?
Harold James: Yes, I think so. I would
see the long-term impact of the 2007–
2008 crisis in exactly that way. It has really
highlighted the problem of depending too
much on the USA as a major financial
center. We saw in the financial crisis how
important dollar funding was for European
banks. The Federal Reserve played a really
big part in supporting Europe through the
swap lines. Ending that dependence and
the sense that ultimately the USA is the
country where the financial markets are
deepest and most liquid is part of the vision
of how the architecture is going to evolve
in Europe, as well as in China.
How likely is it that the European Central
Bank (ECB) will adopt the supreme
role that the Federal Reserve or the Bank
of England have had within their domain? >

GLOBAL INVESTOR 1.14 — 34
And how important is that for the Eurozone
and for Europe in general?
Harold James: It’s enormously important
when you have a common capital market,
a common economic area and financial
institutions that will be cross-border
and channeling flows across national
frontiers. It’s key to have the supervisory
framework that goes along with that. The
point that’s been often discussed is that
this is a different kind of activity than
monetary policy because there’s an
inherently fiscal aspect to it. So the
demand for political accountability when
central banks get into the supervisory
or regulatory mode is much higher than it
is when they do monetary policy.
So the political system should stay out
of monetary policy?
Harold James: Well, politics matter when
it’s a question of which banks will be closed
down, or how the restructuring of banks
should be managed. Those are issues that
involve fiscal resources, and demand a
great deal of political accountability. You’re
going to have to think of a governance system
that treats monetary policy separately
and that has a central bank divided into
two elements, as it were: one that is truly
independent, and one that is accountable
and should present the rationale for what
it’s doing as it’s doing it.
Do you see a stronger Eurozone, with proper
institutions, as an attraction for countries
outside it?
Harold James: The issue highlighted
in the discussions after monetary union, and
particularly after the financial crisis, seems
to indicate that the Eurozone as such needs
It’s hard to see how the countries with the
opt-out, in other words, Denmark and the
UK
the themes that will emerge more and more in
the lead-up to the UK referendum on Europe
United in diversity
A HISTORY OF EUROPE IN BRIEF
MARSHALL PLAN – EUROPEAN
RECOVERY PROGRAM
In the immediate aftermath of the Second World War, European
countries were in dire straits. In 1947, in response both to deteriorating
economic conditions and to a perceived threat of communist expansion,
US Secretary of State George C. Marshall called for a massive program
to rebuild Europe. One year later, the US Congress established the
European Recovery Program – known as the Marshall Plan – which
provided over USD 12 billion for European reconstruction in the form
of loans and grants, as well as commodities and technical information
and assistance. For a range of political reasons, the Marshall Plan
was limited to Western Europe. During its four years of operation,
the program promoted industrialization and foreign investment in the
region. In so doing, it also helped to establish markets for American
goods. Economic historians disagree on the impact of the Marshall
Plan, but it is generally seen as a worthy humanitarian achievement.
It also provided a model for future US foreign aid programs.
ROBERT SCHUMAN – THE ARCHITECT OF
THE EUROPEAN INTEGRATION PROJECT
minister between 1948 and 1952, is regarded as one of the drivers
of European unity. In cooperation with Jean Monnet, he drew up
the internationally renowned Schuman Plan, which he published on
9 May 1950, the date now regarded as the birth of the European Union.
He proposed joint control of coal and steel production, the most
important materials for the armaments industry. The basic idea was
that whoever did not have control over coal and steel production
Schuman giving his famous
speech on 9 May 1950,
the day that is now celebrated
as the EU’s birthday.
One of a number of posters
created by the Economic
Cooperation Administration,
an agency of the US government,
to promote the Marshall
Plan in Europe, 1950.
EUROPEAN COAL AND STEEL
COMMUNITY
The brainchild of French political economist Jean
Monnet, the European Coal and Steel Community
(ECSC) was established by the Treaty of Paris in
1951 to contribute to economic expansion and
increased employment through a common market
for coal and steel. Signed by Belgium, France, West
Germany, Italy, the Netherlands and Luxembourg,
the treaty entered into force in 1952. It led to
the European Economic Community in 1958 and,
ultimately, to the EU.

GLOBAL INVESTOR 1.14 — 35
is that from the European perspective, it’s
rozone without the UK. In terms of the small
central European countries, there’s not really
a doubt about it. They do and they will see
the euro as attractive. For Denmark and
Sweden, I would think a similar line of analysis
would apply. But I can’t see that line really
being taken for either Switzerland or the UK.
Will Europe evolve into a much closer
political union, something like a United
States of Europe? If that were to happen,
who would be part of it ?
Harold James: The EU is indeed starting
to evolve some of the aspects of a real
union – notably fiscal rules – but a move
that is really sustainable in the long run
would need to include some measure of
constitutionalization. In the past, getting
any consensus on such a step – analogous
to the making of the US constitution in
1787 – was impossible. The current triple
crisis – the aftermath of the so-called euro
crisis, the crisis of legitimacy that was reflected
in the high vote for anti-European
protest parties and the security crisis over
the political changes in Ukraine – provide a
much greater incentive to really produce
reform and a transition to genuinely representative
government. I believe that almost
all of the existing EU is capable of meeting
that challenge, though perhaps not the UK.
In the same vein, how likely are we to
see the domestic reforms needed to get
Europe’s growth motor going again?
Harold James: There is domestic
resistance, but a great deal of labor market
legislation has already been carried through,
particularly in Spain. Italy, too, is currently
initiating an impressive reform process. The
measures that we talked about for getting
an effective capital market operating are
a crucial part of that. Because without
growth, there will indeed be a backlash
Adenauer (r.)
shaking hands
with French
President Charles
de Gaulle in 1961.
ENLARGEMENT OF THE EUROPEAN
UNION – A TIMELINE
From its genesis in 1952, with six original members, the European
Union followed more or less a slow and gradual approach toward
enlargement over the next five decades. In 2004, EU membership
accelerated when ten nations joined the fold, bringing the total
to 25. Croatia is the most recent addition (2013), with six nations
currently listed as candidates to join. Source: European Union
KONRAD ADENAUER –
A PRAGMATIC DEMOCRAT
AND TIRELESS UNIFIER
Croatia
Bulgaria
Romania
Cyprus
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Malta
Poland
Slovakia
Slovenia
Austria
Finland
Sweden
Portugal
Spain
Greece
Denmark
Ireland
United Kingdom
Belgium
France
(West) Germany
Italy
Luxembourg
Netherlands
of Germany, who stood at the head of the
newly-formed state from 1949–63, changed
the face of post-war German and European
history more than any other individual. Like
many politicians of his generation, Adenauer
had already realized following the First World
War that lasting peace could only be achieved
through a united Europe. His experiences
during the Third Reich (he was removed from
)
from 1949–55 Adenauer realized far-reaching
foreign policy goals to bind Germany’s future
with the western alliance: membership of
the Council of Europe (1951), founding the
European Coal and Steel Community (1952),
and Germany’s entry into NATO (1955).
A cornerstone of Adenauer’s foreign policy
was reconciliation with France. Together
with French President Charles de Gaulle,
a historic turning point was achieved: in
1963 the once arch-enemies Germany and
France signed a treaty of friendship, which
became one of the milestones on the road to
European integration.
Photos: Art Archive / images.de, The LIFE Picture Collection / Getty Images, Keystone, European Union
0 10 20 30 40 50 60
Period of being a member state in years

GLOBAL INVESTOR 1.14 — 36
Corporates to loosen
DEPLOY
CASH
Improving economic trends are likely
to lead to a distinct increase in corporate
activity. What might be good for equity
valuations may be less so for corporate
credit quality trends.
Corporate
action
Capex
M&A
Dividends
Share
buybacks
Increase
financial
flexibility
Description Benefit Drawback
INVEST
Investing in plant and equipment,
either to maintain current capacity or
expand capacity to meet growing demand
ACQUIRE
Acquiring other
business, potentially a
competitor, or entering
Distributing
a portion of
recurring earnings
to shareholders
DOWN DEBT
Paying
down debt /
raising cash
holdings
BUYING
SHARES
Buying the
company’s own
shares, lowering
the equity count
Improve efficiency /
productivity and /or
raise capacity
IMPROVE
Immediate revenue
gains, potential
market share gains,
market consolidation
could improve
pricing power
CONSOLIDATE
RAISE
Raising dividends
sends a confident
message to investors;
can continue to raise
management capital
discipline
RAISE
Automatically
raises EPS; generally
supportive of
the share price
Lowers financial /
default risk; lower
cost of debt boosts
income statement
RISK
EXPAN SIONARY
CAPEX REQUIRES
GROWING DEMAND
TO UTILIZE
INTEGRATION RISK,
MANAGEMENT
RETENTION,
BUSINESS DISRUPTION,
HIGH GOODWILL
COMPONENT
INVESTORS APPRECIATE
STABLE / INCREASING
DIVIDENDS, SO SUB-
SEQUENTLY LOWERING
DIVIDENDS IS DIFFICULT
CAN SIGNAL A
POTENTIAL LACK OF
GROWTH / INVESTMENT
OPPORTUNITIES IN ITS
OWN BUSINESS
IF IT LEADS TO A
SUB OPTIMAL CAPITAL
STRUCTURE (TOO
LITTLE DEBT) IT CAN RAISE
THE FIRM’S OVERALL
COST OF CAPITAL

GLOBAL INVESTOR 1.14 — 37
their purse strings
For the most part, we believe today’s corporate sector is resilient
and we think it is better positioned to weather an unexpected
credit shock. Many corporates have used the prevailing low
interest rate environment and strong demand for credit to
European economic recovery means better economic visibility
or at least more certainty. During the height of the Eurozone
crisis, management had to formulate contingency plans in case
the common currency experienced an existential threat. Now, as
forward visibility improves, companies may be more willing
to engage in corporate actions to pursue growth opportunities.
This could include raising capital expenditure, entering into
mergers and acquisitions, or returning cash to shareholders via
dividends or share buybacks. In reality, it is likely that we will see
a combination of all these measures.
Priority
Examples
MORE
IF
IF
IF
Maintenance capex needs to
occur regularly to replace
equipment wastage and avoid
capex is necessary if running
up against full capacity
Potential to consolidate
a market, eliminate a
competitor, improve
market share; enter new
business field
Increase if supported
by earnings improvement
and sufficient financial
flexibility
IF
IF
Undertake if substantial
management perceives
current share price
to be low
Economic uncertainty is
increasing, or if temporarily
elevated due to prior M&A,
for example
Civil aerospace – Airbus and Boeing
and jet engine suppliers are having to add capacity
to meet Asian / Middle Eastern demand
General industrial – Automation/
Robotics applications with beneficiaries ABB,
Kuka, Fanuc
Oil & Gas – equipment to sustain
the boom in US shale gas
DIVIDENDS
Several firms have established
track records of
regularly increasing their
dividends. Examples include
Chevron, McDonalds,
Johnson & Johnson, L’Oréal,
Novartis, Roche, Altria
Healthcare
is currently very much
in focus. Firms such as Medtronic,
AbbVie, Novartis, Pfizer and others
are looking to improve scale,
strengthen R&D pipelines and in
some cases access overseas
cash via tax inversions
Cash-rich sectors such
as technology, energy and
healthcare have stepped
up share buyback programs, e.g. Apple,
Microsoft, ExxonMobil, Novartis,
but also General Electric, Philip Morris,
Nestlé
European cement
majors are still restoring
financial flexibility
to support credit
ratings. European utility
and telecoms sectors
both have prioritized
debt reduction in recent
years to try to
stabilize credit ratings

GLOBAL INVESTOR 1.14 — 38
Corporates have many choices available
A step up in capex needs tighter capacity
utilization rates
The European economic recovery may not be
so vigorous as to require a material expansion
in aggregate capital stock. Companies typically
only add to their productive capacity once
utilization rates rise toward full capacity and
to avoid ceding market share to competitors.
A weak growth environment may make raising
capacity relatively uneconomical.
Conditions look ripe for increased
M&A activity …
Instead, companies may seek to deliver the
growth in revenues – and ultimately the earnings
per share that the equity market is looking
for – via mergers and acquisitions. And
since the low inflationary environment has
also left its mark on producer pricing, firms
may well benefit from M&A activity if it consolidates
the market and improves industry
discipline in the process. Competition authorities
will probably be reluctant to allow
mergers that reduce competition and raise
pricing, which explains why companies will
never openly mention this as the motivation
for M&A. Elaborate cost synergies will often
be presented, even if the true rationale underlying
M&A activity often involves improving
market dynamics.
… and may lead to deteriorating corporate
credit quality
We are seeing a marked step-up in M&A activity.
So far, many transactions have been
financed with a substantial equity component,
which limits the potential negative credit
impact. Nonetheless, the current cheap and
plentiful financing available in the corporate
bond market may well encourage corporates
to increasingly use debt in their funding mix,
ultimately leading to an increase in leverage.
It seems likely that we are in the early stages
of an increase in corporate leverage that will
ultimately feed through to pressure on credit
ratings. Sectors likely to see the most M&A
activity include healthcare, telecommunications
and materials, although in reality we
think conditions are ripe for widespread activity
across the board.
01_Corporate cash piles remain high
Corporate cash holdings look ample compared to recent decades and
are complemented by easy access to bond markets. This provides plenty
of fire power for a material increase in corporate actions.
Source: DataStream, Credit Suisse / IDC
02_Corporate confidence is improving
The CEO Confidence index is a survey conducted by the Conference Board
and PwC that measures CEOs’ assessment of current economic conditions.
A reading above 50 indicates more positive responses than negative and that
CEOs expect economic conditions to improve. Source: DataStream, Credit Suisse / IDC
in % in %
5.5
5.0
80
4.5
70
4.0
60
3.5
50
3.0
2.5
40
2.0
30
1.5
20
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Mar 76 Mar 80 Mar 84 Mar 88 Mar 92 Mar 96 Mar 00 Mar 04 Mar 08 Mar 12
Non-financial corporate sector: cash/total assets US CEO business confidence Average

GLOBAL INVESTOR 1.14 — 39
for deploying excess cash
Shareholder distributions are also
set to rise …
Returning cash to shareholders either via
dividends or share buybacks is often seen as
an alternative to investing in the business. In
the extreme case, it could be interpreted as
management not being able to identify any
attractive investment opportunities in its business.
On its own, shareholder distribution of
excessive free cash flow (whether via dividends
or buybacks) is seldom a problem from
a credit perspective.
… but too much at once will cause
credit quality to deteriorate
If higher shareholder distributions coincide
with an increase in capex or opportunistic
M&A that together result in a material releveraging
of the company, then credit deterioration
will likely occur. We see little evidence
of this currently, but improving CEO
confidence on the back of better economic
visibility and the continued easy and cheap
access to debt capital markets may well result
in more aggressive corporate actions. Improving
CEO confidence will invariably lead
management to pursue growth initiatives in
an effort to generate revenues and the higher
earnings per share that the equity market
needs to justify current valuations. How
it impacts corporate credit quality is less
straight forward. However, if corporate actions
rise to the extent that they cause material
releveraging of corporate balance sheets, it
is likely to usher in the next down-cycle in
corporate credit quality.
Corporate cash piles remain high
Company balance sheets are for the most
part in good shape. However, we believe management
was in many instances traumatized
during the stressed funding environment following
on from the Lehman collapse. This was
a period during which access to funding was
severely curtailed, and those able to borrow
were forced to accept very unfavorable terms.
In our view, this has contributed to a shift in
funding preferences in favor of holding a more
ample liquidity position. This likely partly explains
the high cash holdings currently sitting
on corporate balance sheets, though we
would also point out that a large share of the
cash is actually held by cash-rich sectors such
Michael Weber
Auto & Building Materials & Chemicals Research
+41 44 333 54 25
michael.weber@credit-suisse.com
03_US corporates have financial flexibility
US corporates look to have begun releveraging off of the post-Lehman low,
but still remain below the 25-year average. Source: DataStream, Credit Suisse
04_European corporates a little less
Leverage as measured by net debt / EBITDA is slightly above the 25-year
average. As a result, European corporates have a little less financial
flexibility compared to their US peers. Source: DataStream, Credit Suisse
times
times
2.2
2.0
3.0
1.8
2.5
1.6
2.0
1.4
1.5
1.2
1.0
1.0
0.5
Jan 90 Jan 94 Jan 98 Jan 02 Jan 06 Jan 10 Jan 14
Jan 90 Jan 94 Jan 98 Jan 02 Jan 06 Jan 10 Jan 14
US net debt to EBITDA, non-financials
Average
Europe net debt to EBITDA, non-financials
Average

GLOBAL INVESTOR 1.14 — 40
JOE PRENDERGAST chats
with the single European currency
about its birth, existence and
the future of Economic and
Monetary Union (EMU).
JP: It has been said that the euro project
failure, as the Eurozone is not an optimal
currency area and your creators did
not anticipate the challenges you would
inevitably face. Is this fair?
EURO: It is undeniable that the euro
area is not wholly an optimal single currency
area, but I don’t see this as a critical issue.
Is the United Kingdom an optimal currency
area, or was Italy? The so-called North-
South divides are not particular to me.
There were, and still are, missing vital components,
of course, but I disagree that this
was not foreseen. At the time of my birth,
I was seen as a step on a journey toward a
fully integrated Europe. The then European
Commission President, Romano Prodi, in an
interview shortly before my notes and coins
were introduced in January 2002, accepted
that many necessary instruments for
success were missing, but that “some day
there will be a crisis, and new instruments
will be added.” 1 I don’t feel like a failure.
Money talks
In conversation with the euro
JP: That may be seen as a cynical
consequences of the crisis.
EURO: Perhaps, but without EMU
there would also be crises and recessions,
just as there were before me. It is of
course also my view that further European
integration is desirable and ultimately
be considered.
JP: Despite the crisis of recent years,
your growth seems to be an unstoppable
force in Europe. You now cover 18 countries
and a population of over 330 million. How
far do you think your reach will expand?
EURO: Politically, we are reaching
the boundaries of what seems feasible
for the next decade or so. Smaller former
Eastern bloc countries that have built a
record of stability have been absorbed
without any problems. But further expansion
to larger EU member countries in
Photo: Pando Hall/Getty Images

GLOBAL INVESTOR 1.14 — 41
this region may take considerably more time
and preparation. The growth of the EU toward
the boundaries of the Commonwealth
of Independent States has an increasingly
political as opposed to monetary dimension
and has been one source of rising territorial
tension in the region.
JP: For the existing countries,
do you think the framework now in place
stable path?
EURO: Not quite. Against the background
of the current debt crisis, important
measures to improve the economic governance
in the EU and my area in particular
have been taken. EU member states have
strengthened the Stability and Growth Pact,
introduced a new mechanism to prevent or
correct macroeconomic imbalances, and are
increasingly coordinating structural policies.
But is all this enough to avoid another crisis
at some point ? It may not be. Key structural
reforms are still missing, the euro area
economy is in a weakened state, and many
countries are burdened with excessive
debts. Another global cyclical downswing,
for example, would risk another challenge
to my stability.
JP: Do you have a view on your own
value, say versus the US dollar?
EURO: For me the most important
issues of value are the internal ones – most
particularly that “one euro equals one euro
equals one euro,” no matter in which member
state I am issued. The notion of the
being dissolved or diluted may be theoretically
possible, but it is not practically so.
I have read a lot of market views on this
topic through the crisis, and I have to say
I like the line of Credit Suisse’s William
Porter on this: the milk is in the coffee and
it cannot now be practically separated.
External value is a secondary issue, which
experts – what do you think?
JP: Currencies are inherently unpredictable,
I agree, but I believe we can make
strong statements about their relative valua-
drive them, and we know currencies tend to
your recent resilience is understandable in
this context, as the European growth out-
premium associated with EMU and your
existential crisis has faded dramatically. This
has resulted in a large resurgence of capital
is running a large current account surplus. I
also believe euro area banks’ cross-border
deleveraging of balance sheets, much of
which is US-
overvalued.
EURO: If that is all true, it sounds like
I could stay “overvalued” for some time. I am
not sure Mario would approve.
JP: I think it won’t last. A trend change
is likely before long, most probably driven by
anticipation of a trend rise in US short-term
interest rates, while euro area key rates stay
very low. In the meantime, as there was remarkably
little evidence of large-scale capi-
crisis, there should be a limit to the current
reversal; and cross-border bank balance
sheet reduction is well advanced. The large
external surplus is likely to persist, but as
this is driven more by an import decline than
an export boom, it will probably prove at
Central Bank President Mario Draghi may
not approve and this will continue to mani-
ECB monetary
policy even as the Fed moves toward
an exit from its unconventional easing program.
But we seem to be changing roles
here, so let me pose another question …
JP: The European Parliament elections
in 2014 saw a near-doubling of representation
of the extreme right and left. Should
we see this as representing an increasingly
popular anti-euro view in Europe?
EURO: The 2014 European elections
and have understandably shown a large
swing away from the European political center
since 2009. Perhaps the most surprising
outcome is how dominant that center remains,
for now. If it is to stay that way, the
message of the people must be heard, and
policymakers must react. But, in a currency
union of sovereign states, the largest political
risks to me will come from the member
states’ parliamentary elections, not the
European Parliament’s. The single greatest
potential hurdle on this front was the
German elections last year, during which my
name was barely mentioned. More deeply,
at the heart of the political debate lies the
question of what it means to be “anti-euro”
or “anti-EMU.” It is not clear, at least to me,
that there are credible policy alternatives
being tabled by anyone on the right or left
that offer a better and brighter future for
any individual country, or indeed Europe
collectively.
JP: You mentioned earlier that we can’t
rule out a further crisis, say due to a cyclical
economic downswing. Has Europe simply
EMU forward?
EURO: I really don’t think so, but this
is critically dependent upon policymakers
integrating further and, in particular, pursuing
both domestic and EMU-wide reforms
more aggressively. And, most importantly,
as and when a true test of commitment to
European integration comes, it’s vital that all
participants behave reasonably rationally.
These two are really the critical points.
The increasing powers of the European
Parliament and the pragmatic evolution of
ECB policy show that as a vested common
interest grows, so too does the force to
build a much deeper integration in Europe.
This has been a trend since the beginnings
of European integration, with the demise
of the European Monetary System, for
example, leading more rapidly to EMU,
rather than more slowly. In this sense, so
1
Quote from interview with Romano Prodi, December 2001
(cited in the Financial Times, 20 October 2008).
The euro: Not feeling
or looking like a failure
Despite the existential crisis of recent years,
the euro has held in the upper end of its lifetime
range of approximately USD 0.80 and 1.60.
A large euro area current account surplus,
a surge of post-crisis capital inflows, and low
US interest rates have been drivers of the most
recent appreciation. Source: Datastream, Credit Suisse/IDC
USD per euro
1.60
1.50
1.40
1.30
1.20
1.10
1.00
0.90
0.80
1999 2001 2003 2005 2007 2009 2011 2013
Joe Prendergast
Head of Financial Markets Analysis
+41 44 332 83 18
joe.prendergast@credit-suisse.com

GLOBAL INVESTOR 1.14 — 42 1999
Has Spanish
competitiveness
become more
German?
01_Harmonized competitiveness
indicators
The ECB (European Central Bank) publishes
competitiveness indicators (the lower the value,
the better). Germany has improved its competitiveness
since the Hartz reforms of 2005.
Spain’s competitiveness has worsened since
joining the Eurozone, but improved since the
recession and following the reform. Since then,
the country has been regaining ground
vis-à-vis Germany. Source: ECB, Datastream, Credit Suisse
120
110
100
90
80
2001 2003 2005 2007 2009 2011 2013
Spain Germany France
n the late 1990s, the German economy
showed little of the dynamism that
characterizes it today. Unemployment
rose fairly steadily after reunification in
1990, despite comparatively robust GDP
growth during that decade. An ambitious reform
program termed “Agenda 2010” (a.k.a.
the Hartz reforms), announced in 2003, tried
to address certain shortcomings of the labor
market. The Agenda 2010 legislation, most of
which had become law by 2005, modernized
the system of public employment agencies,
reduced regulation of certain forms of employment
(temporary employment, labor leasing),
lowered barriers to layoffs and tied welfare
benefits more closely to efforts to find
employment.
Labor market developments since re form
implementation have been impressive: the
number of employed individuals rose to an
all-time high of 42.1 million from 39 million by
the end of 2005, while the unemployment
rate declined from 12.1 % to a post-reunification
low of 6.7 % by May 2014. Although
these numbers are indeed impressive, critics
of the reforms argue that the quality of the
new jobs created has been rather weak –
focused to a large extent on manual and
low-paid jobs. There may well be some truth
to this claim. For example, the number of employees
of so-called labor-leasing agencies
has increased substantially since the market
was opened up.
In response to these criticisms, the German
government is currently stepping back
somewhat from the spirit of the Agenda
2010 reforms, e. g. through the introduction
of a federal minimum wage and discussions
about lowering the retirement age for certain
types of employees.
The 2012 Spanish labor market reform
While it took Germany several years to agree
on reforming the labor market, the euro crisis
forced Spain to follow a comparable path
within a much shorter period of time. One of
the key initiatives in this regard was the Spanish
labor market reform announced in February
2012. It had a significant impact on labor
costs. Indeed, the OECD estimates that more
than half of the 3.9 % decline in unit labor
costs between Q4 2011 and Q2 2013 can be
attributed to the labor market reform. Among
the key adjustments were improvements in
incentives for firms to hire as well as for individuals
to look for work, e. g. by reducing
severance payments and granting firms more
flexibility in adjusting the size of their workforce.
However, the reform fell short of (high)
expectations. We view the labor market reform
as an important step in the right direction,
but we would like to see further progress
on this issue. Still, the OECD estimates that
the undertaking is responsible for the hiring
of 25,000 employees with permanent contracts
each month, especially among smalland
mid-cap firms. We portray two Spanish
small caps on page 44.
Björn Eberhardt
Global Macro Research
+41 44 333 57 43
bjoern.eberhardt@credit-suisse.com
Javier J. Lodeiro
Banking & Insurance Research
+41 44 334 56 44
javier.j.lodeiro@credit-suisse.com
02_Unemployment rates
in Germany and Spain
Since 2005, the unemployment rate in Germany
has nearly halved, also supported by the Hartz
labor market reforms. Following the global
financial crisis, the Spanish unemployment rate
has shot up to levels beyond 25 %, well above
the previous peak in 1994. Encouragingly,
there have been early signs of improvement
in recent months. Source: Datastream, Credit Suisse
%
30
25
20
15
10
5
0
50
1992 1997 2002 2007 2012
Spain
Rank (out of 148)
1
7 5 7
22
29
22
29
Germany
03_WEF competitiveness
ranking puts Germany close
to the top, with Spain still
below its precrisis highs
Germany has been assessed as a very competitive
economy over the last eight years, without
any substantial variability in its ranking. Spain’s
competitive ranking has declined compared
with precrisis levels, but the 2012 reform and
the improved macroeconomic stability should
lift its ranking back up again. Source: WEF, Credit Suisse
22
29
7
23
33
2007 2008 2009 2010 2011 2012 2013 2014
Spain Germany Eurozone average
5
23
42
6
23
36
6
23
36
4
24
35

GLOBAL INVESTOR 1.14 —
12
1
2
10
11
9
4
04_Other factors matter too
Apart from an efficient labor market, many other factors also contribute to a country’s overall compet itiveness, among
them openness to constant change and the readiness to work hard to maintain an innovative edge. The World Economic
Forum (WEF) has ranked countries according to their competitiveness for over a decade, looking at 12 factors to
determine the overall competitive position.
8
7
Overall competitive
ranking
6
Germany
Ranked 4th overall. Strong and consistently high
competitive ranking, with even a further improvement in the
most recent ranking.
Spain
Ranked overall, still below the precrisis level of 29,
but above the 2011 low of 42.
1 Institutions
Ranked overall, with a score broadly in line with
similar innovation-driven economies. The burden of government
regulation (tax and labor markets) is cited as being somewhat
problematic. Another area for improvement could be the strength
of investor protection.
2 Infrastructure
Ranked overall, very strong positioning and above the
average of similar innovation-driven economies. The only weak
rankings in this category relate to quality of the electricity supply
and mobile phone penetration compared with similar economies.
Ranked overall. Further progress in the overall
competitive ranking might be triggered by more efficient use
of government spending, reducing the burden of government
regulation, and enhancing the protection of minority
shareholders’ interests.
Ranked 10th overall, very strong positioning as well,
and above the average of innovation-driven economies. A further
increase in the penetration rate of mobile phone subscriptions
would support overall competitive positioning.
Macroeconomic
environment
Ranked 27th overall, better than similar innovation-driven
economies. The ranking in this category is negatively impacted by
the currently elevated level of government debt as a percentage
of GDP.
Ranked 116th overall. Certainly the result of the recession
in Spain, and could improve this ranking to some extent once
cyclical economic headwinds recede. A much better overall competitive
positioning would materialize if the central government
budget and debt could be reduced structurally.
4 Health and primary
education
Higher education
and training
6 Goods market
efficiency
7 Labor market
efficiency
Ranked 21st overall, in line with similar innovation-driven
economies, with high scores for quality of primary education and
life expectancy.
Ranked overall, better than other innovation-driven
economies. High scores for availability of research and training
services as well as the extent of staff training.
Ranked 21st overall, similar to innovation-driven eco n-
omies. The taxation and the incentives to invest (including the
process for starting a business) are perceived as areas where
the economy could become even more competitive.
Ranked 41st overall, similar to innovation-driven eco n-
omies. To improve the overall competitive positioning of
the country, more flexible wage determination, as well as more
flexible hiring and firing policies, including a reduction of
redundancy costs, would be needed.
Ranked overall. Improving the quality of primary
education would enhance the overall competitive positioning.
Ranked 26th overall. The overall competitive rank could
be improved by more closely aligning the educational system and
the needs of the economy. Notably, a higher-quality educa tional
system in general terms, and in terms of mathematics and
science education, could raise overall competitive rankings.
Ranked overall. Improvements in the overall competitive
ranking could materialize if more efficient antimonopoly
policies were implemented, the process for starting a new business
was shortened and taxes were reduced.
Ranked overall. The labor reform of 2012 may
improve this overall ranking to some extent. But more must
be done to retain and attract professional talent, for example.
This is definitely an area where the country needs to show
further progress.
8 Financial market
Ranked 29th overall, similar to other innovation-driven
economies. The report claims that more financing flexibility
(loan access, venture capital) and a sounder banking system
could support the overall competitive positioning of Germany.
Ranked 97th overall. This overall ranking may improve
to some extent with the cyclical recovery of the banking sector.
In our view, a more normal economic environment is needed
to properly assess this criterion.
9 Technological
readiness
Ranked 14th overall, similar to other innovation-driven
economies, with room for improvement in the area of foreign
direct investment and technology transfer.
Ranked 26th overall. The overall competitive positioning
could be improved if firms could be incentivized to absorb more
technology.
10 Market size
Ranked overall, above the average of other innovation-
driven economies.
Ranked 14th overall, also above the average of other
innovation-driven economies. Further increases in exports as
a share of GDP could raise the ranking.
11 Business
sophistication
Ranked overall, also substantially above the average
of other innovation-driven economies.
Ranked overall. The country ranking could be
improved by higher rankings in categories such as “willingness
to delegate.”
12 Innovation
Ranked 4th overall, above the average of other innovationdriven
economies, with some bottlenecks apparently existing in
the availability of scientists and engineers.
Ranked overall. Research and development is an
area in which the country still needs to improve, as well as the
area of government procurement of advanced tech products.

GLOBAL INVESTOR 1.14 — 44
SME 1 AVANZARE
Employees: 35
Export: 40 countries
Export quantities: 50% of total production
Region: La Rioja
City: Navarrete, Logroño
Years active: 10 (since 2004)
SME 2 IMPLASER
Employees: 40
Export: 20 countries
Export quantities: 17% of total production
Region: Aragón
City: Alfajarín, Zaragoza
Years active: 16 (since 1998)
Spain’s
new businesses:
Small, but fierce
Spain’s SMEs are seeing definite signs of economic recovery. Two successful companies
describe their formula for maintaining a going concern. Aside from sheer hard work, inspiration
and expertise (no surprise there), other key factors are innovation and exports.
TEXT AVELINA FRÍAS
PHOTOGRAPHY ROBERTO CASTELLI
One of the great lessons of the economic crisis for small and mediumsized
enterprises (SMEs) in Spain is that market rules are no longer
what they once were. In today’s ever-changing and complex world,
staying afloat in the market and remaining competitive in the medium
and long term means that businesses must maintain a global vision
and a flexible approach toward research, development and innovation.
Two of Spain’s best SMEs, based within very different sectors, agree
that the basic formula for economic recovery has two main components:
export and innovation. These components are interdependent. The
first is focused on development within the company, and the second
is geared toward fostering international expansion. In orienting both
of these approaches toward achieving the same goal, these companies
have been able to successfully seize windows of opportunity
despite the economic crisis.

GLOBAL INVESTOR 1.14 — 45
SME 1
AVANZARE
“Our objective is a ‘double
expansion’ – to increase national
sales by 20%, and international
sales by 80%. Export of our
products will continue to be the
main focus for us.”
JULIO GÓMEZ, CEO AVANZARE

GLOBAL INVESTOR 1.14 — 46
Spaniards would find it hard to believe that,
for an SME with only 35 employees, the
economic crisis is already a thing of the
past. This young company has only ten
years of market experience, yet the signs
of economic recovery are becoming increasingly
more evident. So far this year,
Avanzare has increased sales and production levels over
those of the same time last year, and hopes to end 2014 with
a further increase of 50%. Exporting the company’s products
and continuously investing in innovation have been key to
achieving these results.
Avanzare is considered one of the five most innovative
SMEs within Spain and is among the top few in Europe in its
sector. The company’s principal activity is the distribution of
graphene (a versatile form of carbon), as well as the fabrication
of nanomaterials, nanocomposites and nanoparticles.
These nanoparticles are used to create chemically modified
materials that are then employed in the further elaboration
of final products used in everyday life, such as those
produced by the automotive, aeronautical, textile, wood, paper,
plastics, rubber, construction and packaging industries.
In this way Avanzare acts as a “nanointermediary” and is
able to maintain a competitive edge within the global market.
Julio Gómez, Avanzare’s CEO, explains that the company’s
activity is similar to that of intermediaries in the pharmaceutical
industry, which supply the goods and materials that go
into medicinal drugs.
Avanzare is an obvious example of how exporting national
goods and products has helped to dampen the effects
of the economic crisis in Spain. In 2009, when the crisis was
at its peak, 99.5% of the company’s market lay outside the
country, which is why Avanzare began to develop its products
mainly for export.
Thanks to an export and investment program offered by
ICEX (the Institute for Foreign Commerce, a government body
that promotes the internationalization of Spanish companies),
Avanzare was able to present industrial-scale use of graphene
at international fairs for the first time. The company
subsequently expanded its reach to more than 40 countries,
first within the USA and later within Northern Europe and
Asia.
The increase in export sales in 2013 in turn enabled
Avanzare to expand its employee base by 20%. The Spanish
government’s labor reforms made it more flexible for companies
to adjust the workforce. The new employment incentives
for businesses across the board were also beneficial
for Avanzare, and allowed them to offer new jobs to young
investigators and researchers.
As is typical of the pharmaceutical industry, 35% of
Avanzare’s budget goes toward research and development.
This is key to remaining competitive on a global level, as well
as to gaining a larger sector of the market. Up until now, the
market has been dominated by big chemical companies with
upward of 50,000
1
1 Some 35% of Avanzare’s budget goes toward research and development. 2 Avanzare,
3 An increase in international sales in 2013 enabled Avanzare to create new jobs within
the company. 4 Graphene is a form of pure carbon that conducts heat and electricity with
100 times stronger than steel).
5 The company exports to more than 40 countries.
2

GLOBAL INVESTOR 1.14 — 47
3
4 5

GLOBAL INVESTOR 1.14 — 48
SME 2
IMPLASER
“We can’t assume that within
the next ten years we are going
to be doing the same thing as
we are now. The world is
moving fast, and if you stop,
trying to get back on can be
quite complicated.”
JAVIER ARILLA, QUALITY AND PRODUCTION MANAGER
2

GLOBAL INVESTOR 1.14 — 49
1
1
materials, and also manufactures photoluminescent products. 2 The
business is comprised of 2,000 m 2 of plant, facilities and storehouse
space. They have invested heavily in preparing their products for the
international market.
Implaser was founded in 1998 in Zaragoza. Ever since,
this SME has strived to be a big company, not liter ally
in size, but rather in its approach toward business
challenges.
Acting responsibly and maintaining a long-term
vision are two principles that have helped Implaser to
weather the effects of the economic crisis in Spain. In
the process, the company has innovated and transformed
from the inside out.
Implaser is one of Spain’s leading silk-screen printing
companies. It prints text, images and illustrations onto metals
and flat plastic materials, and also manufactures photoluminescent
products. In developing and applying these
photoluminescent products, Implaser has reaped major rewards
within the competitive global market.
The company uses photoluminescent LED (light-emitting
diode) hybrid technology to produce individual emergency
and security sign age, as well as entire systems of more sophisticated
and extensive installations in buildings, industrial
plants, and train and highway tunnels.
The development of these products launched Implaser
on its journey toward exporting, a process that began in
2005 through the PIPE 2000 program, offered by ICEX.
Implaser describes the early days of its expansion as
arduous, long and costly, as it coincided with the peak of
the economic crisis in 2009. Now, however, the company
can see its efforts beginning to bear fruit.
Javier Arilla, quality and production manager, says that
currently 17% of Implaser’s total turnover comes from the
international market. The company is anticipating a further
20% increase for 2014.
In the last five years, Implaser has managed to expand
and export to 20 countries on five continents, with Northern
Europe, Asia and Latin America being the company’s
main markets.
According to Arilla, facing the economic crisis with a more
dynam ic approach was a decisive element for the company.
Implaser invested heavily in preparing its products for the
international market. The company has also used alternative
strategies to better work with the unstable national market,
such as creating parallel lines of business, and investing in
new technologies and research.
These strategies have enabled the company to continue
to create new jobs, primarily for women and young people.
Implaser has progressed from being a company of 34 people
in 2009 to one of 40 in 2014.
The economic recovery is in sight for this small “big” enterprise.
And although the good news comes mainly from
foreign markets, it is clear to Implaser that this would not
have been possible without the company’s dynamic management
vision for change from within.

GLOBAL INVESTOR 1.14 — 50
3 Photoluminescence is a chemical effect whereby an object absorbs light from the visible spectrum and later
emits it, or glows, for some period of time, in total darkness. 4 The export process requires very careful resource
planning and management from beginning to end. 5 To better face the challenges of innovation, Implaser
has created new jobs for specialized technical employees. 6 60% of
the employees are women. These are some of the keys to an excellent management policy at Implaser.
3

GLOBAL INVESTOR 1.14 — 51
5
4
6
Reference herein to any specific commercial products, process or service does not constitute or imply its endorsement, recommendation or favoring by Credit Suisse or
any of its employees. Neither Credit Suisse nor any of its employees make any warranty, expressed or implied, or assume any legal liability or responsibility for the accuracy,
completeness, usefulness or any information, product or process disclosed.

GLOBAL INVESTOR 1.14 — 52
The scope of energy
security in Europe
Energy dependence has long been a known risk: Europe imports more than half of its total energy
needs. Moreover, close to one-third of the region’s crude oil imports and two-fifths of its natural gas
imports come from a single trading partner – Russia. What are the alternatives, and how viable are they?
ISL
2.9%
NA
EU28
6.4%
14.1%
NOR
5.8%
64.5%
DNK
7.5%
26.0%
P
2014
SWE
8.0%
51.0%
P
NORD STREAM
North American
energy exports
Given its success in shale gas exploration,
expectations were high that the would
contribute to energy security in Europe.
However, although recently debated, exports
of crude oil are still largely prohibited. Aspiring
still
have to gain approval from the Department
of Energy through a lengthy process, and the
export infrastructure is still in its infancy.
IRL
6.3%
7.2%
GBR
6.1%
4.2%
2017
P
2015
FRA
6.4%
13.4%
NLD
6.1%
4.5%
LUX
5.9%
3.1%
BEL
6.1%
6.8%
P
DEU
6.5%
12.4%
CHE
NA
21.0%
P
OPAL
2014
AUT
N/A%
32.1%
P
HRV
6.2%
16.8%
POL
5.2%
11.0%
CZE
6.7%
11.2%
P
P
HUN
5.0%
9.6%
SVN
8.5%
20.2%
P
LNG terminal
Import terminal
operational
Import terminal
under construction
Gas pipeline routes
Existing
Interconnectors
Southern Corridor
Shale gas extraction 2013
Shale gas basins
/moratorium
Allowed
Allowed and permits issued
Oil-drilling zones
Oil-drilling zones in Europe
Political risk in North Africa
Number of events related
civilian killings, riots,
protests and recruitment
2010–13.
COUNTRY
Energy savings potential
% of consumption
in 2016
Share of renewables
% of total energy
PRT
6.6%
24.6%
P
169
34
54
P
ESP
7.6%
14.3%
24
47
599
72
1,001
ITA
6.4%
13.5%
MLT
8.2%
1.4%
Dependency on Russian gas
(as a % of total consumption)
0%: None
1–20%: Small
20–50%: Medium
50–100%: High
6
25
4
2
26
13
54
860
5
16
120 432

GLOBAL INVESTOR 1.14 — 53
P
7
2014
P
SVK
4.3%
10.4%
P
P
88
P
LTU
6.5%
21.7%
FIN
5.4%
34.3%
P
ROU
4.5%
22.9%
BGR
6.0%
16.3%
GRC
6.3%
13.8%
LVA
5.9%
35.8%
EST
4.7%
25.8%
14
St.Petersburg
P
2,857
P
SOUTH STREAM
CYP
5.2%
6.8%
390
Ankara
Energy import dependence
for Europe, 2012
Dependence is high across energy assets.
Given limited tradability, gas is most sensitive
to supply disruption.
Source: Eurostat
imports as a % of total energy consumption
100
80
86
60
66
53
40
42
20
0
Petroleum
products
Gas Total energy Solid fuels
YAMAL
Moscow
BLUE STREAM
SOUTHERN CORRIDOR
BROTHERHOOD
Tbilisi
SOYUZ
Baku
TRANS-CASPIAN
Crude oil and natural gas
imports of origin country
as a % of total imports, 2013
Russia is the most dominant trading partner
for both crude oil and natural gas. However,
gas imports are far more concentrated on a small
number of suppliers.
Source: European Commission, Eurostat
ANGOLA
OTHER EUROPEAN
COUNTRIES
IRAQ
ALGERIA
AZERBAIJAN
LIBYA
KAZAKHSTAN
NIGERIA
SAUDI ARABIA
OTHER
NORWAY
RUSSIA
11% 9% 8% 6% 6% 4% 4% 3% 3% 3%
11%
30% 14% 12% 4% 4%
32%
36%
OTHER
NIGERIA
QATAR
ALGERIA
NORWAY
RUSSIA

GLOBAL INVESTOR 1.14 — 54
As Europe reconsiders its relationship
with Russia amid the crisis in
Ukraine, the issue of energy security
and asymmetric dependence
on Russia is now the center of attention. At
a point where the European recovery is still
fragile, the future of energy was high on the
agenda even before tensions rose: the advent
of shale gas in the USA has significantly lowered
the relative price of US natural gas visà-vis
the rest of the world. The renaissance
of US manufacturing has persuaded some
that the decrease in European competitiveness,
paired with the overall effect of higher
energy prices faced by European producers
and consumers, would pose a serious threat
to the European recovery. But how can dependency
be reduced?
New sources of supply: Pipeline illusions
A network of pipelines circumventing Russia,
the “Southern Corridor,” has been proposed in
2008 and is seen by some in Western Europe
as providing diversification of supply. But this
is a complex project and it is unclear that
it will be built soon. One of the key Southern
Corridor projects, the Nabucco pipeline, intended
to connect Europe to Caspian gas
assets, was terminated in 2013. Meanwhile,
South Stream, though not free of issues, is
at a relatively advanced stage and still seems
likely to proceed. Hence, an extended system
of pipelines is unlikely to resolve energy insecurity.
In addition, many of the potential partnerships
identified by the European Union are
subject to a broad array of uncertainty risk.
Africa, which has major energy assets, is subject
to severe political risk (see map). Central
Asia, which holds equal amounts of resources,
can easily look eastward to China and the
rest of Asia, where demand will increase
strongly in the coming years. Hopes are high
that the lack of liquidity in the European gas
market will be compensated over time by
the creation of a global infrastructure for tradable
liquefied natural gas (LNG). Several
import terminals are currently being built in
Europe (see map), but global export capacity,
including future supplies from the USA, has
yet to evolve.
The elusive potential of European shale gas
An obvious solution for Europe’s dependence
on natural gas imports would be to exploit the
supposedly vast shale gas resources on its
own soil. According to the US Energy Information
Administration (EIA), Europe is sitting on
shale resources of 18.1 trillion cubic meters
01_Cumulative installed solar capacity (in gigawatts)
Solar installations are predicted to grow at a high rate until 2020.
Source: European Photovoltaic Industry Association
Germany
Italy
Spain
France
Belgium
UK
Greece
Czech Republic
Romania
Bulgaria
Austria
Netherlands
Slovakia
Denmark
Portugal
Slovenia
Poland
Sweden
Hungary
2013
2.13 4
2.98 7
1.02 5
1.02 3
0.69 4
0.54 3
0.53 1
0.28 3
0.25 1.50
0.04 1
0 5
0.02 2
2.59 8
0.67 8
2020E
4.71 18
2.74 22
4.70 30
17.61 42
36.01 80
0 10 20 30 40 50 60 70 80
02_Nuclear capacity in Europe (in megawatts)
While nuclear energy remains politically unpopular in Europe, new capacity is being added
in emerging markets. Source: World Nuclear Association
France
Germany
UK
Sweden
Spain
Belgium
Czech Republic
Switzerland
Finland
Bulgaria
Hungary
Slovakia
Romania
Slovenia
Netherlands
Poland
Lithuania
485 0 0 485
5,943 0 0 5,943
3,252 0 0 3,252
1,906 0 0 1,906
1,310 0 0 1,310
696 0 0 696
12,003 0 0 12,003
9,508 0 0 9,508
7,002 0 0 7,002
3,766 0 2,400 6,166
2,741 1,700 0 4,441
1,889 0 2,400 4,289
1,816 942 0 2,758
0 0 6,000 6,000
0 0 1,350 1,350
10,038 0 6,680 16,718
63,130 1,720 1,720 66,570
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000
Operational Under construction
Electricity generation by source
Source: IEA
2011 2020E
Coal 26% 22%
Oil 2% 1%
Gas 22% 19%
Nuclear 25% 23%
Wind 5% 10%
Solar 1% 3%
Other renewables 19% 22%
World
640,904
374,611
188,755
77,538
Europe
168,241
139,029
22,240
6,762

GLOBAL INVESTOR 1.14 — 55
03_New routes to the
international gas trade
The increase in gas demand, driven by China
and Europe, must be matched by incremental
increases in exports from five key regions:
the USA, Australia/New Zealand, Russia,
Africa and Central Asia. Source: Eurostat
Incremental change
in natural gas trade,
2015–20 (billion cubic meters)
160
140
120
100
80
60
40
20
0
Incremental demand
04_European natural gas
supply breakdown
LNG imports will likely remain a small fraction
of pipeline imports. However, they could prove
pivotal in the event of supply disruptions.
Source: Eurogas, Wood Mackenzie
in million tons of oil equivalent
600
400
200
0
Latin America
Non-OECD Europe
India
Japan
Other Asia
Europe
China
Middle East ex. Iran
Iran
Central Asia
Africa
Russia
Australia/NZ
USA
Incremental supply
2010 2015E
2020E
LNG net imports Pipeline imports
Indigenous sources
or about 10% of global shale gas reserves.
This amount would cover more than 35 years
of Europe’s current natural gas demand. Despite
the groundbreaking results of the shale
revolution in North America, which provided
the necessary technology and know-how,
considerable obstacles stand in the way of
similar success in Europe. To date, broadbased
development has been prevented mainly
by environmental concerns over hydraulic
fracturing, the predominant extraction method.
Apart from early shale exploration in Poland
and Romania, the UK is the only European
country where shale resources recently received
added support from the government,
including tax advantages for exploration and
planned licensing of shale acreage.
Europe is not the USA
It has yet to be shown whether European geology
is actually viable for commercial shale
extraction and how much of this resource is
ultimately recoverable at a reasonable cost.
In comparison with the USA, Europe’s much
higher population density, lower level of transportation
and processing infrastructure, and
different land ownership structures are further
challenges to be taken into account. While
supply concerns could prompt other countries
to follow the UK’s example and rethink their
strategies toward unconventional shale resources,
commercial development will take
time and is unlikely to materialize before the
end of this decade.
Renewables will continue to play a role
Investors often complain about the degree of
policy uncertainty over different forms of alternative
energy. In fact, policymakers have
found it difficult to voice their support for wind
and solar given the short-term benefits of
natural gas and even coal. However, prices for
solar have been falling constantly, and they are
close to becoming cost-competitive in terms
of their levelized cost of energy (the price that
offers a minimum return required to undertake
a project). In addition, nuclear energy – which
has historically played a large part in European
power generation (see Figure 2) – is still
considered unpopular, and new projects face
enormous financing challenges. Hence, renewables
are likely to remain an integral part
of the EU’s strategy to cope with energy
insecurity and emissions. It has pledged to
increase the share of renewables in total energy
consumption from 14.2% today to 20%
by 2020, and plans to increase it further to
27% by 2030. These targets are certainly
ambitious, but the alternatives are clearly
too few for policymakers not to take them
seriously.
The case for policy coordination
We have argued that Europe cannot solely
rely on new sources of supply. It should focus
on areas that are in its control. First of all,
policymakers should address the inefficiencies
in their fragmented energy network, and
they must be prepared to invest in the infrastructure
for pan-European energy flows and
storage. Second, measures toward increased
energy efficiency are central to energy security
and should be taken seriously. For years,
energy consumption forecasts have been
factoring in efficiency gains, and Europe
cannot risk falling behind. In the absence of
genuine policy coordination, European member
states will continue to be vulnerable to
short-term disruptions in energy markets and
Markus Stierli
Head of Fundamental Micro Themes Research
+41 44 334 88 57
markus.stierli@credit-suisse.com
Matthias Müller
Energy Research
+41 44 332 87 20
matthias.mueller.3@credit-suisse.com
Nikhil Gupta
Fundamental Micro Research
+91 22 6607 3707
nikhil.gupta.4@credit-suisse.com

GLOBAL INVESTOR 1.14 — 56
European telecom
sector ready
to deploy cash
Light regulation and the EU’s “single market” initiative aim to promote
consolidation and investment in Europe’s telecom infrastructure.
USA
20
TELECOM PROVIDERS
EUROPE
70
TELECOM PROVIDERS
Currently, more than 70 telecom companies offer their services in 28 European countries.
This compares to less than 20 telecom companies operating in the USA. This fragmented and fiercely
competitive environment has prevented companies from investing in future technologies,
leaving some business models vulnerable to new, disruptive technology.

GLOBAL INVESTOR 1.14 — 57
An environment of globally cheap
dence
in economic recovery, along
couraging
consolidation, suggests that the
European telecom mergers and acquisitions
(M&A)
an incentive for companies to deploy cash
and improve their return on investment, and
M&A
year to date, telecommunications has been
one of the most active industries globally,
USD 220 billion in deals. This does
not include one of the biggest transactions
in history, Vodafone’s 2013 USD 130 billion
sale of its stake in Verizon Wireless. Beyond
the factors driving global M&A
see an additional driver for telecom sector
consolidation in Europe. We believe the
EU
consolidation and investment in the sector.
EU telecom sector in need of consolidation
“We would
like to have
more BMWs
than Fiats in
the European
telecom
sector.”
NEELIE KROES
EU Commissioner for the Digital Agenda
Currently, more than 70 telecom companies
offer their services in 28 European countries,
20 telecom companies
operating in the USA. This fiercely competitive
environment in the EU telecom sector
has prevented companies from investing in
future technologies, leaving some business
ogy.
Since the launch of the iPhone in 2007,
penetration and the mobile Internet, free cash
from EUR 55 billion to EUR 32 billion at the
end of 2013. The market capitalization of the
nine largest EU
reflects 87% of total EU telecom market
capitalization) has decreased by EUR 220 billion,
during the same period as Apple gained
EUR 320 billion of market value. High-margin
voice and SMS sales have been displaced by
mobile Internet apps such as WhatsApp. In
economic environment, fierce competition
and regulatory impacts (e.g. mobile termina-
decline.
EU moves trigger M&As and investments
The EU telecom authorities launched the
single market initiative in March 2013. >
01_Market value of European telecom operators hurt by smartphones
and the mobile Internet
The launch of the iPhone ushered in the age of the smartphone – displacing traditional sources of revenue
and significantly decreasing the value of the EU telecom market. Recent EU initiatives have helped the sector’s
valuation to recover. Source: Datastream, Credit Suisse
in USD bn
800
2007:
iPhone
launch
Apple gains
USD 320 bn
in market cap
in %
70
700
60
600
50
500
40
400
30
300
Photos: Apple, Wikimedia Commons
200
100
0
EU telecoms lose
USD 220 bn
in market cap
2006 2007 2008 2009 2010 2011 2012 2013 2014
Apple’s market cap Aggregate market cap of five European incumbents European Smartphone penetration (r.h.s.)
20
10
0

GLOBAL INVESTOR 1.14 — 58 20
02_European M&A activity
driven mainly by telecoms
Global M&A activity in 2014 features a number
of big headline deals and multiyear highs for
total deal volumes. The recovery in European
deal volumes is particularly pronounced.
Source: Bloomberg, Credit Suisse
M&A activity on the rise
2,500
2,000
1,500
1,000
500
0
06.02 06.08 06.14
Western Europe – volume (r.h.s.)
Western Europe – deal count
03_FCF generation in the
European telecom sector
in EUR bn
Based on the nine largest EU telecom operators,
representing 87% of EU telecom market value
(in USD bn)
600
500
400
300
200
100
0
The decline in free cash flow generation has
prompted politicians to act. State-of-the-art
communications and high-speed Internet access
are key components of a competitive European
landscape. Source: Company data, Credit Suisse
The initiative highlighted the need to strength-
tant
role in the economy, and needs investment
to maintain its competitive position and
state-of-the-art communications infrastructure
for Europe. A so-called light regulatory
tended
to stimulate investment in broadband
consolidation among European telecom markets.
The regulations have had an immediate
operators increasing their capital expenditure
guidance. This increase reflects the confidence
of companies that investments in future
technology should result in higher returns
on invested capital. While some have expressed
fears about rising prices for consum-
the European recovery and could lead to a
gradual re-rating of European telecom sector
stocks over the next five years.
Recovery could yield over EUR 60 billion
While a number of uncertainties remain, including
discussions over roaming tariff cuts
EU telecoms have
already begun to position themselves for a
more business-friendly environment. M&A
activity has risen materially, and domestic
consolidation has already taken place in
Austria, Ireland and France. At the time of
E-Plus and Telefónica
consolidation is still expected in Spain, Italy
and other European countries. Cable operators
are also engaged in the consolidation
trend. Vodafone, for example, recently ac-
land
and Ono, thus improving its converged
offering in Germany and Spain. Based on our
estimates, the total cost synergies and value
creation from consolidation could exceed
EUR 60
Uwe Neumann
Technology & Telecom Research
+41 44 334 56 45
Dan Scott
Investment Strategy & Research
+41 44 334 56 33
FCF continues to decline
60
50
40
30
58
56
47
49
44
37
32
30
20
10
0
07 08 09 10 11 12 13A 14E
FCF generation in the EU telecom sector
in EUR bn
05_European wireless equipment market to outgrow
Asia and the USA
European telecom companies have increased capex significantly. Investment in the quality
Source: Company data, Credit Suisse
04_Potential value of market
recovery in EUR bn
Market recovery value through domestic
consolidation is a function of potentially rising
affect EBITDA and FCF generation positively.
Source: Arthur D. Little, Credit Suisse
EU market recovery values
16
12
8
in %
18
16
14
12
10 10 %
8
7 %
6
4
2
13 %
13 %
3 %
12 %
10 %
19 %
11 %
6 %
4
0
1 %
0 %
0
2011 2012 2013 2014E
FR DE IT ES UK NL BE SE DK AT
US Asia Pacific Western Europe

GLOBAL INVESTOR 1.14 — 59
Investor know-how
Ratings
and risks
Valuation is not an exact science and there is no single approach that can accurately assess whether
an asset is fairly priced without making assumptions. Sometimes markets are driven more by liquidity
and sentiment rather than fundamentals, but it is in such cases when well-researched valuation analysis
can prove most useful in helping investors identify opportunities and avoid risk.
VALUATION
What is a fair price for an asset ? This question
has spurred the creation of a multibillion dollar
industry that tries to identify the intrinsic
value of assets and benefit from possible
mispricings. There are numerous valuation
methodologies, of which discounted cash flow
and relative valuation are the most commonly
used. All methodologies share some principles,
but they can yield very different results.
The most commonly used method is relative
valuation, whereby the market price of a
security is compared to the price of other assets.
Security prices are standardized using
one or more variables, such as earnings or
book value. Metrics like earnings are relatively
volatile, which is why some practitioners
prefer to use averages or forecasts. The
Shiller price-earnings (P/E) ratio, for example,
uses real earnings averaged over 10 years.
Valuation multiples are often compared to
their own history or those of comparable
secu rities, but the time horizon used can
provide conflicting results. For example, at
the time of writing, the 12-month forward P/E
ratio of the S&P500 is well above its 10-year
average, but is in line with its 20-year average.
While this type of analysis is intuitive and
simple to use, it has significant limitations as
it assumes that fundamental conditions do
not change over time and/or that other assets
are fairly valued. In addition, there is no guarantee
that valuations will immediately revert
to their mean: the Shiller P/E ratio has been
above its 144-year average value 96% of the
time in the last 20 years. Comparable assets
are not always easy to find, different multiples
should trade at a premium or discount.
Another common valuation methodology
is the discounted cash flow model, which
estimates an asset’s intrinsic value by
advantage is that it is very versatile and
can be tailored to different types of assets
(e.g. non-public assets), market conditions
(e.g. liquidity), contexts (e.g. corporate mergers)
and investment horizons.
The cash flows of some assets like Treasury
bills and bonds are relatively certain, but
this is not the case for most assets like equi-
flows by making assumptions that can vary in
complexity and depth. Alternatively, it is also
possible to apply a constant growth rate to
future cash flows, a method commonly used
cash flows that are far into the future.
The second component of the discounted
cash flow is the discount rate, which is at the
heart of finance theory and represents the
expected rate of return on the asset, given
its risk. Discounting reflects two key assumptions:
cash flows become less valuable as
time passes, and investors prefer safer over
riskier cash flows. Estimating this has become
somewhat of a Holy Grail in the financial industry,
as no single model provides a definitive
answer as to what the rate should be. The
Capital Asset Pricing Model is the most
popular approach to evaluating assets and
won its originators the Nobel Memorial Prize
in Economic Sciences. It postulates that >

GLOBAL INVESTOR 1.14 — 60
01_US real equity returns
A popular way of assessing valuation is to compare the market level to its long-term trend, which is associated with potential growth. A buy or sell signal
is triggered when equities have deviated significantly from their trend. Markets can remain at such levels for long periods, so momentum can also
be factored in. Wars and economic depressions may have permanent negative effects on a market’s potential level, meaning that it is not always correct
to extrapolate the past. Source: Datastream, CS Global Strategy/IDC
Index level (log scale)
16
Trend = 6.2%
Standard deviation = 33.9%
14
Panic
8 yrs
Secular bull
24 yrs
Aftermath
12 yrs
Reflation
13 yrs
Inflation/war
14 yrs
Bubble
9 yrs
Deflation/war
14 yrs
Secular bull
27 yrs
Stagflation
14 yrs
Secular bull
16 yrs
Aftermath
12
10
8
6
4
2
–8.3%
11.1%
2.9%
9.5%
–2.5%
22.4%
–1.3%
8.3%
2.8%
13.6%
0
1849 1869 1889 1909 1929 1949 1969 1989 2009
US long-term real equity returns (log level index – returns per annum)
02_US discount rate (January 1976 – June 2014)
The Credit Suisse HOLT discount rate also factors in inflation and differences in accounting standards, which makes it a powerful valuation tool.
Source: Credit Suisse HOLT
US discount rate (%)
10
9
8
7
6
Tech bubble bursts
Current DR: 4.3
90th percentile: 7.6
75th percentile: 6.9
Median: 5.7
25th percentile: 4.6
10th percentile: 4.0
5
4
3
2
1
0
Energy crisis
1980 recession
1981 recession
Kuwait invasion
9/11 attacks
Enron, WorldCom
Credit crisis
European debt crisis
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Note: Excludes financials and regulated utilities
US discount rate
10th percentile 75th percentile
90th percentile

GLOBAL INVESTOR 1.14 — 61
the expected return of an asset is a function
of the risk-free rate, the risk premium of a
diversified (market) portfolio and how much
risk the asset contributes to this portfolio
(also known as beta).
In practice, the risk premium is often inferred
from history. According to the Credit
Suisse Investment Returns Yearbook, which
provides estimates of risk premia for different
asset classes since the start of the 20th century,
global equities have generated a return
of 4.3% in excess of the risk-free rate (the
US Treasury bill), while the excess returns on
US equities have been 5.5%. Practitioners
often compare asset returns or yields to the
long-term trends in order to understand the
impact that positive and negative economic
shocks can have on valuations. At the time of
writing, US equities are slightly above their
trend since 1849, but not excessively so. As
Figure 1 suggests, equities can spend entire
decades above or below trend.
Some valuation methodologies estimate
the discount rate by reversing the problem of
asset pricing: instead of estimating the fair
price of an asset, they estimate the rate that
makes discounted cash flows equal the market
price for the asset class (see Figure 2). This
at the single security level (a method used by
Credit Suisse HOLT). Alternatively, it can be
compared to its own history, as well as other
financial variables like implied volatility and
credit yields to gauge whether an asset is
fairly valued and to conduct scenario analyses
(a method favored by Credit Suisse strategists).
HOLT’s implied discount rate methodology
indicates that equities are currently
trading at a premium relative to their historic
average but at a discount relative to government
bonds.
Choosing between competing methodolo-
often determined by data availability. No
valuation methodology is ironclad as they all
they are extremely useful for investors who
use them properly and are able to understand
Antonios Koutsoukis
Fundamental Micro Themes Research
+44 20 7883 66 47
antonios.koutsoukis@credit-suisse.com
BOND SPREADS
TEXT JAMES GAVIN
Sovereign bond spreads are the difference
between yields issued by governments with
high and low credit ratings. Bonds that have
a lower rating – for example in an emerging
market – carry a higher yield due to the perception
of additional risk involved in buying
the debt. Widening or narrowing spreads can
reflect perceived differences in central bank
policies as well as economic growth prospects.
Bond spreads are therefore used to
compare risk between markets.
A bond yield mainly has two components –
interest rate risk and credit risk (plus a bit of
liquidity risk). Some investors are happy to
carry all the risk, but when interest rates are
expected to rise, bond prices fall, leading to
capital loss. Consequently, investors may
try and strip out the interest rate risk by
hedging or doing long-short trades on bonds
(or combinations of bond and credit default
The role of rating agencies: Chicken or egg?
swaps). Thus they get exposed only to
credit risk.
There are several techniques for measuring
spreads. One is by yield differential, i.e.
calculating the difference between equivalent
sovereign notes. The second is by the
so-called credit default swap (CDS) differential.
The first method is based on traded
prices, for example, 10-year government
bonds are physically traded in the market,
providing a physical price signal. The second
is a derivative.
The sovereign CDS
component of capital markets, providing a
means for estimating individual sovereign
risk by taking out insurance against default:
the buyer pays a default swap premium,
usually expressed in terms of basis points.
Typically, CDS trading volumes are much
higher, react more rapidly, and at times are >
The narrowing of bond spreads in 2014 bears a relation to the trajectory of the European
economic recovery, with growing belief that the worst is over. The yield story says much
about investor sentiment and the urgency with which many are looking for yield – including
That bullish sentiment, though, is based at least in part on signals provided by the
Sovereign investment grade status is often associated with lower spreads in international
markets. In a study of 35 emerging markets between 1997 and 2010, the International
found that investment-grade status reduces spreads by 36%, above and
beyond what is implied by macroeconomic fundamentals.
The decline in European periphery yields follows positive ratings assessments, such as
Fitch Ratings increasing its risk rating for sovereign debt in Greece and Spain and announcing
an improvement in its outlook for Ireland, Cyprus, Italy and Portugal.
Investors rebalance their portfolios across markets to reduce exposure to riskier borrowers,
and they factor in the rating agencies assessments. But there is a chicken-and-egg situation.
In general, credit ratings tend to be slow and reactive, and spread movements lead to rating
changes, rather than the other way round. So spread changes can become a leading indicator
of fundamental improvement signals in an economy, which ultimately leads to rating changes.

GLOBAL INVESTOR 1.14 — 62
a better reflection of market sentiment and
market pricing. Bonds, on the other hand, can
become illiquid under certain conditions.
Spreads track Eurozone fall and rise
The contraction in sovereign bond spreads
seen in some early months of 2014 between
states of the European periphery – Portugal,
Spain, Greece, Italy and Ireland – and core
Eurozone economies like Germany has highlighted
positive investor reaction to signs of a
recovery under way in formerly struggling
economies such as Portugal and Ireland.
Portugal, which entered a bailout program
in 2011, has experienced a sharp fall in sovereign
bond yields, which dropped from 6.2%
at the end of 2013 to 5.3% in January 2014,
to 3.5% in early May. Even Greece, in its first
sortie into the debt capital market, managed
to raise EUR 3 billion in five-year bonds in
April, with a yield below 5%.
Investors have moved into Eurozone
periphery bonds, helping bring yields down
to levels not seen for more than a decade. In
DIFFERENCE IN YIELD
DEFINES SPREAD
The difference in yield among variously
yields were 1.47%, whereas the equivalent
Italian yield was 3.02%. This 155-basispoint
difference represents the desired
premium – or spread – that investors
ask to hold for the perceived higher-risk
Italian sovereign paper, as compared
to the better-rated German bunds.
early May, yields on 10-year Italian government
bonds fell to near 3%, the lowest on
record. Spain’s 10-year bond coupon dropped
below the 3% mark, but Ireland’s yields
have declined the most, reaching 2.74% in
early May.
The way spreads have contracted shows
that investors now require less yield to hold
the debt of European periphery states. The
spread in early May that investors demanded
for Spain’s 10-year bonds, compared to
equivalent-tenor German debt, shrank as
much as 6 basis points to 146 basis points –
the narrowest since August 2010.
Sentiment is clearly playing a role in driving
this process, with investors taking a cue
from signals of an ongoing economic revival
and reduced volatility. On 5 May, Portugal
announced it was ready to exit its three-year
bailout program, an indication of its slow
emergence from the financial crisis. Many
investors who were put off from investing in
lower-rated European sovereign paper have
found reassurance in the commitment of the
European Central Bank (ECB) to support
these economies come what may.
A mixture of more favorable fundamentals
and reviving investor sentiment has combined
to shift allocations toward the likes of Portugal
and Italy. Investors’ hunger for yield is
clearly pushing them back to these markets,
given the lack of adequate returns elsewhere.
For example, Germany’s benchmark 10-year
yield stood at 1.46% in early May, a level
offering too little reward for the risk.
Investors also see an environment where
there is a higher risk of deflation than inflation.
The decline in bond yields witnessed in
CREDIT DEFAULT SWAPS
Before the 200
sovereign CDS markets were not
an accurate measure of developed
The post-Lehman environment changed that,
with an increase in CDS trading volumes.
According to data from the Bank of
of 2010 sovereign CDSs accounted for
13% of total CDSs, whereas at the beginning
6%.
Sovereign CDS premiums rose most
sharply in the European periphery
economies most affected by the crisis.
year-to-date 2014 reflects in part the fact
that investors are betting that the ECB will
begin printing money, after comments from
President Mario Draghi that “unconventional
measures” might be considered to stop inflation
falling further.
However, there is some evidence of
greater appetite from European periphery
investors for sovereign paper in their own
markets. There are reports that insurers in the
Eurozone periphery, which rely on sovereign
bonds to match their liabilities, have been
How shifts in the investor base affect spreads
to an USA, UK and core euro area countries
decline in long-term sovereign bond yields.
The
crisis contributed to a decline in the long-term sovereign bond yields in the USA, UK and
foreign investors contributed to an increase in long-term sovereign bond yields in Spain and Italy
of 110–180 and 40–70 basis points, respectively. The study suggests that “normalization”
to bring long-term rates back to their precrisis level unless this is accompanied by a similar
“normalization” of the foreign investor base.

GLOBAL INVESTOR 1.14 — 63
Authors
Michael Gähler
Co-Head Global Equity & Credit Research ..................
michael.gaehler@credit-suisse.com ...........................
+41 44 333 51 84 ....................................................
Thomas C. Kaufmann
Pharmaceuticals Research ........................................
thomas.c.kaufmann@credit-suisse.com .....................
+41 44 334 88 38 ...................................................
Michael Gähler is Co-Head of Global Equity & Credit
Research at Credit Suisse Private Banking and Wealth
Management, covering European Utilities. Previously,
he was Head of Global Infrastructure Credit & Equity
Research, having joined Credit Suisse in 2004.
He holds a Master of Business Administration and
Economics from the University of Zurich, Switzerland,
and is a CFA charterholder. > Pages 15–17
Thomas C. Kaufmann joined Credit Suisse Private
Banking in 2006 as an equity analyst for nanotechnology
in the healthcare sector. He is now senior
research analyst for the global pharmaceuticals sector
and is also in charge of research on the megatrend
topic of Innovation. He holds a Master of Science in
Biochemistry and a PhD in Biophysics, both from the
University of Basel, Switzerland. > Pages 26–29
Oliver Adler
Head of Economic Research .....................................
oliver.adler@credit-suisse.com ..................................
+41 44 333 09 61 ....................................................
Nikhil Gupta
Fundamental Micro Research ....................................
nikhil.gupta.4@credit-suisse.com ..............................
+91 22 6607 3707 ..................................................
Ulrich Kaiser
Technology & Media Research ....................................
ulrich.kaiser@credit-suisse.com ................................
+41 44 334 56 49....................................................
Oliver Adler is Head of Economic Research at Credit
Suisse Private Banking and Wealth Management.
He has a Bachelor’s degree from the London School of
Economics as well as a Master of International Affairs
and a PhD in Economics from Columbia University
in New York, USA. > Pages 04–10, 12–14, 32–35
Nikhil Gupta joined Credit Suisse Private Banking
and Wealth Management in 2011, and is currently part
of the thematic research team. He has six years of
experience, which encompasses consulting and
financial research. He is a postgraduate from the Indian
School of Business, Hyderabad. > Pages 52–55
Ulrich Kaiser is a senior research analyst in the Global
Equity and Credit Research team at Credit Suisse
Private Banking and Wealth Management, covering the
IT services and software, hardware and media sectors.
He joined Credit Suisse in 1993, initially working in
Japanese Equity Research. He is a CEFA charterholder
and holds a Master of Economics from the University
of Constance in Germany. > Pages 26–29
Björn Eberhardt
Global Macro Research .............................................
bjoern.eberhardt@credit-suisse.com ..........................
+41 44 333 57 43 ....................................................
Reto Hess
Auto & Capital Goods Research ..................................
reto.hess@credit-suisse.com ....................................
+41 44 334 56 24 ....................................................
Stefanie Kluge
Consumer Discretionary & Retail & Industrials Research
stefanie.kluge@credit-suisse.com .............................
+41 44 332 03 74 ....................................................
Björn Eberhardt is Head of Global Macro Research
at Credit Suisse Private Banking and Wealth
Management. He joined Credit Suisse Group in 2011
after working as a financial markets analyst and
mutual fund manager at Luzerner Kantonalbank.
He holds a PhD in Economics from the University of
Wisconsin-Milwaukee and a Diploma in Economics
from the University of Potsdam, Germany, and he is
a CFA charterholder. > Pages 04–10, 42–43
Reto Hess is a senior research analyst at Credit Suisse
Private Banking and Wealth Management, covering
the European, North American and Japanese automotive
and capital goods sectors. He is a CFA and CAIA
charterholder and has a Master of Science from the
University of Zurich, Switzerland. > Pages 22–23, 30–31
Stefanie Kluge joined the Global Equity and Credit
Research team at Credit Suisse Private Banking and
Wealth Management in 2014. Prior to this, she worked
in the Institutional Clients department as a junior
consultant. She holds a Master of Science in Banking
and Finance from the University of Applied Sciences
in Winterthur, Switzerland. > Pages 30–31
Dominik Garcia
Real Estate & Emerging Markets Research ..................
dominik.garcia@credit-suisse.com .............................
+41 44 334 25 38....................................................
Philippe Kaufmann
Global Real Estate Research .....................................
philippe.kaufmann.2@credit-suisse.com ....................
+41 44 334 32 89 ...................................................
Antonios Koutsoukis
Fundamental Micro Themes Research ........................
antonios.koutsoukis@credit-suisse.com .....................
+44 20 7883 66 47 .................................................
Photos: Martin Stollenwerk
Dominik Garcia is a research analyst in Global Equity
and Credit Research at Credit Suisse Private Banking
and Wealth Management, focusing on global real estate
and emerging market financials. Before joining Credit
Suisse in 2010, he worked as an analyst in product
management at the largest Swiss life insurance company.
He holds a Master of Banking and Finance from
the University of Zurich, Switzerland. > Pages 24–25
Philippe Kaufmann is Head of Global Real Estate
Research at Credit Suisse Private Banking and Wealth
Management, where he also worked for Swiss Real
Estate Research for six years. Before joining Credit
Suisse in 2007, he worked for a policy consulting firm
and an economic research company. He holds a
Master of Economics from the University of Fribourg,
Switzerland. > Pages 24–25
Antonios Koutsoukis is a research analyst in Fundamental
Micro Themes Research. His areas of responsibility
include thematic strategy and megatrends
research. Antonios Koutsoukis holds an MSc in Finance
from Cass Business School and a BSc in Economics
and Economic History from the London School of
Economics, United Kingdom. > Pages 59–61

GLOBAL INVESTOR 1.14 — 64
Javier J. Lodeiro
Banking & Insurance Research ...................................
javier.j.lodeiro@credit-suisse.com ..............................
+41 44 334 56 44 ...................................................
Javier J. Lodeiro joined Credit Suisse in 2010 as
research analyst responsible for the global insurance
sector and US banks, and now heads the Global
Research Financials team. He has 18 years of
experience as a buy- and sell-side analyst. He holds
a Master of Economics from the University of Bern,
Switzerland, and is a CFA and FRM charterholder.
> Pages 42–43
Roman Ochsner
Junior Research Analyst ...........................................
roman.ochsner@credit-suisse.com ............................
+41 44 332 03 72 ....................................................
Roman Ochsner joined the Global Equity and Credit
Research team at Credit Suisse Private Banking
and Wealth Management as a Career Starter in 2013.
He covers European asset managers and banks.
Before joining as a Career Starter, Roman interned
with UBS IB and Credit Suisse Investor Services.
He is a graduate of the University of St. Gallen,
Switzerland. > Pages 15–17
Markus Stierli
Head of Fundamental Micro Themes Research ...........
markus.stierli@credit-suisse.com ..............................
+41 44 334 88 57 ....................................................
Markus Stierli is Head of Fundamental Micro Themes
Research at Credit Suisse Private Banking and Wealth
Management. His team focuses on long-term investment
strategies, including sustainable investment and global
megatrends. Before joining the bank in 2010, he taught
at the University of Zurich. He earlier worked at UBS
Investment Bank. He holds a PhD in International
Relations from the University of Zurich. > Pages 52–55
Romano Monsch
Consumer Staples Research .....................................
romano.monsch@credit-suisse.com ...........................
+41 44 332 90 59....................................................
Romano Monsch joined the Global Equity and Credit
Research team at Credit Suisse Private Banking and
Wealth Management in 2013 and covers the consumer
staples sector. He holds a Master of Science in Sustainable
Development with a Major in Economics from
the University of Basel, Switzerland. Before joining
Credit Suisse, he was a sustainability analyst for different
companies in the financial industry. > Pages 30–31
Joe Prendergast
Head of Financial Markets Analysis ...........................
joe.prendergast@credit-suisse.com ...........................
+41 44 332 83 18 ....................................................
Joe Prendergast is Head of Financial Markets Analysis
at Credit Suisse Private Banking and Wealth Management
and also a member of the Credit Suisse Investment
Committee and the Global Economics and Strategy
Group. He holds a BA in Pure Economics from University
College, Dublin, Ireland, and a Master of Science
in Economics from the London School of Economics
in the United Kingdom. > Pages 40–41
Michael Weber
Auto & Building Materials & Chemicals Research ..........
michael.weber@credit-suisse.com .............................
+41 44 333 54 25....................................................
Misha Weber is a senior research analyst at Credit
Suisse Private Banking and Wealth Management,
responsible for covering various cyclical sectors.
He holds a Bachelor of Commerce from the University
of New South Wales, Sydney, Australia, as well as a
Graduate Diploma in Applied Finance & Investment
from the Financials Services Institute of Australasia.
> Pages 36–39
Matthias Müller
Energy Research .....................................................
matthias.mueller.3@credit-suisse.com .......................
+41 44 332 87 20 ...................................................
Matthias Müller is a research analyst in the Global
Equity and Credit Research team at Credit Suisse
Private Banking and Wealth Management, responsible
for covering the energy sector. He joined Credit Suisse
in 2007, initially working in the Investment Fund
department. He holds a Master of Science in Banking,
Finance and Controlling from the University of Basel,
Switzerland. > Pages 52–55
Dan Scott
Investment Strategy & Research ................................
dan.scott@credit-suisse.com ....................................
+41 44 334 56 33 ...................................................
Dan Scott is a research analyst with over ten years
of capital market experience. Dan Scott is in charge of
key Investment Strategy & Research initiatives including
the Credit Suisse Top Investment Ideas, Dividend
Strategies, the Top 30 (a managed portfolio that reflects
Credit Suisse’s equity strategy), the M&A15 (a list of
equities set to benefit from M&A activity), and is the
metals and mining sector specialist. > Pages 56–58
Uwe Neumann
Technology & Telecom Research ................................
uwe.neumann@credit-suisse.com ..............................
+41 44 334 56 45 ...................................................
Uwe Neumann is a senior research analyst in the Global
Equity and Credit Research team at Credit Suisse Private
Banking and Wealth Management, covering the
telecom and technology sector. He joined Credit Suisse
Private Banking in 2000 and has 28 years of experience
in the securities and banking business, including
18 years in research. He holds a Master of Economics
from the University of Constance, Germany, and is a
CEFA charterholder. > Pages 56–58
Christine Schmid
Co-Head Global Equity & Credit Research ..................
christine.schmid@credit-suisse.com ..........................
+41 44 334 56 43 ...................................................
Christine Schmid is Co-Head of Global Equity &
Credit Research at Credit Suisse Private Banking and
Wealth Management, covering financials. She has
covered financials for 15 years and coordinates the
global financial view. She joined Credit Suisse in 1993
in accounting, and later portfolio management. She
holds a Master of Economics from the University
of Zurich, Switzerland, and is a CFA charterholder.
> Pages 18–21

Risk disclosure
Investors should consider this report as only a single factor in making their investment
decision. For a discussion of the risks of investing in the securities mentioned in this report,
please refer to the following Internet link:
https://research.credit-suisse.com/riskdisclosure
CS may not have taken any steps to ensure that the securities or financial instruments
referred to in this report are suitable for any particular investor. CS will not treat recipients
as its customers by virtue of their receiving the report. The investments or services contained
or referred to in this report may not be suitable for you and it is recommended that you
consult an independent investment advisor if you are in doubt about such investments or
investment services. Nothing in this report constitutes investment, legal, accounting or tax
advice or a representation that any investment or strategy is suitable or appropriate to your
individual circumstances or otherwise constitutes a personal recommendation to you.
The price, value of and income from any of the securities or financial instruments mentioned
in this report can fall as well as rise. The value of securities and financial instruments is
affected by changes in spot or forward interest and exchange rates, economic indicators,
the financial standing of any issuer or reference issuer, etc., that may have a positive or
adverse effect on the income from or price of such securities or financial instruments. By
purchasing securities or financial instruments, you may incur a loss or a loss in excess
of the principal as a result of fluctuations in market prices or other financial indices, etc.
Investors in securities such as ADRs, the values of which are influenced by currency volatility,
effectively assume this risk.
Additional disclosures for the following jurisdictions
United Kingdom: For fixed income disclosure information for clients of Credit Suisse (UK)
Limited and Credit Suisse Securities (Europe) Limited, please call +41 44 333 33 99.
For further information, including disclosures with respect to any other issuers, please
refer to the Credit Suisse Disclosure site at:
https://www.credit-suisse.com/disclosure
Guide to analysis
Absolute stock performance
The stock recommendations are BUY, HOLD and SELL and are dependent on the expected
absolute performance of the individual stocks, generally on a 6–12 months horizon
based on the following criteria:
BUY
HOLD
SELL
RESTRICTED
TERMINATED:
10% or greater increase in absolute share price
variation between –10% and +10% in absolute share price
10% or more decrease in absolute share price
In certain circumstances, internal and external regulations exclude certain types of
communications, including e.g. an investment recommendation during the course
of Credit Suisse engagement in an investment banking transaction.
Research coverage has been concluded.
Absolute bond recommendations
The bond recommendations are based fundamentally on forecasts for total returns versus
the respective benchmark on a 3–6 month horizon and are defined as follows:
Commission rates for brokerage transactions will be as per the rates agreed between CS
and the investor. For transactions conducted on a principal-to-principal basis between CS
and the investor, the purchase or sale price will be the total consideration. Transactions
conducted on a principal-to-principal basis, including over-the-counter derivative transactions,
will be quoted as a purchase/bid price or sell/offer price, in which case a difference
or spread may exist. Charges in relation to transactions will be agreed upon prior to transactions,
in line with relevant laws and regulations. Please read the pre-contract documentation,
etc., carefully for an explanation of risks and commissions, etc., of the relevant
securities or financial instruments prior to purchase
BUY
HOLD
SELL
RESTRICTED
Expectation that the bond issue will outperform its specified benchmark
Expectation that the bond issue will perform in line with the specified benchmark
Expectation that the bond issue will underperform its specified benchmark
In certain circumstances, internal and external regulations exclude certain types of
communications, including e.g. an investment recommendation during the course
of Credit Suisse engagement in an investment banking transaction.
Structured securities are complex instruments, typically involve a high degree of risk and
are intended for sale only to sophisticated investors who are capable of understanding and
assuming the risks involved. The market value of any structured security may be affected
by changes in economic, financial and political factors (including, but not limited to, spot
and forward interest and exchange rates), time to maturity, market conditions and vola tility,
and the credit quality of any issuer or reference issuer. Any investor interested in purchasing
a structured product should conduct their own investigation and analysis of the product
and consult with their own professional advisers as to the risks involved in making such a
purchase.
Some investments discussed in this report have a high level of volatility. High volatility
investments may experience sudden and large falls in their value causing losses when that
investment is realized. Those losses may equal your original investment. Indeed, in the case
of some investments the potential losses may exceed the amount of initial investment, in
such circumstances you may be required to pay more money to support those losses. Income
yields from investments may fluctuate and, in consequence, initial capital paid to make the
investment may be used as part of that income yield. Some investments may not be readily
realizable and it may be difficult to sell or realize those investments, similarly it may prove
difficult for you to obtain reliable information about the value, or risks, to which such an
investment is exposed. Please contact your Relationship Manager if you have any questions.
Disclosure appendix
External authors and interviewees
The views expressed by the external authors or interviewees do not necessarily reflect
those of Credit Suisse.
Analyst certification
The analysts identified in this report hereby certify that views about the companies and
their securities discussed in this report accurately reflect their personal views about all of
the subject companies and securities. The analysts also certify that no part of their compensation
was, is, or will be directly or indirectly related to the specific recommendation(s)
or view(s) in this report.
Knowledge Process Outsourcing (KPO) Analysts mentioned in this report are employed by
Credit Suisse Business Analytics (India) Private Limited.
Important disclosures
Credit Suisse policy is to publish research reports, as it deems appropriate, based on
developments with the subject company, the sector or the market that may have a ma terial
impact on the research views or opinions stated herein. Credit Suisse policy is only to
publish investment research that is impartial, independent, clear, fair and not misleading.
The Credit Suisse Code of Conduct to which all employees are obliged to adhere, is accessible
via the website at:
https://www.credit-suisse.com/governance/doc/code_of_conduct_en.pdf
For more detail, please refer to the information on independence of financial research,
which can be found at:
https://www.credit-suisse.com/legal/pb_research/independence_en.pdf
The analyst(s) responsible for preparing this research report received compensation that
is based upon various factors including Credit Suisse’s total revenues, a portion of which
is generated by Credit Suisse Investment Banking business.
Credit Suisse HOLT
With respect to the analysis in this report based on the HOLT(tm) methodology, Credit
Suisse certifies that (1) the views expressed in this report accurately reflect the HOLT
methodology and (2) no part of the Firm’s compensation was, is, or will be directly related
to the specific views disclosed in this report. The Credit Suisse HOLT methodology
does not assign ratings to a security. It is an analytical tool that involves use of a set of
proprietary quantitative algorithms and warranted value calculations, collectively called
the Credit Suisse HOLT valuation model, that are consistently applied to all the companies
included in its database. Third-party data (including consensus earnings estimates) are
systematically translated into a number of default variables and incorporated into the algorithms
available in the Credit Suisse HOLT valuation model. The source financial statement,
pricing, and earnings data provided by outside data vendors are subject to quality
control and may also be adjusted to more closely measure the underlying economics of
firm performance. These adjustments provide consistency when analyzing a single company
across time, or analyzing multiple companies across industries or national borders.
The default scenario that is produced by the Credit Suisse HOLT valuation model establishes
the baseline valuation for a security, and a user then may adjust the default variables
to produce alternative scenarios, any of which could occur. The Credit Suisse HOLT methodology
does not assign a price target to a security. The default scenario that is produced
by the Credit Suisse HOLT valuation model establishes a warranted price for a security,
and as the third-party data are updated, the warranted price may also change. The default
variables may also be adjusted to produce alternative warranted prices, any of which could
occur. Additional information about the Credit Suisse HOLT methodology is available on
request.
CFROI(r), CFROE, HOLT, HOLTfolio, HOLTSelect, HS60, HS40, ValueSearch, AggreGator,
Signal Flag and “Powered by HOLT” are trademarks or registered trademarks of Credit
Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance
and valuation advisory service of Credit Suisse.
Global disclaimer/important information
For a discussion of the risks of investing in the securities mentioned in this report, please
refer to the following Internet link:
https://research.credit-suisse.com/riskdisclosure
References in this report to Credit Suisse include subsidiaries and affiliates. For more information
on our structure, please use the following link:
http://www.credit-suisse.com/who_we_are/en/
The information and opinions expressed in this report were produced by the Research
department of the Private Banking & Wealth Management division at Credit Suisse as of
the date of writing and are subject to change without notice. Views expressed in respect
of a particular security in this report may be different from, or inconsistent with, the observations
and views of the Credit Suisse Research department of Investment Banking
division due to the differences in evaluation criteria. This report is not directed to, or intended
for distribution to or use by, any person or entity who is a citizen or resident of or
located in any locality, state, country or other jurisdiction where such distribution, publication,
availability or use would be contrary to law or regulation or which would subject
Credit Suisse AG, the Swiss bank, or its subsidiaries or its affiliates (“CS”) to any registration
or licensing requirement within such jurisdiction. All material presented in this report,
unless specifically indicated otherwise, is under copyright to CS. None of the material, nor
its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed
to any other party, without the prior express written permission of CS. All trademarks,

service marks and logos used in this report are trademarks or service marks or registered
trademarks or service marks of CS or its affiliates.
The information, tools and material presented in this report are provided to you for information
purposes only and are not to be used or considered as an offer or the solicitation
of an offer to sell or to buy or subscribe for securities or other financial instruments.
CS does not offer advice on the tax consequences of investment and you are advised to
contact an independent tax adviser. Please note in particular that the bases and levels of
taxation may change.
CS believes the information and opinions in the Disclosure Appendix of this report are accurate
and complete. Information and opinions presented in the other sections of the report
were obtained or derived from sources CS believes are reliable, but CS makes no representations
as to their accuracy or completeness. Additional information is available upon
request. CS accepts no liability for loss arising from the use of the material presented in
this report, except that this exclusion of liability does not apply to the extent that liability
arises under specific statutes or regulations applicable to CS. This report is not to be relied
upon in substitution for the exercise of independent judgment. CS may have issued, and
may in the future issue, a trading idea regarding this security. Trading ideas are short term
trading opportunities based on market events and catalysts, while company recommendations
reflect investment recommendations based on expected total return over a 6 to
12-month period as defined in the disclosure section. Because trading ideas and company
recommendations reflect different assumptions and analytical methods, trading ideas may
differ from the company recommendations. In addition, CS may have issued, and may in
the future issue, other reports that are inconsistent with, and reach different concusions
from, the information presented in this report. Those reports reflect the different assumptions,
views and analytical methods of the analysts who prepared them and CS is under no
obligation to ensure that such other reports are brought to the attention of any recipient of
this report. CS is involved in many businesses that relate to companies mentioned in this
report. These businesses include specialized trading, risk arbitrage, market making, and
other proprietary trading.
Information, opinions and estimates contained in this report reflect a judgment at its original
date of publication by CS and are subject to change without notice. This report may
provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which
the report refers to website material of CS, CS has not reviewed the linked site and takes
no responsibility for the content contained therein. Such address or hyperlink (including
addresses or hyperlinks to CS’s own website material) is provided solely for your convenience
and information and the content of the linked site does not in any way form part of this
document. Accessing such website or following such link through this report or CS’s website
shall be at your own risk.
Distribution of research reports
Except as otherwise specified herein, this report is distributed by Credit Suisse AG, a
Swiss bank, authorized and regulated by the Swiss Financial Market Supervisory Authority.
Australia: This report is distributed in Australia by Credit Suisse AG, Sydney Branch
(CSSB) (ABN 17 061 700 712 AFSL 226896) only to “Wholesale” clients as defined by
s761G of the Corporations Act 2001. CSSB does not guarantee the performance of, nor
makes any assurances with respect to the performance of any financial product referred
herein. Bahamas: This report was prepared by Credit Suisse AG, the Swiss bank, and is
distributed on behalf of Credit Suisse AG, Nassau Branch, a branch of the Swiss bank,
registered as a broker-dealer by the Securities Commission of the Bahamas. Bahrain: This
report is distributed by Credit Suisse AG, Bahrain Branch, authorized and regulated by the
Central Bank of Bahrain (CBB) as an Investment Firm Category 2. Brazil: Any information
contained herein does not constitute a public offer of securities in Brazil and securities
mentioned herein may not be registered with the Securities Commission of Brazil (CVM).
Dubai: This information is distributed by Credit Suisse AG, Dubai Branch, duly licensed and
regulated by the Dubai Financial Services Authority (DFSA). Related financial products or
services are only available to wholesale customers with liquid assets of over USD 1 million
who have sufficient financial experience and understanding to participate in financial markets
in a wholesale jurisdiction and satisfy the regulatory criteria to be a client. France:
This report is distributed by Credit Suisse (France), authorized by the Autorité de Contrôle
Prudentiel (ACP) as an investment service provider. Credit Suisse (France) is supervised
and regulated by the Autorité de Contrôle Prudentiel and the Autorité des Marchés Financiers.
Germany: Credit Suisse (Deutschland) AG, authorized and regulated by the Bundesanstalt
fuer Finanzdienstleistungsaufsicht (BaFin), disseminates research to its clients
that has been prepared by one of its affiliates. Gibraltar: This report is distributed by
Credit Suisse (Gibraltar) Limited. Credit Suisse (Gibraltar) Limited is an independent legal
entity wholly owned by Credit Suisse and is regulated by the Gibraltar Financial Services
Commission. Guernsey: This report is distributed by Credit Suisse (Channel Islands) Limited,
an independent legal entity registered in Guernsey under 15197, with its registered
address at Helvetia Court, Les Echelons, South Esplanade, St Peter Port, Guernsey.
Credit Suisse (Channel Islands) Limited is wholly owned by Credit Suisse AG and is regulated
by the Guernsey Financial Services Commission. Copies of the latest audited accounts
are available on request. Hong Kong: This report is issued in Hong Kong by Credit Suisse
AG Hong Kong Branch, an Authorized Institution regulated by the Hong Kong Monetary
Authority and a Registered Institution regulated by the Securities and Futures Ordinance
(Chapter 571 of the Laws of Hong Kong). India: This report is distributed by Credit Suisse
Securities (India) Private Limited (“Credit Suisse India”), regulated by the Securities and
Exchange Board of India (SEBI) under SEBI registration Nos. INB230970637;
INF230970637; INB010970631; INF010970631, with its registered address at 9th Floor,
Ceejay House, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai 400 018,
India, Tel. +91-22 6777 3777. Italy: This report is distributed in Italy by Credit Suisse (Italy)
S.p.A., a bank incorporated and registered under Italian law subject to the supervision
and control of Banca d’Italia and CONSOB, and also distributed by Credit Suisse AG, a
Swiss bank authorized to provide banking and financial services in Italy. Japan: This report
is solely distributed in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments
Dealer, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member
of the Japan Securities Dealers Association, Financial Futures Association of Japan,
Japan Investment Advisers Association, and Type II Financial Instruments Firms Association.
Credit Suisse Securities (Japan) Limited will not distribute or forward this report outside
Japan. Jersey: This report is distributed by Credit Suisse (Channel Islands) Limited, Jersey
Branch, which is regulated by the Jersey Financial Services Commission. The business
address of Credit Suisse (Channel Islands) Limited, Jersey Branch, in Jersey is: TradeWind
House, 22 Esplanade, St Helier, Jersey JE2 3QA. Luxembourg: This report is distributed
by Credit Suisse (Luxembourg) S.A., a Luxembourg bank, authorized and regulated by the
Commission de Surveillance du Secteur Financier (CSSF). Mexico: The information contained
herein does not constitute a public offer of securities as defined in the Mexican Securities
Law. This report will not be advertised in any mass media in Mexico. This report does not
contain any advertisement regarding intermediation or providing of banking or investment
advisory services in Mexico or to Mexican citizens. Qatar: This information has been distributed
by Credit Suisse Financial Services (Qatar) L.L.C, which has been au thor i zed and
is regulated by the Qatar Financial Centre Regulatory Authority (QFCRA) under QFC No.
00005. All related financial products or services will only be available to Business Customers
or Market Counter-parties (as defined by the Qatar Financial Centre Regulatory Authority
(QFCRA)), including individuals, who have opted to be classified as a Business Customer,
with liquid assets in excess of USD 1 million, and who have sufficient financial
knowledge, experience and understanding to participate in such products and/or services.
Russia: The research contained in this report does not constitute any sort of advertisement
or promotion for specific securities, or related financial instruments. This research report
does not represent a valuation in the meaning of the Federal Law On Valuation Activities
in the Russian Federation and is produced using Credit Suisse valuation models and methodology.
Singapore: This report has been prepared and issued for distribution in Singapore
to institutional investors, accredited investors and expert investors (each as defined under
the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG,
Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations).
By virtue of your status as an institutional investor, accredited in vest or, expert investor
or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying
with certain compliance requirements under the Financial Advisers Act, Chapter 110 of
Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and
Guidelines issued thereunder, in respect of any financial advisory service which Credit
Suisse AG, Singapore branch may provide to you. Spain: This report is distributed in Spain
by Credit Suisse AG, Sucursal en España, authorized under number 1460 in the Register
by the Banco de España. Thailand: This report is distributed by Credit Suisse Securities
(Thailand) Limited, regulated by the Office of the Securities and Exchange Commission,
Thailand, with its registered address at 990 Abdulrahim Place Building, 27/F, Rama IV
Road, Silom, Bangrak, Bangkok Tel. 0-2614-6000. United Kingdom: This report is issued
by Credit Suisse (UK) Limited and Credit Suisse Securities (Europe) Limited. Credit Suisse
Securities (Europe) Limited and Credit Suisse (UK) Limited, both authorized by the Prudential
Regulation Authority and regulated by the Financial Conduct Authority and the
Prudential Regulation Authority, are associated but independent legal entities within Credit
Suisse. The protections made available by the Financial Conduct Authority and/or the
Prudential Regulation Authority for retail clients do not apply to investments or services
provided by a person outside the UK, nor will the Financial Services Compensation Scheme
be available if the issuer of the investment fails to meet its obligations.
UNITED STATES: NEITHER THIS REPORT NOR ANY COPY THEREOF MAY BE SENT,
TAKEN INTO OR DISTRIBUTED IN THE UNITED STATES OR TO ANY US PERSON.
Local law or regulation may restrict the distribution of research reports into certain jurisdictions.
This report may not be reproduced either in whole or in part, without the written permission
of Credit Suisse. Copyright © 2014 Credit Suisse Group AG and/or its affiliates. All rights
reserved.
14C024A_R

Imprint
Credit Suisse AG, Investment Strategy & Research,
P.O. Box 300, CH-8070 Zurich
Publisher
Giles Keating
Editors
Nilanjan Das, Dan Scott
Editorial deadline
23 July 2014
Production management
Markus Kleeb, Katharina Schlatter
Concept
arnold.kircherburkhardt.ch
Design and realization
arnold.kircherburkhardt.ch
Arno Bandli, Benno Delvai, Angélique El Morabit,
Bernadette Costello, Rahel Schwarzentruber
(project management)
Editorial support
arnold.kircherburkhardt.ch
Giselle Weiss, Robin Scott
Printer
GDZ print, Zurich
Copies of this publication may be ordered via your customer
advisor; employees contact Netshop directly. This publication
is available on the Internet at:
www.credit-suisse.com/globalinvestor
Intranet access for employees of Credit Suisse Group:
http://research.csintra.net
International research support is provided by Credit Suisse’s
Cover photo: Talaj/Getty Images
PERFORMANCE
neutral
Printed Matter
No. 01-14-440613 – www.myclimate.org
© myclimate – The Climate Protection Partnership

Expert know-how for investors
www.credit-suisse.com/globalinvestor
PDF format.
Demographics
Multipolar world
Economy
Sustainability
GIE 1545894
www.credit-suisse.com/globalinvestor