New brands on the horizon

Global Investor
Expert know-how for Credit Suisse private banking investment clients February 2005
Healthcare <strong>New</strong> advances in cancer therapies
IFRS Simplifying company analysis
Alternative energy Untapped potential
Telecom equipment Will the share-price recovery prevail?
Inflation-linked bonds Protection amid times of uncertainty
Emerging-market equities China, India and Brazil
Emerging-market bonds Latin America in the spotlight
I n d i a >>>
NEW BRANDS ON THE HORIZON

GLOBAL INVESTOR 1.05 Contents— 3
Healthcare
<strong>New</strong> rays of hope thanks to promising cancer therapies . . . . . .6
IFRS
IFRS: The biggest change in accounting ever! . . . . . . . . . . . .12
Alternative energy
Alternative energy: The next big investment craze? . . . . . . . . .16
Interview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Telecom
Telecom equipment manufacturers:
Positive surprises cannot be ruled out . . . . . . . . . . . . . . . . . .24
Inflation-linked bonds
A worthwhile look at inflation-linked bonds . . . . . . . . . . . . . . .28
Emerging-market equities
China, India and Brazil:
The future giants of the global economy . . . . . . . . . . . . . . . . .32
Global companies made in China?
An initial assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Significant burst of innovation in the
pharmaceuticals sector
Simplifying company analysis
Depletion of crude-oil resources
poses a challenge
Will the uptrend prevail, or will 2005
be a year of disenchantment?
A good instrument for enhancing
diversification
When is the time ripe for entering the
emerging markets?
Emerging-market bonds
Emerging-market bonds:
Latin America in the sweet spot . . . . . . . . . . . . . . . . . . . . . .38
Services
Interview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Author index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Imprint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Favorable signals emanating
from the political front
Restructuring Credit Suisse research
publications

Gilles Keating, Head of Global Research

Brands for the twenty-first century
GLOBAL INVESTOR 1.05 Editorial — 5
The rise of China, and more recently India and Brazil, has exerted
great influence on the world economy, crushing the prices of
manufactured goods while creating major new domestic markets
and boosting demand for energy and raw materials. Important
as these trends are, they tend to distract attention from a parallel
process that could over the next few years have an even
bigger impact on businesses worldwide. This is the progressive
move up-market of Chinese companies, followed by Indian
and ultimately Brazilian firms, away from competing merely on
price and, instead, toward developing their own <strong>brands</strong> and
distribution networks, backed up by leapfrogging technology.
Parallels to the rise of Japan in the 1960s
In the 1950 s, companies in the USA and Europe used Japan
as a source of low-cost manufacturing to feed in to their own distribution
chains. In the 1960s, Japanese companies turned
the tables, building up their own <strong>brands</strong> and distribution systems.
They innovated products and production processes at such a
pace that by the mid-1970s, they were dominating American and
European companies in sectors from automotive to consumer
electronics, with <strong>brands</strong> such as Toyota and Sony becoming world
leaders from a zero base. And looking further back, we can
draw comparisons with the rise of upstart American companies
in a late nineteenth century world dominated by European firms.
In both 1960s Japan and China today, young companies have
benefited from the existence of a rapidly growing domestic
consumer market that is willing to embrace new products and
where obvious language issues inhibit penetration by foreign
firms. Chinese companies today are exploiting this advantage,
developing homegrown <strong>brands</strong> in areas such as designer
clothing, with many aimed at the top end of the market. However,
Chinese companies are not enjoying the same free flow
of technological know-how that was offered by US firms to Japan
in the Cold-War era of the 1960s. Moreover, the real costs of
establishing new <strong>brands</strong> in Western markets are arguably now
much higher, given the accumulated expenditure on brandbuilding
and distribution channels by the incumbents over the
last four decades.
timetable. The recently announced link-up between the ailing
UK car company MG Rover and major Chinese automobile
manufacturer Shanghai Automotive Industry Corp. (SAIC) could
turn out to be just such a deal.
These trends would be good news for economic growth and
prosperity in Asia, and possibly for shareholders in US or European
firms that get bought out. For other Western companies,
it amounts to a major new competitive threat as Asian companies
buy into Western markets through takeovers using the financial
firepower provided by today’s capital inflows, and then turn their
weapons of low-cost production and leapfrogging technology
on the incumbent firms.
Companies emerging as global brand leaders
Against this background, this issue of Global Investor suggests
a number of Asian firms with the potential to emerge as new
global brand leaders. These have the potential to offer very high
returns as medium- to long-term investments. We also examine
the more general topic of investment in the emerging giants,
noting the attraction of both bonds and equities in Brazil, with
India also offering possibilities for equity exposure. Meanwhile,
in China, equity valuations are more stretched, making it
important to focus on our long-term brand plays. With demand
from these countries set to keep energy prices high for a prolonged
period, we consider the investment opportunities in alternative
energy sources. And at a time when the profitability of
major pharmaceutical companies is threatened by competition
from generic producers in India and elsewhere, we discuss
the prospects for them to generate strong new branded products
based on new cancer treatments.
A separate insert takes a short- to medium-term view of global
financial markets, noting that the first half of 2005 looks
set to be a turbulent period for investors at the level of the broad
indices, with the US Federal Reserve likely to keep raising
rates, the world economy sluggish ahead of an expected rebound
later in the year, and both equities and (especially) bonds
looking expensive in terms of valuation.
Ultimately, these costs are likely to act more as a brake than
an absolute barrier to the establishment of Chinese and
Indian <strong>brands</strong> in the wider world, given the sheer scale of the
domestic market on which they can build. To speed things
up, Chinese and, eventually, Indian firms have a different and
much more aggressive possibility: to acquire established
Western <strong>brands</strong> and distribution networks through outright takeovers,
or by becoming the dominant partner in joint ventures
with weaker partners. These would then provide the beachhead
for penetration of Western markets on a greatly accelerated

“The financial markets have previously underestimated
new classes of medicine.” Dr. Luis Correia

GLOBAL INVESTOR 1.05 Healthcare — 7
<strong>New</strong> rays of hope thanks to promising cancer therapies
Although a cure for cancer still looms far on the horizon, the latest state-of-the-art
therapies have brought real progress. The relevant pharmaceutical companies
should reap considerable rewards therefrom. Dr. Luís Correia, Dr. Maria Custer
Over the last 150 years, the pharmaceutical industry has progressed
through waves of innovation. While all of the major discoveries
changed medical practice considerably, some of them
played a central role in transforming smaller companies into topten
global players in their time. In Table 1 , we highlight some
examples of products that changed both medical practice and the
companies involved. In our view, the field of cancer therapies
represents the main new wave of innovation in the pharmaceutical
industry in this decade.
Although the ultimate aim of finding a cure for cancer is probably
still in the distant future, for some types of cancer, there are
realistic expectations that it can become a chronic disease. For
other cancer patients there is at least the hope of a longer life,
lived out with better quality. This is mainly thanks to the enormous
focus that pharmaceutical companies have put into cancer
research over the last 20 years.
Plenty of reasons cancer is an interesting area
for the industry
A combination of several factors makes oncology (i.e., the field of
medicine devoted to cancer) an interesting area for pharmaceutical
companies:
p According to the World Health Organization, cancer is currently
the second-largest cause of death in the Western world
after heart disease.
p The fact that there is a high unfulfilled medical need means
companies believe that even if a drug leads to only slight progress
it is still worth bringing it to the market.
p Regulatory authorities typically tolerate more side effects for a
new cancer drug than for other therapeutic areas, where established
drugs are known to work comparatively well (e.g., gastric
ulcers).
p Companies can charge high prices for novel cancer drugs, and
the entities that carry the burden of paying for these drugs have,
to date, accepted such high prices.
p Cancer treatment is the main area of business for Roche
(accounting for 23% of sales) and Amgen (27% of sales).
p Other top-five companies are Novartis, Sanofi-Aventis and
Johnson & Johnson.
p Supportive care is the largest area since these products are
prescribed for a large proportion of patients undergoing
chemotherapy. These medicines try to mitigate some of the side
Figure 1
Top-ten companies with the largest sales
in oncology
Source: Company data, Credit Suisse estimates
USD millions
4500
4000
3 500
3 000
2 500
2 000
1 500
1 000
500
0
%
3 %
Pflizer
4 %
GlaxoSmithKlin e
11%
T a k e d a
1 2 %
B ris tol-Myers Squibb
1 2 %
A s t r a Z e n e c a
1 4 %
J ohns on & Johns on
9 %
Sanofi- A v e ntis
1 8 %
N o v a r t is
2 7 %
A m g e n
2003 s a les U S D millions
Percen tage of to tal sa l e s deri ved from onc ology pro ducts
2 3 %
R o c h e

effects associated with chemotherapy, such as anemia, neutropenia
and nausea.
p Within supportive care, one single product family (erythropoietin)
is responsible for about USD 5 billion in sales. Erythropoietin
is administered to patients who have developed anemia as a consequence
of undergoing chemotherapy. The most important
<strong>brands</strong> are Procrit (J&J), Epogen/Aranesp (Amgen) and Neo-
Recormon (Roche).
We estimate that the market associated with cancer treatments
and supportive care was worth USD 30 billion in 2003 and should
grow at 10% per annum, to achieve USD 48 billion in 2008 . This
compares well to the expected market growth of 7%–8% in this
period. Overall growth of cancer drug sales, however, is masked
by the impact of patent losses of older products. Innovative cancer
drugs are expected to grow much faster, at 22% per year.
Developing cancer drugs is a slow process
Clinical experimentation of new cancer drugs usually requires
them to be added to existing therapies and/or to be used when
all other usual treatments have failed (3 rd line). If they prove to add
benefit, companies file for approval in one type of cancer with
usage restricted to a late stage in the disease. In the meantime,
companies continue their efforts, starting new trials to use the
new drug alone (monotherapy) and/or in an earlier stage of the
treatment sequence (e.g. 2 nd line) and experimenting if the drug
works in other cancer types. As the drugs move to earlier stages
of therapy, they are also applied to more patients. This means that
the build-up in sales of a cancer treatment is typically slow. In
some exceptional cases, when the drugs show a quickly visible
benefit, regulatory authorities give special support to the development
program (fast track) and promise to review the drugs
quickly (priority review). This has happened with Novartis’ Glivec
(chronic myeloid leukemia). Also exceptionally, authorities can
grant permission for drugs to be used from the start in first-line
treatment, which happened with Genentech/Roche’s Avastin
(colorectal cancer).
Exciting discoveries for scientists
Figure 2 illustrates the incidence and mortality of cancer types. Of
the cancer types affecting more people, cancers of the lung,
colon and pancreas are the ones with the poorest prognosis.
Interestingly, exactly these types of cancers are due to benefit
Table 1
Medicines that changed medical practice and the size of companies
Source: Datastream
Year of launch Product Company Indication Stock return 1
1976 Tagamet SmithKline Gastric ulcers 446%
1982 Zantac Glaxo Gastric ulcers 420%
1982 Sandimmun Sandoz Transplants 104%
1988 Losec Astra Gastric ulcers 152%
1989–1991 Epogen, Neupogen Amgen Following chemotherapy, supportive care 1247%
1997–1998 Rituxan, Herceptin Genentech, Idec Non-Hodgkins lymphome or brest cancer 53%
1
Returns measured over a period of three years, beginning one year prior to year of product launch

from the recent launches of new products, which have demonstrated
that they help patients live longer.
p In the field of colorectal cancer, Eloxatin (Sanofi-Aventis) was
finally made available in the USA two years ago after it had been
on the market in Europe since 1998.
p Avastin (Genentech/Roche) and Erbitux (BristolMyersSquibb/
InClone/Merck KGAA) were launched in the USA in 2004 and
should become available in Europe in 2005 .
p In the field of lung cancer, Roche and its partners Genentech
and OSI demonstrated a survival benefit with the novel drug
Tarceva, and Eli Lilly has launched Alimta.
For scientists, the survival benefit was particularly exciting since
it was able to validate new mechanisms of action such as cutting
the blood supply to tumors (angiogenesis inhibitors like Avastin)
or inhibiting their growth (endothelial growth factor receptor
inhibitors such as Erbitux or Tarceva).
GLOBAL INVESTOR 1.05 Healthcare — 9
The emerging field of personalized medicine
Genetic variation or biochemical individuality is believed to have
important medical implications, such as causing an individual to be
more vulnerable to a disease as well as having differential
responses to a drug. A better molecular understanding of disease
mechanisms should allow for earlier diagnosis: for instance, it will
help to identify genetic predisposition for a disease even before
symptoms appear. The diagnosis will also become more accurate,
in that it will enable doctors to better predict a patient’s response
to a drug. This will help in the selection of a more targeted therapy,
which should result in cost savings to the healthcare system.
Examples of targeted therapies
The field of cancer is one of the few where targeted therapies are
already on the market: Herceptin (Roche, breast cancer) and
Glivec (Novartis, chronic myeloid leukemia) are the two established
examples. In comparison to classical therapies, targeted
therapies may work only on certain sub-group of patients but then
in a very effective way. By being more specific on the target, they
also avoid the common side effects of cancer drugs, which attack
both healthy and sick cells. AstraZeneca’s Iressa, which is indicated
for advanced non-small-cell lung cancer targets the epidermal
growth factor receptor (EGFR) , an enzyme that stimulates
cell division and whose excessive activation is associated with
advanced stages of solid tumors. As only 10% of the patients
show a strong improvement with Iressa researchers decided to
investigate the genetic differences and gene expression profiles
of the patients who responded well to the drug. While they discovered
that the responders had a mutant form of the enzyme, a
clear link could not be established conclusively. Further research
could potentially enable Iressa to become a more targeted therapy.
What is a DNA chip?
The central tool for achieving personalized medicine is genetic
profiling. One of the forefront technologies is the DNA chip, otherwise
known as the gene chip. DNA is a molecule present in our
cells that forms the genes. A DNA chip is a small device such as
a glass plate, silicon chip, or nylon membrane that allows scientists
to perform hundreds to millions of hybridization assays simultaneously
in a single experiment. Hybridization studies allow the
detection of differences in DNA. These differences can be, for
example, due to genetic variation in a single DNA position (single
nucleotide polymorphism, SNP) or to differences in gene expres-
Figure 2
Incidence and mortality by cancer type
Source: American Cancer Society 2003
450
400
350
300
250
200
150
100
50
0
Number of patients, thousands
Prostate cancer
Breast cancer
<strong>New</strong> cases
Deaths
Lung cancer
Colon cancer
Lymphoma
(all types)
Urinary system
Pancreatic
cancer
All others
Types of cancer with bad prognosis

sion in normal versus diseased tissue. The DNA chip supports
these two important applications, namely SNP genotyping and
gene expression profiling.
The most common form of genetic variation is SNP, which is
a variation in a single position in a DNA sequence. Biologists estimate
that the human genome contains three to six million SNPs.
SNP genotyping is the process of determining which SNPs, if any,
occur in a DNA sequence. Except for identical twins, who share
100% of the same DNA, a person’s genome is about 99.9% the
same as any other person.
Gene expression profiling determines which genes are active
in a specific cell or group of cells. This technique monitors gene
expression patterns in normal tissue versus diseased tissue or in
the presence and absence of a drug. The knowledge acquired
with gene expression profiling will enhance diagnostics and allow
the monitoring of the progress of patients on a molecular level.
The major pure-play DNA chip companies
For investors who are interested in pure-play DNA chip stocks, we
are highlighting Affymetrix and Illumina:
p Affymetrix (not rated) has a market capitalization of USD 2.2
billion; it is the largest pure-play DNA chip company, with approximately
85% of the market. The company’s technology, called
GeneChip, leverages semiconductor-based fabrication techniques
to synthesize a large variety of DNA sequences in predetermined
locations on a glass chip called a probe array. The
GeneChip technology produces arrays with hundreds of thousands
of different probes packed at an extremely high density.
p Illumina (not rated) has a market capitalization of USD 288.2
million. The company is particularly strong in SNP genotyping. Its
BeadArray technology combines etched microwells and specially
prepared beads that randomly self-assemble into an array. The
randomization, which leads to higher quality control, is unique to
the company. The technology is deployed in two formats: the
Array Matrix, which uses fiber optic bundles that are dipped into
a sample, and BeadChip, which processes multiple samples on a
slide.
Table 2
Products recently launched or for which approval has been filed
Source: Company data, Credit Suisse estimates
Product Company Indication Launch year Product class Peak sales potential
(USD m)
Neulasta Amgen Neutropenia 2002 Second-generation GCSF 2500
Avastin Roche/Genentech Colorectal 2004 VEGF inhibitor 2000
Aranesp Amgen Chemotherapy induced anemia 2002 Second-generation erythropoietin 1500
Tarceva Roche/Genentech/OSI Lung, pancreas 2004 EGFR inhibitor 1500
Erbitux BristolMS/ImClone Colorectal, head & neck 2004 EGFR inhibitor 1000
Alimta Eli Lilly Lung cancer 2004 Anti-folate 750
Iressa AstraZeneca Lung 2003 EGFR inhibitor 500
Velcade Millenium/Pharsight Multiple myeloma 2004 Proteasome inhibitor 500
Bonefos Schering Tumor-induced hypercalcaemia 2005 E Biphosphonate 300
Palifermin Amgen Mucositis, endometriosis 2005 E Keratinocyte growth factor 300

Who pays for expensive new cancer drugs?
The cost of drugs has become a target for politicians and has
made the pharmaceutical industry unpopular in recent years. <strong>New</strong>
cancer drugs can cost between USD 2,000 and USD 9,000 per
month. So far, the entities that must pay for healthcare (e.g., governments
and health-management organizations) have been willing
to pay for these treatments. As some types of cancer turn into
more chronic diseases, the proportion of cancer drug costs relative
to all prescription drug costs is set to rise. Will those entities
that carry the burden of healthcare costs put pressure on companies
to decrease their prices? As patents in other therapy classes
expire, we believe substantial funds will become available to
pay for novel cancer drugs –at least for some years to come. As
much as society is unwilling to accept drugs that represent no
additional benefit in terms of efficacy and could pose safety risks,
it should also be prepared to reward genuine innovations.
GLOBAL INVESTOR 1.05 Healthcare — 11
Investment conclusion
In summary, we believe that the current introduction of new cancer
therapies is the most important wave of innovation in the
pharmaceutical industry this decade. Moreover, the forecasts are
still moderate, in our view. Historically, the financial markets have
underestimated the sales potential of innovative classes of medicines.
Some classical examples were the proton pump inhibitors
for gastric ulcer treatment, or statins for cholesterol disorders.
This offers interesting potential for upside surprises in companies
with highly innovative cancer therapies. Our analysis indicates
that the companies with the greatest exposure to the area of cancer
treatment, as well as depth and breadth of pipeline are Novartis,
Roche and Amgen.
In terms of risks, we note that biological treatments for cancer
are not fully immune to the possibility of generics. However,
we believe that the impact of generics may take hold in the more
distant future and be of lower magnitude than that of classical,
small-molecule medicines. Why? Because the regulatory framework
is not yet established, and due to the fact that the complexity
of biologics manufacturing will likely restrict the number of
players, making pricing competition more moderate. |
Genetic analysis will allow for earlier
and more accurate cancer diagnosis
and treatment.
1
Sales of erythropoietin products are actually higher, but we have taken only sales in the
cancer area into account.

“This important move makes analysis
of European companies easier.” Lars Kalbreier, Eric Güller, Olivier P. Müller

GLOBAL INVESTOR 1.05 IFRS— 13
IFRS: The biggest change in accounting ever!
With the new International Financial Reporting Standards (IFRS) , companies’
financial reports will be more easily comparable. Hence, the risk associated with
investing in European stocks will be mitigated. Lars Kalbreier, Eric Güller, Olivier P. Müller
At the beginning of this year, the biggest-ever single change in
accounting took place in Europe as 7,000 EU companies have to
switch their accounting principles to International Financial
Reporting Standards (IFRS) for the 2005 financial year. This
important move makes cross-border analysis of European companies
easier and consistent, and can be viewed as a further step
toward a standardized capital market in Europe. Furthermore,
enhanced and fuller information must be disclosed under the new
standard, which makes European companies more transparent
and lowers the risk associated with investing in European equities.
Since there are some important differences between IFRS
and the formerly used local GAAPs (Generally Accepted Accounting
Principles), reported numbers may change, thus shedding a
different light on some companies. Supported by the Mazard
study (Figure1) , we believe that the most important changes will
occur in the following four areas of accounting: business combinations
(goodwill, IFRS 3), financial instruments (fair value, IAS
39/32), pensions (pension accounting, IAS 19) and intangible
assets (R&D, IAS 38).
Figure 1
Key changes from introduction of IFRS
Source: Mazard (2003)
Farewell to regular goodwill amortization
From this year on, there will no longer be any systematic amortization
of goodwill. Instead, goodwill will be subject to annual
impairment tests. This will apply prospectively, which means that
existing goodwill will in essence be frozen at its current value and
then subjected to impairment testing. The elimination of goodwill
amortization will clearly have a distinctive impact on the earnings
of companies with sizeable volumes of goodwill. Earnings will step
up. Since the rise in earnings is likely to be higher than the
increase in equity due to non-amortization, returns on book equity
are expected to increase too. However, the introduction of
impairment testing will make profits less predictable because
assessing impairments is rather subjective.
With the abolition of amortization, acquisition provisioning will
become much stricter and will offer less opportunity to manipulate
post-acquisition results. Hence, while the end of goodwill amortization
might appear to encourage M&A activity, the stricter provisioning
lessens the attractiveness of acquisition-based growth
strategies.
Since telecom, food-and-beverage and utility companies hold
the largest goodwill positions in relation to equity (Figure 2) , these
industries will profit the most from the abolition of amortization.
%
50
45
40
35
30
25
20
15
10
5
0
Financial instruments
(IAS 39/32)
B usiness co m b inatio ns, M& A
(IFR S 3)
Evaluatio n o f assets
(IAS 39/32)
R esults (all)
P ensio ns
( IAS 1 9 )
C a p ital (o r net asset b ase,
mainly IAS 39/32)
R emuneratio n (includ ing
sto c k o p tio ns, mainly IFR S 2)
T reasury po licy (IAS 39/32)
S o lv ency (IAS 39/32)

However, their impairment risk will also be the highest, and the
greater the concentration of the goodwill position, the higher the
impairment risk.
Financial instruments: Switch from cost to fair value
Most national GAAPs in Europe do not employ a fair-value-based
approach to accounting. Hence, most assets tend to be valued at
historical cost. Under IFRS 39/32, the majority of assets, including
hedge positions, are valued at fair value. Since this normally
equates to market values, the new standard provides more up-todate
information, which we view as a positive development. In
addition, the move of derivative instruments from off to on balance
sheet gives investors more insight into a company’s risk profile.
On the other hand, earnings and equity will become more volatile
due to the higher fluctuation of fair values.
Financial sector firms such as insurance companies, banks
and financial services providers are most affected by the switch
to fair value because these businesses have large and volatile balance
sheets. The adoption of hedge accounting affects financial
services companies as well and might also impact sectors such as
automobiles, aerospace and utilities.
Recognition of pension costs as a balance-sheet item
The net position of assets (invested plan assets) and liabilities
(present value of future benefit obligations) position of pension
plans must now be recognized on the balance sheet. In addition,
all current pension plan costs must now be treated as an expense.
As a result, the financial condition of pension plans will now be
accurately reflected on the balance sheet, whereas previously, the
net asset/liability positions of pension plans were reported inconsistently
and were sometimes disclosed only in footnotes to financial
statements. IAS 19 also now requires companies to disclose
additional pension plan information. The introduction of IAS 19 is
particularly troublesome for companies with massively underfunded
pension plans because they must now record pension
shortfalls as a liability. Although this problem must be individually
evaluated for each company, it can generally be said that the
pension accounting rule change is likely to have the biggest
impact on British companies, which previously carried pension
plans only as off-balance-sheet items (FAS 17) and will now have
to systematically recognize them on the balance sheet.
Figure 2
Ratio of goodwill to equity
Source: Worldscope, Credit Suisse
x
Other minor changes will enhance the transparency
and uniformity of corporate financial statements
Companies previously had considerable discretionary latitude in
capitalizing research and development costs. The introduction of
IAS 38, on the one hand, now places narrow limitations on the
capitalization of research costs. On the other hand, it also requires
companies to capitalize development costs that satisfy the stringent
criteria specified in IAS 38. This is likely to put some pressure
on operating margins in industries that had heretofore liberally
capitalized R&D costs, while industries that have always
booked all of their development costs as an expense, as has been
the practice at many companies in the automotive and industrial
goods & services sectors, should now start exhibiting slightly
higher operating margins.
Since the start of this year, employee stock options must
now be expensed at fair value over their vesting period. We think
this will probably tend to diminish the use of stock options as a
component of employee compensation. In addition, numerous
0.8
0.6
0.4
0.2
0
Automobile
Banking
Basic resources
Chemicals
Construction
Cyclical goods & services
Energy
Financial Services
Food & beverage
Healthcare
Industrial goods & services
Insurance
Media
Non-cyclical goods & services
Retail
Technology
Telecommunications
Utilities

minor improvements in the accounting treatment of provisions,
leases and revenue recognition enhance the uniformity of financial
reporting.
GLOBAL INVESTOR 1.05 IFRS— 15
The impact on valuations and credit profiles
Oftentimes, the first reaction to accounting alterations is to argue
that they are of limited relevance to company valuations since
cash flows for the DCF models do not change. We do not fully
agree with this view for four reasons. First, valuation metrics such
as P/E , P/B and EV/EBITDA multiples, which will look more
attractive thanks to the switch to IFRS, are still commonly used.
Second, the underlying assumptions for DCF models could be
affected as new and more reliable segmental information
becomes available. Third, credit ratios such as EBITDA interest
coverage, interest-bearing debt to EBITDA, and leverage will
change and thus shift company credit profiles. It is still uncertain
how the rating agencies will handle this issue, but some companies
presenting higher operating performance in addition to beneficial
alterations on their balance sheets are likely to receive rating
and outlook upgrades in due course. And fourth, moving
off-balance-sheet information to the balance sheet will change
investors’ perceptions of companies’ leverage and risk.
The introduction of IFRS is a welcome development
The volatility of net earnings and shareholders’ equity is likely to
increase, particularly due to the switch from goodwill amortization
to impairment testing (IFRS 3) and the valuation of financial instruments
at fair value (IAS 39/32) . Some market participants may
initially have difficulty absorbing the new, complex financial information
and appropriately assessing the aforementioned heightened
volatility. Hence, the information policy (guidance) of individual
companies is likely to be of essential importance here.
We welcome the implementation of IFRS because, in the
longer term, it will substantially enhance the transparency and
comparability of corporate financial statements and will move
European accounting practices closer to US GAAP norms. As for
company valuations, we believe that the transition to IFRS will lead
to improved earnings quality in the longer term and will thus give
rise to more accurate, more reliable and more consistent valuations
for European companies.
Figure1 shows the impact that the introduction of IFRS will
have on individual sectors. Banks (Société Générale, Italian
banks), insurers (Allianz, Italian insurers), media companies and
retailers are likely to experience the biggest changes. In all cases,
the effects of IFRS must be individually examined for each firm,
and company guidance must be taken into account. |
Figure 3
Impact of the key changes on individual sectors
Source: Credit Suisse
Business combinations
Goodwill, IFRS 3
Share-based payments
Stock Options, IFRS 2
Financial instruments
IAS 39/32
Employee benefits
Pension Accounting, IAS 19
Automobiles
Banks
Basic resources
Chemicals
Construction
Financial services
Food & beverage
Healthcare
Industrial goods & services
Insurance
Media
Oil & gas
Personal & household goods
Retail
Technology
Telecom
Travel & leisure
Intangibles
R&D, IAS 38
Utilities
very important
important
not important

“A combination of several factors should lend
alternative energy stocks a boost.” Lars Kalbreier, Hervé Prettre

GLOBAL INVESTOR 1.05 Alternative energy — 17
Alternative energy: The next big investment craze?
The run in alternative energy stock prices in 2004 might well have signaled
the start of a multiyear investment trend. The growing depletion of oil resources
will compel mankind to find new sources of energy. Lars Kalbreier, Hervé Prettre
After decades of reliance on oil, where will we look for new
sources? First, there are existing sources that are more abundant
than oil, such as natural gas, coal and nuclear energy. Second,
new transition technologies, hybrid cars and fuel cells reduce oil
consumption without eliminating it. Third, renewable energy
sources, such as geothermal, solar, wind and biomass, have been
underdeveloped in recent years and should benefit from a boost
in investment in the near future. <strong>New</strong> catalysts like technological
breakthroughs and tougher environmental laws also provide
unparalleled potential to companies operating in those sectors.
Kyoto Protocol sparks action
Among the tougher environmental laws, the Kyoto Protocol has
already triggered corporate activity and should compel countries
to reduce greenhouse gas emissions by 2012 , which is likely to
trigger a replacement of several existing fossil-fuel facilities by
new energy infrastructure. <strong>New</strong> technologies are already available
now, though they are still expensive for some energy sources.
Still, increased investment and new developments are expected
to improve this situation in the coming years. What is the potential
for these new energy sources? Looking at the success of
some other new technologies in recent history – such as personal
computers in the 1980 s, or mobile phones in the 1990 s – the sky
is indeed the limit.
The run in alternative energy stock prices in 2004 might well
have signaled the start of a multiyear investment trend. We
believe that a combination of several factors, such as depleting oil
reserves, striving for energy independence and increasing
demand from China and India, is likely to boost share prices in the
sector.
p The oil issue: Oil reserves are starting to be depleted: Proven
reserves total about 1trillion barrels, which corresponds to only 33
years of additional global consumption, based on global demand
of 83 million barrels a day (estimate for 2005 ), according to the
IEA (International Energy Agency).
p Striving for energy independence: Two-thirds of oil reserves are
located in the Middle East – a region marked by increasing geopolitical
risks, as evidenced by the mounting tensions in recent
years.
p <strong>New</strong> demand for oil has emerged from energy-hungry developing
countries like China. China consumes 7.7% of the world’s
oil supply and is now the second-largest oil consumer, surpass-
Figure1
<strong>New</strong> crude-oil discoveries and the trend
in demand
Source: manicore.com
80
60
40
20
0
Billions of barrels
1900 1920 1940 1960 1980 2000 2020
Discoveries
Demand

ing Japan. According to IEA estimates, China is expected to
boost its oil consumption by between 4% and 4.8% every year
until 2025 .
Hence, Western countries will have to limit oil use sooner
rather than later. For the first time in four generations, the burning
question on everyone’s mind is whether we, or our children,
can someday live without oil. So, what can replace oil as a source
of energy?
Immediate oil replacements
The first energy sources to benefit from lower oil use are oil-substitute
fossil fuels, natural gas, coal and nuclear power.
p Natural gas is already the best substitute for oil. Natural gas
can replace oil in heating, electricity generation and industrial
power production. Moreover, the resources are abundant: according
to the US Geological Survey, there are 386 trillion cubic
meters including undiscovered resources, corresponding to 155
years of world consumption. Due to the expected diversification
of gas imports as well as depleted reserves in North America, the
USA and Europe will increasingly import natural gas from overseas.
In this regard, a new application is expected to play a key
role: liquefaction. Liquefied natural gas ( LNG) is the only means
of transporting the gas by sea. LNG is expected to represent
nearly all the increase in US net imports over the coming years,
or more than 56 billion cubic meters from 2003 until 2010 .
Liquefaction capacity will likely be expanded by 30% worldwide
by 2006. This creates significant upside potential for companies
that are well positioned in the field of LNG.
p Coal, the victim of the oil revolution following the Second
World War, is about to take its revenge: it is the second obvious
replacement for oil, mostly used for energy generation. Coal
offers ample reserves, almost 200 years of global demand. The
use of coal is likely to increase in the coming years thanks to
demand from China, where coal accounts for 70% of energy
demand. Since China’s industrial expansion will probably continue,
the demand for coal is expected to increase further.
p Nuclear energy Public opinion and politicians have had an
adverse view of nuclear energy in recent decades, mostly in the
aftermath of the Chernobyl accident in 1986 . However, nuclear
energy has recently returned as a growth theme. <strong>New</strong> technology
for nuclear reactors and tougher safety rules have considerably
improved the security of nuclear plants. In this context, nuclear
energy offers unparalleled assets: independence for OECD countries,
low production costs ( 0.05 euros per kilowatt) and no greenhouse
emissions. The replacement needs for out-of-date infrastructure
(mostly the power plants of the 1960s) should definitely
trigger investment in nuclear energy.
Opportunities for transition technologies
Transition technologies encompass existing technologies that
help to reduce oil consumption. The production of hybrid cars and
fuel cells, which belong to this group, has also started expanding.
p Electric hybrid cars have so far seen the greatest commercial
success of alternative energy sources, and the prospects still
offer the opportunity for future development. Toyota’s Prius is the
first hybrid car that is built in series production and sells for a competitive
price. Hybrid cars have a gasoline-powered engine as well
as an electric motor that work in tandem to drive the vehicle. Toyota
announced plans to double its US Prius supply to 180,000 for
2005 and will add two hybrid SUVs (sport utility vehicles) in early
Figure 2
Annual growth in demand for energy sources
Source: Credit Suisse estimates, International Energy Agency
30
25
20
15
10
%
5
0
Total energy
Oil
Natural gas
Nuclear
Coal
Hydroelectric
Other
Wind
Bioenergy
Geothermal
Solar

2005 to meet company expectations for demand. Several carmakers
have expressed their interest in adopting Toyota’s new
hybrid technology, including Porsche. We estimate that the hybrid
car is going to remain the “most wanted” car in Western countries
in the coming years.
p Fuel cells offer gigantic development potential. Fuel cells convert
hydrogen into electricity through a chemical reaction. This
technology is promising since the level of pollution is low, and it
carries lighter-than-air elements, with considerable energy efficiency
(twice as much as with gasoline-powered engines). Commercial
applications have been limited so far due to the high cost
associated with implementation of this technology. However,
these costs have declined rapidly, from USD 1 million in the 1970s
to USD 4,500 per kilowatt today. As research intensified in recent
years, we believe the trend toward reduced costs will accelerate
in the future, so that we could envision purchasing the first fuelcell-powered
car within a decade.
GLOBAL INVESTOR 1.05 Alternative energy — 19
<strong>New</strong> energy sources harbor huge potential
Wind, solar and geothermal energy as well as bioenergy belong
to the third group of alternative energy sources. These new energy
sources offer the greatest potential of all energy sources, and
we believe the pace of investment is beginning to accelerate for
alternative energy soures. The IEA and several energy experts
anticipate average sales growth of more than 13% per year until
2010 . In our view, these impressive estimates are justified since
catalysts, which failed to take hold in the 1980 s and 1990 s, are
likely to have more of an impact this time round.
p Tougher environmental rules: The Kyoto Protocol targets very
strict greenhouse emission levels by 2012 . According to the Protocol,
signatory nations agreed to cut their greenhouse gas emissions
by 5% by 2012 , from a base of 100 in 1990 . Because
greenhouse gas emissions rose by 16% worldwide since 1990 ,
the reduction in gas emissions should be significant from the current
levels. The consequences of the Kyoto Protocol targets will
be the reduction of oil consumption, the replacement of outdated
coal plants (about 2.5% to 3% of current installed plants), a boost
in non-polluting energy sources. Respecting the Kyoto Protocol
will trigger a surge in alternative energy use of 50% of total current
capacity in new energy resources, according to the IEA. Several
utilities facing the 2012 deadline are starting to purchase
alternative energy assets in order to increase their share of clean
energy generation of total sales – a fact recently highlighted by
the success of the bidding process for Australia-based Pacific
Hydro, an electric utility that generates all its power through alternative
energy sources.
p Technological improvements enabled new energy sources to
move from state-subsidized laboratory status to commercial applications:
for example, windmills are now equipped with super-light
alloys, instead of traditional steel; solar panels are framed with
silicon.
p Lower electricity generation costs: Several large-scale energyrelated
projects have been implemented in recent years: for
example, the installation of solar panels on the roof of Berlin’s
main train station, as well as the development of more than
100,000 green houses in Japan. As a result, economies of scale
have been achieved, new technologies tested and commercial
applications eased. This has led to significantly lower powergeneration
costs, which (except for solar energy) are now in a
range of competitiveness with oil and natural gas.
Figure 3
Cost of energy production
Source: Credit Suisse estimates
70
60
50
40
30
20
10
0
US cents per kilowatt-hour
S o la r ( b e f o r e
s u b s id ie s )
Hydroelectric
B io e n e r g y
G e o t h e r m a l ( b e f o r e s u b s id ie s ,
in c e r t a in r e g io n s o n ly )
W in d
s u b s id ie s )
( a f t e r
C o a l
n u c le a r
c o s t s )
N u c le a r ( e x c lu d in g
w a s t e d is p o s a l
D ie s e l
Natural gas
G a s o lin e

Technological improvements and existing implementation have, by
now, demonstrated the economic sustainability of these new
energy sources – 20 years after their first rather unsuccessful
launch.
p Wind is a free and environmentally friendly energy. The market
has now grown to USD 8 billion a year and is benefiting from several
large-scale projects, mostly in coastal areas. Offshore wind
farms have been the latest commercial hype, with strong efficiency
(since wind can be found almost 365 days a year at sea).
This application is expected to drive the development of wind
farms at a 16% annual growth rate in the coming years.
p Solar power still suffers from cost efficiency, though it has
managed to grow into a USD 7billion market. The potential
remains tremendous due to its status as free energy, scalability
and geographical flexibility. In view of the additional expected
technological improvements, such as the improved panel weight,
the concentration of power cells and savings in power transport,
some experts believe costs can decline further by more than 20%
by 2010 . Should this occur, CLSA (the Hong Kong-based
research group) estimates that sales could jump by 30% a year.
p Geothermal energy is the thermal energy stored in rocks and
fluids in the earth’s crust. The temperature of the earth increases
with depth, by three degrees Celsius every 100 meters. Geothermal
energy benefits from ample resources and is a non-polluting
energy that can serve isolated regions, usually mountainous
regions. It has now become a USD 1.5 billion market in the USA
and is expected to grow further at a pace of 11% per annum,
helped by better drilling and well detection techniques.
p Bioenergy comprises hydrocarbon deposits derived from onceliving
matter from a previous geological age that is used for fuel.
This includes the traditional petroleum, coal, or natural gas, but
also sugar, soy, beets or waste. In the past, the potential was limited
by the lower efficiency of bioenergy versus oil, ranging
between 15% and 30% of oil or coal. However, two major developments
can be observed. Several countries are testing local
bioenergy on a large scale as a substitute for oil, creating a sizeable
market, and energy efficiency is being improved by further
research. The leading US ethanol producer, Archer Daniels Midland,
managed to develop E10 – a mix of ethanol and gasoline –
which is competitive with regular gasoline. A partnership with
Volkswagen for producing biodiesel fuels is expected to bring
results in the coming years.
Top: Wind turbines in Hannover,
Germany – wind as an energy source
is currently reaping rewards from
large-scale projects.
Bottom: Solar energy is emerging –
the potential is huge, but the cost
efficiency has not been achieved.

We recommend investing in diversified funds
In our view, all the aforementioned energy sources harbor tremendous
potential in the coming years due to the growing global
energy demand, depleting oil resources, tougher environmental
rules and the aging of the US and European infrastructure. Transition
technologies, such as hybrid cars and fuel cells, as well as
new technologies like geothermal, solar, wind and biomass, have
the greatest potential for development. The general public now
has access to these energy sources, making them more of a consumer
good, rather than an experimental state-sponsored investment
– as it was in the past. Moreover, this constitutes a starting
point for a revolution. Just consider the following: When was the
last time we witnessed such a change in the status of an entire
sector? In the 1990 s, mobile phones became accessible to everybody
and not merely CEOs and heads of state. In the 1980 s, personal
computers made their way into every house. Looking back
at history, early investors in the mobile telephone or PC industry
realized substantial returns investing in these new technologies.
For those investors keen on spotting the next big investment
trend, we would recommend looking at the alternative energy
sector. While the next Microsoft may well be looming somewhere
within this investment theme, we would still advise investors to
gain exposure in this exciting area via a diversified fund-of-fund
structure. This allows investors to garner exposure to the rapidly
developing field of alternative energies, while reducing the stockspecific
risk. |
GLOBAL INVESTOR 1.05 Alternative energy — 21
This power plant in Iceland provides
geothermal energy for heating – but at
the same time serves swimmers well.

GLOBAL INVESTOR 1.05 Alternative energy — 22
“The supply of hybrid automobiles
will grow robustly”
Markus Mächler, Equity Sector
Research, addresses the efforts by the
automobile industry to economically
produce alternative vehicle propulsion
systems and talks about the considerable
influence of underlying political
conditions on market opportunities.
Markus Mächler: “The statutory regulations are becoming increasingly stricter.”
Global Investor: Rising raw-material costs have further fueled the
debate over alternative energy vehicles. How far has the automobile
industry advanced with respect to alternative propulsion systems?
Markus Mächler: Since the energy crisis of the 1970s, the automobile
industry has endeavored to carry out research at various
times, to a greater or lesser extent. While European carmakers
have focused primarily on innovations in diesel technology
(e.g., diesel filter technology, emissions recycling, etc.), their
Japanese counterparts – with Toyota leading the pack – have
launched hybrid drive systems. Both technologies represent
further developments of already existing propulsion systems.
One view often expressed is that advances in new propulsion
technology for conventional automobiles have come to a standstill
in recent years. Has such research been defensively structured
with intention due to pressure exerted by the oil companies?
On the contrary. The current fossil-fueled propulsion system
has seen a considerable boost in efficiency. Since 1990, the
average fuel consumption of new cars in Europe has been
reduced, from 8.8 to 6.9 liters per 100 kilometers. In addition,
such developments have been aimed toward increasing performance,
which seems to be a necessity since modern automobiles
are much heavier, with all the onboard electronics and
safety equipment, than older models. For example, the
VW Golf I (1980 model) weighed roughly 800 kilograms,
versus the VW Polo (2004 model), with a weight of nearly
1,200 kilograms and comparable size.
The impression is that as long as just one drop of crude oil can be
extracted, the environmental implications will be overlooked
because consumers have chosen to prefer gas-guzzling sport utility
vehicles (SUVs). What is your view on this?
The trend in rising popularity of SUVs will prevail. However, fullsize
SUVs do hold the advantage of having sufficient reserve
space for adapting to alternative propulsion concepts suitable
for the mass market. Most suppliers are in the process of launching
such projects. Toyota is on the verge of launching its
Lexus RX400h on the market. But the statutory regulations are
becoming increasingly stricter. For instance, manufacturers of
diesel engines in the USA that do not sufficiently comply with
the current environmental regulations (i.e., the Environmental
Protection Act 04) face government fines. In Europe, although
the manufacturers are unaffected, the owners of less environmentally
friendly cars (Euro 04) are financially disadvantaged.
Which alternative propulsion concepts are already available in the
automobile industry?
The proportion of diesel-engine automobiles is constantly
growing, particularly in Europe. The advances made in the field
of diesel technology and the introduction of particle filters
have brought initial success in this area. Diesel-powered cars
are more economically fuel efficient and are thus promoted
by the manufacturers since they are compelled to do so by poli-

GLOBAL INVESTOR 1.05 Alternative energy — 23
Figure1
Toyota Prius monthly US sales
Source: Company data
5000
4000
3000
2000
1000
0
07/00
10/00
01/01
Units sold
04/01
07/01
10/01
01/02
04/02
07/02
10/02
01/03
04/03
07/03
10/03
01/04
04/04
07/04
tics (i.e., the reduction of new car exhaust emissions by 25% in
Europe from 1990–2005). Significant progress has been made
in the development of natural-gas-powered automobiles. The
supply of natural gas is independent of crude oil. Alternatively,
natural gas can be supplanted by biogas. Considerable advances
have also been made in the area of hydrogen-cell (H 2 )
systems, though these are hardly suitable for series production.
Hydrogen is regarded as a very environmentally friendly power
supply, particularly since H 2 can be produced in various ways
that are not harmful to the environment. One hindrance, however,
is the fact that H 2 is very volume intensive, and there is
hardly room for the hydrogen tanks in passenger cars. Extensive
test drives are now being carried out using local public
transportation. With city buses, there is the possibility to carry
enough hydrogen fuel in overhead compartments. And since city
buses return to their depots on a daily basis, it would require
just one very expensive and cost-intensive refueling station.
Such technology is still some years on the horizon for use in private
automobiles. The transition period will be dominated by
hybrid automobiles.
Toyota offers its version of a hybrid automobile with the new Prius.
What distinguishes hybrid cars from the propulsion technologies
that you have mentioned so far?
With its new, second-generation Prius, Toyota has succeeded in
marketing the trend toward environmentally friendly cars. The
carmaker is currently boosting its monthly production of the
Prius, from 10,000 to 15,000 units in order to meet the rising
demand. The Prius features two hybrid synergy drive systems
that are ideally coordinated. First, there is an internal combustion
engine (gas powered), which is primarily for heavy acceleration
and highway cruising over long distances. But in
addition, there is an electric motor with onboard traction battery,
which is geared toward city driving (i.e., stop-and-go traffic)
and initial acceleration. With higher-speed driving, downhill driving
and braking maneuvers, the electric motor recharges the
battery, thereby reducing the average power consumption. This
concept makes sense in urban areas, where city traffic plays a
significant role in driving. For drivers who use their automobiles
exclusively for long-distance travel, which mainly utilizes the
gas-powered engine, the additional weight of the electric motor
and battery is more of a burden.
Such concepts are successful only when they offer mass-market
appeal. Do you expect to see other models with hybrid propulsion
systems?
Nearly all manufacturers are in the process of launching an
identical or similar propulsion concept. Even Porsche has teamed
up with Toyota – the market leader in hybrid propulsion
technology – in order to be able to offer its sport utility vehicle,
Cayenne, equipped with such technology. Alternatively, some
European carmakers are developing hybrid automobiles that
combine diesel technology with an electric motor. DaimlerChrysler
and General Motors have recently announced plans to jointly
invest in further developing hybrid technology. The two companies
say they will focus on a permanent combination of electric
motor and internal combustion engine, similar to what Honda
has already developed. I can well imagine that we will soon see
every model series additionally equipped with hybrid drive
systems.
When does it pay off for consumers to purchase a car with an
alternative propulsion system?
This is entirely dependent on the needs of the individual. Such a
purchase could really be worthwhile for driving in urban areas.
Some countries even offer financial incentives: for example,
London, where these types of cars are exempt from the GBP 5
charge for driving in the city center. The slightly higher acquisition
costs are offset by lower operating costs and reduced wear
and tear. The supply of hybrid automobiles, in particular, should
grow significantly in the coming years. For those who are not
exclusively long-distance drivers, a suitable model will soon be
available.
That sounds like good news. As an investor, how could I reap
rewards from this trend?
As already mentioned, Toyota is the technological leader in the
field of hybrid propulsion systems. Ballard Power is the leading
company in fuel-cell technology, though such innovation has
limited market potential for the time being. BMW is regarded
as one of the market leaders in the area of hydrogen-propulsion
technology. Nevertheless, it will take some time until the
research and development efforts turn into commercial success
for these companies – and for investors as well.

“We believe that telecom equipment stocks will
turn in a third consecutive successful year.” Uwe Neumann

GLOBAL INVESTOR 1.05 Telecom— 25
Telecom equipment manufacturers: Positive surprises cannot be ruled out
On the heels of two good years for stocks of telecom equipment makers,
many market participants anticipate retreating share prices again. Still, some
factors indicate that these stocks will perform well in 2005 too. Uwe Neumann
During the last two years, telecom equipment stocks for the most
part led the stock-exchange hit parade in terms of both absolute
and relative performance. Shares of companies like Ericsson,
Lucent Technologies, Nortel Networks and Juniper Networks
more than tripled in value during this period. However, these
share-price advances must be viewed in the context of the tech
stock crash that occurred in the preceding years. Ericsson’s current
share value, for example, is still 86% lower than its peak price in
March 2000 at the apex of the technology boom, though the company’s
annual revenue for 2004 is only around 50% lower than it
was in 2000. Does this simple reasoning suggest that the stock has
further catch-up potential? Could 2005 prove to be a third consecutive
year of relative strength for telecom equipment stocks?
Market outlook for the sector remains cautious
This thought exercise seems overly simplistic. The majority of
investors are looking ahead to 2005 with rather mixed feelings. In
the wake of a year in which a cyclical recovery, restructuring
measures and investment-backlog-driven revenue growth all had
a positive impact on earnings at telecom equipment manufacturers
and sparked a sharp turnaround, the prevailing opinion today
is that 2005 will tend to be a disenchanting year. In concrete
terms, investors are anticipating that the robust expansion in the
cellphone and network gear markets in 2004 (Figure1) will slow
back to single-digit growth rates in both segments in 2005 . Given
this outlook, this means that telecom equipment company valuations,
on an enterprise value-to-sales basis, look set to return to
a very rich average multiple of more than 2.5x.
Figure 1
Global investment in telecom equipment sector
by region
Source: Credit Suisse, Lehman Brothers
USD billio n s
The revenue trend could surprise on the upside
The 2005 sales trend is likely to be the crucial determinant of the
share-price trend for telecom equipment stocks. In the wake of
the massive restructuring efforts undertaken primarily by network
gear makers, there is little further profit growth that can be
achieved through cost cutting. The gross profit margin at mobile
network market leader Ericsson, for example, has risen from 35%
to a historical high of 47% within the span of two years. While we
agree with the consensus opinion about the profit-margin trend,
we are much more optimistic than the market with regard to the
revenue potential for telecom equipment makers. We think the
worldwide telecom equipment market is actually likely to surpass
the previous year’s growth rate in 2005 .
200
160
120
80
40
0
2001 2002 2003 2004 2005 2006
Americas Eur ope Asia Other

Telecom service providers expected to embark on a new
investment cycle
There are good reasons for this expectation. Paramount among
them is the investment behavior of telecom service providers. We
anticipate a growing propensity to invest motivated by technological
as well as economic factors. The migration from analog to alldigital
networks that commenced in the mid-1990 s is entering a
new phase because the flow of data and network utilization is
poised to increase. Telecom service providers are searching for
revenue growth. Waning customer growth in the mobile telephony
segment and arbitrage competition in the fixed-line business are
posing challenges for telecom operators. Technological advances
in terminal devices such as cellphones, laptops and PDA s now
make it easy to process large volumes of digital data. The only
thing that still leaves much to be desired is device connectivity to
the network, particularly where data throughput speed is concerned.
Breaking open this bottleneck gives telecom carriers new
growth opportunities, in our opinion, and protects them first and
foremost from the mounting competition posed by cable network
operators. These prospective benefits will prompt telecom operators
to increase their capital spending on boosting data transmission
speeds over mobile (UMTS) or fixed-line networks. We foresee
a new investment cycle that should last for at least three
years. However, the propensity to invest in the three subsegments
of the telecom equipment market (fixed-line infrastructure, mobile
infrastructure and cellphones) is likely to exhibit differing dynamics.
Broadband as a growth driver for fixed-line equipment
manufacturers
The increasing market penetration of broadband connections
enables telecom operators to offer a new quality of service distribution.
In the future, the so-called “triple-play offer” should
enable customers to receive television broadcasts and video on
demand, as well as Internet access and traditional telephone services
over their phone lines – a package that promises telecom
service providers higher overall revenue per user. However,
investments in fixed-line infrastructure first need to be made.
Estimates on the amount of investments required vary widely. The
greater the transmission and communication capacity strived for,
the closer that investments need to be made to the proximity of
customers, which is relatively expensive. If, for example, optical
fiber needs to be installed directly into the home (fiber to the
home, or FTTH) , the bandwidth upgrade could cost well above
USD 1,000 per customer. But if bandwidth capacity is expanded
only up to certain connection points within the network (fiber to
the node, or FTTN) , industry estimates place the ensuing investment
cost at only around USD 250 per customer. However, the
rule of thumb holds that the better the network is outfitted, the
lower the subsequent maintenance costs, the better the network’s
integration properties and the more it can be utilized by
alternative wireless access technologies in enclosed spaces
(WLAN, WiMAX, mobile Internet, etc.). Hence, in many instances,
such as in areas where new buildings and subdivisions are going
up, telecom service providers are likely to opt for the more expensive
solution. In any case, this subsegment of the telecom equipment
industry probably holds the most potential for surprises.
Market leaders like Cisco Systems, Juniper Networks and Alcatel
should profit from this. Above-average growth rates are likely
to be posted mainly by US mid-caps like Sonus Networks,
Extreme Networks, Foundry Networks and Tellabs.
Figure 2
Investment in mobile telephone infrastructure
in USD billions and handset growth in millions
of units
Source: Credit Suisse, Gartner Group
8 0
6 0
4 0
20
0
USD billions
2001 2002 2003 2004 2005
I n ves t men t in m obile
t e lephone eq u ipmen t
M illions of unit s
700
600
500
400
300
200
100
D ema n d f o r m obile t e lephone s
0

Mobile telephony equipment: Stable, high growth
The mobile infrastructure business was the main sales driver for
the telecom equipment industry last year. While the overall market
expanded by an estimated 5%, spending on mobile telephony
equipment rose by around 13% from the previous year (Figure 2) ,
mainly due to network upgrades implemented by European telecom
service providers (60 new UMTS networks are now operational)
and particularly brisk demand from developing countries
and Asia. In contrast to the fixed-line infrastructure business,
demand for mobile telephony equipment in these regions is likely
to subside a bit this fiscal year. In the USA, however, more money
will be spent this year than in 2004 in view of last year’s robust
customer growth (+14% YoY ) and the technological network
upgrade (3G migration) initiated by the nation’s mobile operators.
On balance, we expect growth to consolidate at a high level.
North American suppliers such as Lucent and Nortel will probably
profit more from this market environment in 2005 than the
market leader Ericsson, which is exposed to increasing competition
from suppliers in Asia, like Huawei, LG and ZTE.
GLOBAL INVESTOR 1.05 Telecom— 27
Battle over market share in the mobile telephone business
Compared with the telecom infrastructure business, the cellphone
market is beholden to its own laws. Market leader Nokia suffered
noticeable market-share losses in 2004 for the first time in a
decade, smack in the midst of a record year that saw 640 million
mobile phones sold worldwide, a good 25% more than in the previous
year (Figure 2) . The beneficiaries of Nokia’s market-share
woes were Samsung, Sony-Ericsson and Motorola, whose products
evidently better suited the tastes of consumers and telecom
service providers. Nokia swiftly reacted to the situation and is now
attempting to recapture lost market share by means of an adapted
product range and price reductions. Nokia has a war chest of
more than EUR 10 billion that it can deploy in its battle for market
share. No other supplier can match Nokia’s financial strength.
Hence, Nokia is bound to successfully wage its market-share battle,
which should start to become evident in 2005 . However, the
company’s pricing policy is depressing profit margins for the time
being. Nokia’s handset business is quite unlikely to return to its
old operating profit margins in excess of 20% in 2005 . Moreover,
the cellphone market will probably stagnate on the whole in the
wake of the record 2004 year. We take a skeptical view of the
market forecasts calling for continued growth of 10% . This environment
is fundamentally conducive to predatory competition,
which is likely to foster new company mergers.
Stock picks for a third consecutive successful year
We believe that telecom equipment stocks will turn in a third consecutive
successful year. Our stock recommendation is centered
on fixed-line equipment manufacturers because we think this
market is likely to hold the most potential for surprises. US midcap
fixed-line equipment makers (such as Sonus Networks,
Extreme Networks, Foundry Networks and Tellabs) have the
greatest upside share-price potential, in our opinion, but market
leaders like Cisco and Alcatel are also likely to perform well. Due
to its financial strength, Nokia remains a core investment in the
telecom equipment sector despite the ongoing market-share war.
In contrast, high priced-in expectations and a weak US dollar will
probably tend to constrain Ericsson’s upside potential. |
Top: Alcatel should benefit from a new
investment cycle by telecom services
companies.
Bottom: Samsung counts among the
companies that have recently chalked
up noticeable gains in the mobile
telephone market.

“Inflation-linked bonds offer protection against
future inflation risks.” Dr. Jeremy Field

GLOBAL INVESTOR 1.05 Inflation linked bonds — 29
A worthwhile look at inflation-linked bonds
Inflation-linked bonds offer investors a real return and a direct hedge against
inflation. Additionally, they provide the benefit of portfolio diversification in offering
a low correlation to government bonds, corporate bonds and equities. Dr. Jeremy Field
Concern about the future purchasing power of money is nothing
new. Until the early part of the twentieth century, most industrialized
countries linked their currencies to gold as a way to peg the
real value of their money. Certain less-developed countries, such
as Brazil, started issuing inflation-linked (or real-return) government
bonds shortly after the Second World War, out of necessity
to raise financing in a volatile inflationary environment. Governments
of industrialized countries, with modest and stable inflation
rates, followed later: Great Britain (1981), Australia (1985), Canada
(1991), Sweden (1994), USA (1997) , France (1998) and Italy
(2003) . Germany is scheduled to start issuing inflation-linked
bonds in 2005 . Additionally, corporate and financial institutions
and government agencies also issue inflation-linked bonds.
Robustly growing market for inflation-linked bonds
The value of inflation-linked bonds outstanding has grown by
more than 500% in the last eight years. The total size of the global
inflation-linked government bond market is estimated at USD
680 billion (see Table 1 for the major sovereign issuers among
OECD countries and the linked inflation indices.) The market is
expected to grow by 12% during 2005 to reach USD 850 billion.
By the end of 2006, the global inflation-linked market is expected
to be larger than the current German government bond market,
which is USD 1.207 trillion ( EUR 911 billion). The greatest
supply in inflation-linked bonds in 2005 is forecast to be in the
euro zone, despite the fact that Germany is not expected to start
issuing inflation-linked bonds before the second quarter. In the
USA, the supply of Treasury Inflation Indexed Securities (TIPS) is
forecast at USD 80 billion. It is important to note that there are
significant differences in inflation indices in different countries.
For example, the weighting of food in the UK RPI (retail price
index) is 10%, whereas in the EUR HICP (harmonized index of
consumer prices) the weighting is 15%. Even more significant is
that the EUR HICP does not include a measure of owner-occupied
housing, whereas in the UK it is 8% of the index and 22% in the
USA. Hence, protecting financial assets against inflation risk is
contingent upon the index used. Inflation indices are not necessarily
comparable. The weighting of the food, clothing, healthcare,
etc. sectors is the most significant difference between
indices. For the EUR CPI, French CPI and UK RPI, these sector
weightings are revised every year.
Table 1
Sovereign inflation-linked bond markets
Source: Barclays Capital, Bloomberg, Credit Suisse
Issuer Inflation indices Face value Ratings
at last issuance
in USD bn
USA US CPI 162 Aaa/AAA
UK UK RPI 66 Aaa/AAA
France FR CPI, EUR HICP 1 51 Aaa/AAA
Sweden SW CPI 23 Aaa/AAA
Italy EUR HICP 1 25 Aa2/AA-
Canada CDN CPI 13 Aaa/AAA
Australia AUS CPI 4 Aaa/AAA
1
excl. tobacco

Inflation-linked bonds
Although there are several types of inflation-linked bonds, the
most common structure is one where both the nominal principal
and the nominal coupon are revised (upward, assuming inflation)
for changes in the linked CPI between the issue date of the bond
and the coupon (or coupon plus principal at maturity) payment
date, subject to an indexation lag because official CPI (inflation)
data is published with a delay. In Canada, France and the USA,
this lag is three months. In the UK – the second-largest inflationlinked
market in the world after the USA – the lag is eight months,
but the coupons are semiannual in the UK as opposed to annual
in France. All new inflation-linked UK government bonds (gilts) will
follow the so-called Canadian conventions, quoting with a real
price and yield, in contrast to the uplifted price and yield based on
assumed inflation that is used for current bonds. <strong>New</strong> UK inflation-linked
bonds will still be linked to the retail price index, but
with a three-month time lag that is used by other major sovereign
issuers. Index-linked bonds are generally linked to the initial
release of the CPI and are not subject to potential subsequent
revisions. Since the principal is indexed to the CPI and increases
in line with inflation, investors in inflation-linked bonds are guaranteed
that the real purchasing power of the principal will be preserved.
Investors receive coupon payments (either annual or
semi-annual, depending on the issuer), with the coupon rate
applied to the inflation-adjusted principal. Investors therefore
receive a real rate of return that exceeds the rate of inflation. Most
inflation-linked bonds have a deflation floor, guaranteeing at least
par value of the principal at maturity, in case the level of the CPI
over the life of the bond is lower when it was when the bond was
issued. Canadian and UK inflation-linked bonds do not have a
deflation floor, but so far this has not been and issue.
Inflation and inflation forecasts
Over a two-year period, a forecast of inflation is required to estimate
the value of an inflation-linked bond resulting from the
increase in the value of its coupon for future payments through
the uplift of the CPI affecting the principal. This can be influenced
by seasonal factors and external shocks such as adverse weather
conditions. Over 12 months, the seasonality effects cancel
out. However, over shorter periods, inflation accruals on inflation-
linked bonds can vary substantially. Longer-term inflation can be
considered a monetary phenomenon, driven by growth in the
money supply and largely influenced by central-bank policy and
the bank’s credibility. Break-even inflation for an inflation-linked
bond is approximately the difference between the quoted nominal
yield of a government bond with a comparable maturity and the
quoted real yield of an inflation-linked bond. Break-even inflation
is the rate of inflation that, if realized, will make the investor indifferent
between holding a conventional government bond or an
inflation-linked bond of the same maturity. It can be considered as
a spread that is highly influenced by inflation expectations and
inflation volatility, as well as by supply and demand considerations.
Break-even inflation indicates the markets expectations regarding
future inflation rates. Breakeven inflation also includes a component
known as the inflation risk premium. The uncertainty about
future inflation determines the inflation risk premium. The more
volatile inflation expected, the higher the risk premium. Breakeven
inflation is the amount of inflation priced in by the market
over the remaining life of the bond.
Inflation-linked bonds and asset allocation
Why should investors be interested in inflation-linked bonds in a
period of low inflation? Figure1 shows consumer price inflation
(CPI) for France, the USA and the UK, indexed to 100 at the
beginning of 1996. For France, the CPI (excluding tobacco) over
this period has averaged 1.4% (i.e., low inflation). Nevertheless,
this has resulted in a loss of purchasing power of 12.7%. Over the
same period, the inflationary erosion of purchasing power was
22.7% in the USA and 25.2% in the UK, with inflation averaging
just under 2.5% in the USA and just over 2.5% in the UK over the
time period. Even with modest inflation, there is a clear need to
protect financial assets from the loss of value over an extended
period. For example, pension funds are exposed to the effects of
inflation; the value of their financial assets erodes and their liabilities
increase because of periodic cost-of-living adjustments to
pensions. Private investors want to protect the purchasing power
of their savings that decline in real terms because of inflation. A
further reason both institutional and private investors should consider
holding a part of their portfolio in inflation-linked bonds is
that they are an asset class in their own right. Table 2 shows the
Table 2
Correlation between various bond and equity asset classes
Source: JP Morgan
EUR bonds, USD bonds, EUR USD EUR AA USD AA EUR USD
inflation inflation government government corporate corporate equities equities
linked linked bonds bonds bonds bonds
EUR bonds, inflation linked 1.00 0.40 0.58 0.30 0.56 0.30 0.09 0.02
USD bonds, inflation linked 0.40 1.00 0.52 0.65 0.50 0.62 0.11 0.05
EUR government bonds 0.58 0.52 1.00 0.64 0.95 0.62 0.15 0.05
USD government bonds 0.30 0.65 0.64 1.00 0.62 0.92 0.15 0.05
EUR AA corporate bonds 0.56 0.50 0.95 0.62 1.00 0.63 0.12 0.04
USD AA corporate bonds 0.30 0.62 0.62 0.92 0.63 1.00 0.11 0.02
EUR equities 0.09 0.11 0.15 0.15 0.12 0.11 1.00 0.56
USD equities 0.02 0.05 0.05 0.05 0.04 0.02 0.56 1.00

correlation between EUR and USD government inflation-linked
bonds and other asset classes. The lower the correlation coefficient
(R 2 ), the higher the diversification value, and a value of 1.00
indicates perfect correlation, while a value of 0.00 indicates that
two asset classes exhibit no correlation. For example, the correlation
between EUR linkers and EUR (nominal) government bonds
is 0.58. The correlation between USD linkers and USD equities
is 0.02, etc.
Real bond yields are comparatively stable, leading to less
price and yield volatility for inflation-linked bonds than nominal
government bonds with a similar maturity. The attractiveness of a
financial asset is usually measured in terms of the balance
between expected return and volatility (risk). In this respect, inflation-linked
bonds are attractive in a portfolio context because of
their low volatility. Barclays Capital has analyzed the so-called
efficient portfolio frontier for a mix of US dollar-denominated
assets: TIPS, the S&P 500 equity index, and US Treasury notes
and bills. The efficient portfolio frontier is the portfolio weighting
of these four financial assets that gives the minimum standard
deviation of return for a range of return outcomes (Figure 2) . The
maximum return of 8.25% for the lowest risk is achieved with a
portfolio comprising 89% TIPS and 11% of the S&P 500 index.
The middle curve in Figure 2 is the efficient frontier when the
TIPS weighting is constrained at 20% . However, both curves indicate
how the risk-adjusted return can be improved by adding
inflation-linked bonds to the asset allocation. The EUR inflationlinked
bond market is newer and smaller than the TIPS market,
but similar conclusions can be drawn regarding the positive
effects of including inflation-linked bonds.
Conclusions and recommendations
Inflation-linked bonds can be considered as an asset class in their
own right and offer valuable diversification in an asset portfolio.
The demand for inflation-linked bonds comes mainly from pension
funds. The total market in government linkers is large and transparent,
with relatively good liquidity, except for very large institutional
investors. We expect the inflation-linked market in euros to
be the object of renewed interest when Germany starts issuing
such bonds in 2005 . Recent macroeconomic developments have
heightened uncertainty about the prospects for inflation and make
a renewed look at inflation-linked bonds worthwhile in our opinion.
These bonds provide a certain protection against future inflation
risk, contingent on how well investors’ inflation risk is aligned
with the CPI, to which a particular bond is linked. The inflation
adjustment applied to the coupon is based on the time-lagged
inflation rate of the linked CPI. The CPIs used for the inflation
linking are generally not seasonally adjusted, which adds to transparency.
In general, inflation-linked bonds outperform nominals as
interest rates rise because they benefit from increasing inflationrate
expectations. |
Index
01/96
GLOBAL INVESTOR 1.05 Inflation linked bonds — 31
Figure 1
Consumer price indices (renormalized)
for France, UK and USA
Source: Bloomberg
130
120
110
100
90
Return in %
01/97
01/98
01/99
01/00
01/01
01/02
01/03
France CPI USA CPI UK CPI
Figure 2
Efficient investment frontier in US dollars
Source: Barclays Capital
8.5
8
7.5
7
6.5
6
5.5
5
4.5
4
3.5
01/04
Volatility % 0 1 2 3 4 5 6
No TIPS
Max. 20% TIPS
TIPS, Treasurys, S&P,
T-bills, unconstrained

“The strategy is to buy Brazil now and later
buy China and India on market dips.” Cédric Spahr

GLOBAL INVESTOR 1.05 Emerging-market equities — 33
China, India and Brazil: The future giants of the global economy
Investors who wish to reap rewards from the emerging growth
markets cannot overlook China, India and Brazil, which offer favorable
opportunities. Cédric Spahr, Arjuna Mahendran
Economic reforms initiated across the developing world in the
1990 s, together with trade liberalization, have accelerated the
industrialization of populous, but underdeveloped, countries such
as China, India and Brazil. These countries have good chances of
becoming the new giants of the global economy over the next
twenty to thirty years, and they offer corresponding opportunities
for risk-conscious stock-market investors. Low production costs
are leading to increased foreign direct investment and the transfer
of production technology to low-wage countries. China’s
demonstration effect and the rise of a new generation of reformminded
politicians in India should make high rates of economic
growth a reality. In Brazil, the election of an economically pragmatic
leftist president provides the country with a unique opportunity
to break out of its vicious cycle of escalating government
deficits, hyperinflation and economic misery.
China: Not a one-way street to fast riches
China’s dizzying economic expansion since 2000 has exerted a
palpable impact on global growth and the price of key commodities.
So far, Western companies have only outsourced the less
profitable processing and manufacturing parts of the value chain,
but it is only a matter of time before Chinese <strong>brands</strong> will be competing
on the world markets. The recent purchase by Lenovo, a
Chinese PC manufacturer, of IBM’s PC business, is a harbinger
of things to come. After all, remember how much Japanese cars
were still being ridiculed back in the early 1970s.
China’s growing domestic market can hardly be overestimated.
China is currently the world’s third-largest importer, after the
USA and Germany, with imports amounting to more than USD
413 billion in 2003. The pulling force generated by the flood
of imports into China is stimulating Asian economies and is
benefiting the European capital goods industry. It is estimated
that 150 million Chinese citizens will have real annual incomes
in excess of USD 10,000 by 2013 . Surging Chinese demand
for such commodities as crude oil and metals augurs well in the
long run for raw-material producers and countries like Brazil,
Canada and Australia, which possess vast reserves of natural
resources. At the same time, this also means growing competitive
pressure for all manufacturers of tradable mass-produced
goods. In other words, the goods that China produces are
becoming cheaper, while the goods that China needs are becoming
more expensive.
Figure 1
The Brazil stock market is trading at a noticeable
discount to the Chinese and Indian markets
Source: IBES, Datastream
24
18
12
6
0
P/E
96 98 00 02 04
MSCI India, 12M forward P/E
MSCI China, 12M forward P/E
MSCI Brazil, 12M forward P/E

From 1987 to 2004 , the Chinese economy expanded at an average
annual real growth rate of 9%. The future harbors enormous
opportunities, but also clear risks. China’s very tense relations
with Taiwan demonstrate that, in certain cases, the Chinese government’s
political interests can definitely take precedence over
the country’s economic interests.
Investors should bear in mind that investments in Chinese
companies in the 1990 s were not a one-way street to fast riches.
The similarities between 1990 s China and the industrialization and
economic boom in the USA in the second half of the nineteenth
century are striking. Investors should consider that at the time
nearly all of the American railway companies went bankrupt. Chinese
accounting rules are inadequate and the transparency of
Chinese companies leaves much to be desired. Investors should
put their money only in companies listed on the Hong Kong
exchange, which requires them to comply with stricter accounting
and disclosure standards.
India: Infrastructure problems must be overcome
Though not as spectacular as China’s, the progress that India has
made with respect to development over the last decade has still
been remarkable. The boom in information technology services,
such as software development, as well as the outsourcing of
white-collar jobs in accounting and engineering from OECD member
countries, has attracted attention internationally and is
expected to earn India USD 25 billion in revenues in 2005 . But a
more fundamental process of restructuring in the industrial and
financial sectors is nearing completion. This has triggered a wave
of new investment in the manufacturing sector, financed by historically
low interest rates, which should spark a one-time boost
in productivity. The result is the emergence of companies producing
competitive products for the domestic and global markets
in sectors as varied as automotive components, textiles, machinery
and petrochemicals. Another significant improvement has
been in the area of government finances. India’s government
recently reported that for the first time in decades its primary
government budget deficit had turned to a slight surplus in
November 2004 . This has removed a significant driver of inflationary
pressure in the economy, which will ensure that the cost
of capital is kept low on a sustainable basis.
The impact of these remarkable achievements in recent years
has been the rapid accumulation of India’s foreign-exchange
reserves, which now exceed USD 120 billion, enabling the country
to fund eight months of its imports. This has cushioned the
energy-import-dependent country from the rise in energy prices.
It has also spawned renewed interest in petroleum exploration
activity, which has already resulted in significant oil and gas discoveries
in diverse areas of this vast country. The challenge facing
the new government of economic reformer Prime Minister
Manmohan Singh is the conversion of these strong reserves into
better economic infrastructure such as ports, airports, highways
etc. Plans are to be unveiled with regard to the government
budget, which will be presented in late February 2005 .
Unsurprisingly, there is a wave of global investor confidence
sweeping across India. For investors who are growing wary of an
overheating Chinese economy, India offers a favorable opportunity
to diversify their risk. Over USD 8 billion poured into the Indian
stock market in 2004 – a new record. The benchmark Sensex
index has breached the 6,500 line of resistance and is set to
reach 6,800 in early 2005 . For a market trading at a price-earn-
Figure 2
China, India and Brazil are likely to see above
average economic growth in the coming years
Source: Consensus economics
10
8
6
4
2
0
Estimated GDP growth in %
China India Brazil
2004 2005 2006
Figure 3
China remains a driving force for many metals
and raw-material prices
Source: Exane, BNP Paribas
140
120
100
80
60
40
20
0
%
19.8
121.4
Copper
26.8
89.9
Steel
34.1
65.8
18.8
50.7
10.7
43.8
Iron ore Aluminum Nickel
China as a percentage of global consumption
China as a percentage of global consumption growth

ings ratio of 12, which is a fair value by historical measures, we
think that there is a fundamental re-rating process currently
underway. The Indian rupee appreciated 4.2% against the US dollar
in 2004 and could move up another 3% in 2005 , in our view.
GLOBAL INVESTOR 1.05 Emerging-market equities — 35
Brazil: Good potential for stock-market returns
Brazil’s young population and abundant natural resources theoretically
give the country good fundamental requisites for economic
growth. In the past, unstable political institutions and public
finance deficits gave rise to recurring financial and monetary
crises. The pragmatic economic policy that President Luiz Inácio
Lula da Silva has pursued since taking office has confounded the
pessimists. The containment of government deficits is reducing
inflationary pressure and stabilizing the Brazilian currency. It is
also allowing capital market yields to retreat and is stimulating
investment. Moreover, as an exporter of commodities, Brazil is
directly profiting from the spike in Chinese demand for raw materials.
The Brazilian stock market’s low price-to-earnings (P/E)
ratio of 6.5 based on profit estimates for 2005 reflects investors’
persistent skepticism about the country. The emerging boom in
the commodity markets gives Brazil good prospects of overcoming
the vicious cycle of public deficits and economic stagnation
over the next ten years. Brazil is now running a current-account
surplus, and a prudent monetary policy has inflation largely under
control. Given the low stock-market valuation, we think the return
potential more than compensates for the political and economic
risks associated with Brazil. Brazilian companies enjoy comparative
advantages in the petroleum, iron ore, steel and paper sectors.
Outlook: Broadly diversified products preferred
Long-term investors who are seeking to orient their portfolios
toward emerging growth markets cannot bypass China, India and
Brazil. The question is not whether positions should be accumulated,
but when. Valuations play a key role here. A glance at the
P/E ratios for these three stock markets reveals that the Brazilian
market, with a P/E of 6.5, is trading at a steep discount to the
Chinese and Indian markets. The Indian market, with a P/E of 12,
is no longer inexpensive, but the country’s domestic economy is
less dependent on the global business cycle, while China and
Brazil are likely to experience a slowdown in growth in the first half
of 2005 . This should open up good long-term entry opportunities,
in our opinion. The strategy therefore is to buy Brazil now and to
wait until later in the first quarter to buy China and India on market
dips.
Broadly diversified investment vehicles should primarily be
used to invest in these markets. We recommend the HSBC GIF
Chinese Equity Fund for China and the HSBC GIF Indian Equity
Fund for India. For Brazil, we recommend the iShares MSCI Brazil
Index Fund or the Merrill Lynch Latin American Fund for those
who wish to focus their investments on Brazil and Mexico. |
Top: Union Bank of India billboard –
lack of infrastructure poses a problem
for emerging-market countries
Bottom: Banco do Brasil branch office
– the government’s pragmatic
politics has brightened up the country’s
outlook

Global companies made in China? An initial assessment Giles Keating, Harald Zahnd
Visit any major shopping mall in China, and alongside established
Western consumer <strong>brands</strong>, such as Armani or Gucci, you
will find new upmarket local <strong>brands</strong> with elegant products and
high-quality premises, catering to the double-digit growth in middle-class
spending power that is fueling a retail sales boom (Figure1)
. As well as designer clothing, strong local <strong>brands</strong> are starting
to emerge in food and beverages, consumer electronics, and
in less visible areas such as telecom equipment and semiconductors.
In many cases, these have high levels of local market
share, but may be completely unknown outside China, either
because their products are not exported, or because they are relabeled
for sale under established Western brand names. If the
pattern seen for certain Japanese companies in the 1960s and
1970s is repeated, then some of these Chinese brand names
could emerge as world leaders over the coming decade as China
evolves from being merely a low-cost production center for
Western companies, capturing for itself the benefits of owning
<strong>brands</strong> and technologies.
Creating new global <strong>brands</strong> is a costly and time-consuming
process – but it is starting. Chinese companies such as Lenovo
and TCL have recently carried out acquisitions or formed joint ventures
that give their <strong>brands</strong> access to US and European markets.
China’s vast and very fast-growing domestic market provides a
powerful springboard, and if the example of Japan is any guide,
then the rewards for success are potentially enormous. Figure 2
shows how Toyota’s share price – following its IPO in 1958 –
delivered a stellar outperformance against the S&P 500 Index.
Figure1
Retail sales China versus USA
Source: Datastream
16
14
12
10
8
6
4
2
0
Retail sales (2-month moving average, YoY in %)
01/98
China
01/99
01/00
USA
01/01
01/02
01/03
01/04
The significance of the right brand strategies
Due to the significance of its <strong>brands</strong>, the consumer goods sector
really offers the opportunity for analyzing this phenomenon. Every
year, Business Week (in cooperation with Interbrand) publishes its
rankings of the world’s ten most valuable <strong>brands</strong> (Table 1). The
value of a brand as a company’s intangible asset can be derived
relatively simply from a comparison of the stock-market valuation
with the valuation of its tangible assets. The positive valuation differential
provides information on the value of a brand. Leading
Western companies have long since recognized the significance
of an appropriate brand strategy and the inherent value of their
<strong>brands</strong> and – as exemplified by the Coca-Cola Company – have
spun off their production assets into separate companies. Hence,
the success of a consumer goods company stems primarily from
the right brand strategy and, to a lesser extent, from utilizing
favorable traditional production factors, in contrast with most
companies in the emerging markets.
One example of a very advanced global brand and distribution
strategy can be found in the luxury goods sector. Luxury goods
brand names such as Louis Vuitton, Hermès, Cartier and Bulgari,
among others, are world-renowned. The fact that some companies
in the emerging markets produce pirate copies of these
Figure 2
Toyota’s share price outperforms S&P 500 Index
Source: Datastream
2500
2000
1500
1000
500
0
01/73
01/75
01/77
01/79
01/81
Toyota Motor Corp.
01/83
01/85
01/87
01/89
01/91
01/93
S&P 500 Index
01/95
01/97
01/99
01/01
01/03

GLOBAL INVESTOR 1.05 Emerging-market equities — 37
<strong>brands</strong>, or legal products inspired by them, is testament to their
attractiveness.
In a recently published study, we examined the role that luxury
goods <strong>brands</strong> play. Overall, these <strong>brands</strong> communicate to
customers or consumers an array of desired attributes: for
instance,1) tradition, which guarantees that the company has
spent many years enhancing its product; 2) quality, which shows
customers that they are getting the appropriate value in exchange
for their money; and 3) consistency, which ensures that the goods
purchased retain their value over time. The right <strong>brands</strong> guarantee
the use of leading technology, so buyers can demonstrate the
status achieved to their peer group. All of these desired attributes
are communicated by a (luxury goods) brand. Closely tied to these
attributes is a global distribution system, which, besides distribution,
concurrently ensures the function of protecting the brand –
a factor that is of paramount significance in the luxury goods sector.
Our analysis reveals that a company’s operating margin and,
in turn, its stock-market valuation rises with the increasing exclusivity
of its distribution network. For other consumer sectors, such
as beverages or mobile phones, a similar but generally less rigorous
set of criteria apply when assessing brand value.
research and development, and building China’s most modern
chip plant. This will allow it to compete with leading international
chip producers such as Infineon and Micron. TCL is the leading
Chinese producer of multimedia consumer electronics and mobile
phones. Sales growth has averaged 30% in the past three years
on the back of increased outsourcing by US and European OEMs
of mobile phones and electronics production. TCL had been
mostly focused on the Chinese market in recent years, but is currently
switching its strategy to international expansion. In July
2004, TCL won European Union approval to buy control of Alcatel's
mobile-phone unit. One month later, it started a joint venture
with Thomson SA to gain access to international markets for TVs.
Other possible companies of interest include Sichuan Changhong
Electric in the consumer electronics sector, Vitasoy in the food
and beverages area, and Haier, which supplies telecom equipment.
We will provide further information on this crucial investment
area as more information becomes available. |
Identifying potential interesting companies
Chinese domestic <strong>brands</strong> are developing rapidly, but it will only
become apparent gradually which of these have the potential to
follow in the footsteps of the success of companies such as Sony
or Toyota. In the coming months, we will publish a number of
reports on this topic, as one of our major investment themes. For
the time being, we are not making firm investment recommendations,
but we would tentatively suggest a number of companies
that might be of interest. Possibly the best-known is the Chinabased
brewery Tsingtao, which already has a significant global
distribution network, but has potential to go much further. Another
well-known name is Lenovo, China’s leading manufacturer of PCs
and handheld devices. Formally known as Legend Holdings, it
launched the brand Lenovo in 2003, primarily for use outside
China. The Chinese government holds a majority stake in the
company, which helps it obtain major domestic contracts. The
authorities will likely encourage Lenovo to grow its international
business rapidly to improve the added value of Chinese exports,
and to create a Chinese high-tech giant. Lenovo has started
to expand in the USA by purchasing underperforming assets,
acquiring IBM’s PC operations for approximately USD 1.75 billion
in December 2004, and obtaining access to IBM’s US distribution
network.
Other important but less well-known names include Semiconductor
Manufacturing and TCL. The former is China’s largest
semiconductor producer, specializing in integrated circuits. Sales
have grown by 29% since 2002, and the firm is now moving one
notch up in the value-creation chain by increasing expenditure on
Table 1
The world’s ten most valuable <strong>brands</strong>
Source: Interbrand Corp., J.P. Chase&Co, Citigroup, Morgan Stanley, Business Week
Rank Brand 2004 brand value (USD billions)
1 Coca-Cola 67.4
2 Microsoft 61.4
3 IBM 53.8
4 GE 44.1
5 Intel 33.5
6 Disney 27.1
7 McDonald’s 25.0
8 Nokia 24.0
9 Toyota 22.7
10 Marlboro 22.1

“As a bellwether nation, Brazil’s policies have
implications for the rest of the region.” Walter Mitchell

GLOBAL INVESTOR 1.05 EM_ Bonds — 39
Emerging market bonds: Latin America in the sweet spot
Latin American bonds have outperformed other regions as growth has recovered,
led by surging exports. External factors started the rally, but prudent domestic
policies are playing a role too. Walter Mitchell
Latin America is often considered the most volatile region in
emerging markets. From a bond investor’s perspective, this reputation
is well-deserved. Beginning with the debt crisis of the
early 1980 s and continuing with Mexico in 1994 and Argentina in
2001 , the region seems to move from one crisis to the next. Latin
America’s external vulnerabilities – large hard-currency debt burdens
combined with relatively closed economies – are well known.
The question now is whether the region can escape the boombust
vicious circle that has dominated much of its past. While vulnerabilities
certainly remain, we can identify some encouraging
developments too.
During the past two years, sovereign bonds from Latin American
issuers have significantly outperformed bonds from non-Latin
American sovereigns. Based on monthly return data from the
EMBI+ Index, the total return on Latin American bonds is nearly
double the return on non-Latin American bonds (Figure1) . Since
the fall of 2002, the average annual return on Latin American debt
was 24% versus 14% for non- Latin American bonds. This is a
recent phenomenon. If we take monthly returns over the past
decade, the opposite is true with non-Latin American bonds outperforming
by a 14.6% to 9.7% margin. What’s behind this reversal
of fortune?
Return to growth
In a number of key ways, Latin America looks different than it did
in the late 1990 s. First and foremost, economic growth has
returned. After averaging just 2.1% from 1994 to 2003, real GDP
growth in Latin America is expected to reach 5.1% this year – the
fastest expansion since 1997 and only the third time growth will
exceed 5% since 1986 (source: IIF) . More importantly, domestic
demand is rebounding this year after contracting each of the last
three years. Strong growth is needed to stabilize and eventually
trim the sizeable external debt burden that many countries carry.
For 2005 , the IIF forecasts a regional growth rate of 3.8%, slower
than this year, but still nearly double the average rate during the
previous decade.
Figure 1
Latin American bonds have outperformed bonds
from other regions during the past two years
Source: Bloomberg, Credit Suisse
%
60
50
40
30
20
10
0
–10
Vastly improved trade flows
Second, trade flows have improved significantly. The region’s current-account
balance swung to a surplus in 2003 for the first time
since 1990 . This shift is due almost entirely to surging merchandise
exports. Achieving a current-account surplus is crucial since
12/02
02/03
04/03
Latin American
sovereigns
06/03
08/03
10/03
12/03
02/04
04/04
06/04
08/04
Non-Latin American
sovereigns
10/04
12/04

it reduces the region’s external borrowing requirement. The trade
surplus is a result of both faster global growth and rising commodity
prices. It also reflects geographical shifts in trade flows
with countries such as Argentina and Brazil exporting more to
Asia. Another fundamental change in Latin America involves the
shift to tighter fiscal policy. This trend is best measured by the
increase in primary budget surpluses: i.e., the budget balance
before considering interest costs (Figure 2) . Large primary surpluses
reduce the public sector’s borrowing needs and are beneficial
for future growth prospects.
This combination of faster growth, expanding export base
and reduced borrowing requirement has moved Latin American
sovereign debt into the sweet spot, both for investors and for
credit rating agencies. In 2004, we witnessed a wave of upgrades
of Latin American sovereign ratings – seven in all – by Moody’s
and S&P, with Brazil (B1/BB–) and Venezuela (B2/B) receiving
upgrades from both agencies (Table 1).
Is this trend sustainable?
We note that the rally in Latin American bonds occurred amid a
global economic backdrop that has been extremely favorable to
the region. Prices on commodities, which are abundant in the
region, have surged in recent years. In addition, global financial
markets are awash with liquidity, keeping G-7 interest rates at or
near historically low levels. The low yield environment is compelling
bond investors to move down the “credit curve” into higher-yielding
assets such as emerging-market bonds. Clearly, Latin
American economies have benefited from these external factors.
But more importantly from a sustainability viewpoint, a number of
governments in the region have seized the opportunity presented
by the recovery to implement prudent economic policies while
advancing fiscal and structural reforms.
Although much work still needs to be done, especially in the
area of structural reforms, the fact is that politicians such as President
Luiz Inácio Lula da Silva in Brazil and President Alvaro Uribe
in Colombia are willing to incur the costs inherent in these reform
efforts. We find it encouraging that the public-approval ratings of
these leaders remain extremely high well into their respective
terms and despite efforts to push unpopular or costly reforms. As
a bellwether nation, Brazil’s political policies have implications for
the rest of the region. If the Lula administration can put publicsector
finances on a stable path while pushing micro reforms that
unleash investment spending and attract more FDI, then governments
throughout the region will no doubt follow suit. Conversely,
if Brazilian politicians abandon reforms, we would expect less
progress in other countries. Only time will tell whether the current
economic expansion proves sustainable and reforms lasting. Still,
it is encouraging to note how the political discourse in countries
like Brazil has evolved. Recently, the debate is no longer if the
government should target a primary surplus, but rather how big
that surplus needs to be. If prudent fiscal policy becomes more
entrenched in the region’s political process, then the ability to
sustain access to foreign capital and avoid crisis situations
improves greatly, in our view.
Positive outlook for Latin American bonds in 2005
We expect Latin America’s risk profile to continue improving in
2005 . GDP growth may moderate some, but should remain positive.
For the region as a whole, political uncertainty should remain
low, in our view, since most governments enjoy high approval rat-
Figure 2
Large primary surpluses lower borrowing
requirements and improve Latin America’s
risk profile
Source: UBS
%
3.0
2.5
2.0
1.5
1.0
0.5
0
94 95 96 97 98 99 00 01 02 03 04F
Regional primary surplus (in % of GDP)
Table 1
Sovereign credit rating upgrades in 2004
Source: Bloomberg
Issuer Current rating Agency Date changed
(previous)
Brazil B1 (B2) Moody’s 09/09/04
Brazil BB- (B+) S&P 17/09/04
Chile A (A-) S&P 14/01/04
Uruguay B (B-) S&P 21/07/04
Venezuela B2 (Caa1) Moody’s 07/09/04
Venezuela B (B-) S&P 25/08/04

ings and elections are not scheduled until 2006. With respect to
sovereign debt markets, we believe Latin American sovereign
bonds will continue outperforming non- Latin American sovereign
debt during the first quarter of 2005 as investors continue to favor
the higher yield and spread levels available. Among Latin American
sovereign borrowers, we prefer Brazil (B1/BB–), Colombia
(Ba2/BB), Mexico (Baa2/BBB–) and Peru (Ba3/BB). Venezuela
(B2/B) and Ecuador (Caa1/ CCC+) are more risky credits and
heavily dependent on high oil prices. The outlook for Argentina
depends on how the debt restructuring progresses. If it is successful
with a high (say 85%) participation rate, then Argentine
defaulted debt has upside potential. If the restructuring fails, then
prices on defaulted Argentine bonds could begin to fall again.
GLOBAL INVESTOR 1.05 EM_ Bonds — 41
We recommend bonds with medium-term maturities
However, we are in the later stages of a strong rally in emerging-market
debt. A correction in spreads and yields is possible
during first-quarter 2005 , especially if the US Federal Reserve
begins raising interest rates faster than the market currently
expects. Given the potential for such a correction, we recommend
shifting exposure from long-dated bonds into mediumterm
issues (i.e., 2009 to 2012 ) and increasing holdings of eurodenominated
sovereign debt. During previous downturns,
euro-denominated debt outperformed US dollar-denominated
emerging-market bonds – and we expect this to happen again if
a correction indeed occurs. |
Brazil’s President Luiz Inácio Lula
da Silva in a televised address – the
success of his political strategy plays
a significant role for Latin America

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services
“Timing has gained considerable
significance”
Bernhard Felder, Head of Research
Services & Publications, comments
on the new concept of the Global
Investor and explains why the changing
situation on the financial markets
has an impact on the publications
Credit Suisse provides to its clients.
Peter Christoph: A year ago, you presented a completely revamped
version of the Global Investor, and now, the new concept
with respect to content is already changing once again. Was the
first redesign a misstep?
Bernhard Felder: No, not at all. The new Global Investor
brought noticeable improvements in terms of readability,
structure and liveliness.
Then why is another revamping necessary?
Differentiating between news and background information
has become increasingly difficult. With the new concept, we
now clearly distinguish between in-depth background reports
and up-to-date financial-market analysis. Consequently,
the different types of content are divided into two publications.
Now, we offer the Global Investor with background reports,
as well as a supplemental, highly contemporary booklet –
in other words, a publication within a publication. This also
provides a tremendous advantage from the perspective of
production.
Were you on the wrong track combining background reports
and up-to-date news in one publication?
The conditions on the financial markets have changed. In
view of the sideways-trending markets, it is more important
than ever for investors to be able to react expeditiously to
new developments. Indeed, timing has gained considerable
significance.
So, have customer needs changed?
Of course. And we are now striving to focus on these changing
needs in a determined way. We want to supply our
clients with the kind of information that they require and
at the ideal time for them. Hence, this has not only had
an impact on the contents of the Global Investor, but also
changed the frequency of its publication.
What does that mean? When will the Global Investor
be published in the future?
The magazine will be published precisely at a time when investors
desire in-depth information and want to be informed
about what’s going on in financial markets: according to our
experience, at the beginning of each year, after Easter and
following the summer vacation. The Global Investor will thus
no longer be published at the precise regular interval of once
every quarter, rather in line with the timing of our clients’
investment practices.
Are changes on the drawing board for other
Credit Suisse publications?
Yes. The entire assortment of publications offered by Credit
Suisse will be restructured. For the future, we are banking
on a simplified structure for our publications and moving
away from assigning original names: We will provide our
clients with daily, weekly and monthly investment information,
aptly named the Research Daily, Research Weekly and
Bernhard Felder: “We have completely restructured our research
analysis process.”

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GLOBAL INVESTOR 1.05 Services — 43

GLOBAL INVESTOR 1.05 Authors— 44
Giles Keating, Head of Global Research .. . . . . . . . . . . . . . . . . . . . 4–5, 36–37
Lars Kalbreier, Head of Equity Trading Research .. . . . . . . . . . . . 12–15, 16–21
Dr. Luìs Correia, Equity Sector Research. . . . . . . . . . . . . . . . . . . . . . . . . . 6–11
Hervé Prettre, Equity Trading Research . . . . . . . . . . . . . . . . . . . . . . . . . 16–21
Dr. Maria Custer, Equity Sector Research . . . . . . . . . . . . . . . . . . . . . . . . . 6–11
Markus Mächler, Equity Sector Research . . . . . . . . . . . . . . . . . . . . . . . . 22–23
Olivier P. Müller, Equity Sector Research .. . . . . . . . . . . . . . . . . . . . . . . . 12–15
Uwe Neumann, Equity Sector Research. . . . . . . . . . . . . . . . . . . . . . . . . 24–27
Eric Güller, Equity Sector Research.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12–15 Dr. Jeremy Field, Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28–31

GLOBAL INVESTOR 1.05 Research team — 45
Global Research
Giles Keating, Managing Director, Head of Global Research . . . . . . . .(1) 332 22 33
Research Switzerland
Bernhard Tschanz, Managing Director, Head of Research Switzerland .(1) 334 56 27
Cédric Spahr, Equity Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32–35
Arjuna Mahendran, Head of Asia Research .. . . . . . . . . . . . . . . . . . . . . . 32–35
Harald Zahnd, Equity Trading Research. . . . . . . . . . . . . . . . . . . . . . . . . . 36–37
Fixed Income and Credit Research
Dr. Thomas Trauth, Director,
Head of Global Fixed Income and Credit Research . . . . . . . . . . . . . .(1) 333 34 62
Manfred Büchler, Public Sector and Corporate Bonds . . . . . . . . . . . .(1) 333 37 35
John Feigl, Swiss Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . .(1) 333 13 70
Dr. Jeremy Field, Vice President, Public Sector and Corporate Bonds .(1) 334 56 29
Maja Ganarin, Assistant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 333 57 97
Sylvie Golay, Credit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 333 51 84
Karsten Linowsky, Fixed Income Strategist . . . . . . . . . . . . . . . . . . .(1) 333 44 31
Walter Mitchell, Vice President, Emerging Markets . . . . . . . . . . . . . .(1) 334 56 67
Dr. Ursula Oser, Vice President, Global Credit Strategist . . . . . . . . . .(1) 334 56 92
Ernst Zbinden, Swiss Corporate Bonds . . . . . . . . . . . . . . . . . . . . . .(1) 333 67 10
Equity Sector Research
Robin Seydoux, Director, Head of Equity Sector Research . . . . . . . . .(1) 333 37 39
Dr. Luis Correia, Vice President, Global Pharmaceuticals . . . . . . . . . .(1) 334 56 37
Dr. Maria Custer, Vice President,
Global Biotechnology and Medical Technology Europe . . . . . . . . . . . .(1) 332 11 27
André Frick, Energy, Basic Resources . . . . . . . . . . . . . . . . . . . . . . .(1) 334 66 71
Eric Güller, Vice President, Insurance and Financial Services . . . . . . .(1) 332 90 59
Ulrich Kaiser, Vice President, Media, IT Hardware and Software . . . . .(1) 334 56 49
Markus Mächler, Vice President, Automotive, Capital Goods, Transport (1) 334 56 41
Olivier P. Müller, Nordic and Italian Banking . . . . . . . . . . . . . . . . . . .(1) 333 01 46
Uwe Neumann, Vice President, Telecommunications . . . . . . . . . . . . .(1) 334 56 45
Sasa Peric, Assistant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 334 56 44
Christine Schmid, Vice President, Banking Europe . . . . . . . . . . . . . .(1) 334 56 43
Basil Sohrmann, Assistant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 334 88 38
Henry Stalder, Assistant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 334 56 47
Claude Vautier, Assistant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 334 88 38
Equity Strategy
Christian Gattiker-Ericsson, Director, Head of Equity Strategy . . . . . .(1) 334 56 33
Cédric Spahr, Vice President, Equity Strategy, Emerging Markets . . . .(1) 333 96 48
Walter Mitchell, Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38–41
Bernhard Felder, Head of Research Services & Publications. . . . . . . . . . 42–43
Economics & Forex
Dr. Anja Hochberg, Director,
Head of Global Economics and Forex Research . . . . . . . . . . . . . . . .(1) 333 52 06
Sven Friebe, Forex Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 334 56 91
Marcus Hettinger, Vice President, Forex Strategist . . . . . . . . . . . . . .(1) 333 13 63
Roland Kläger, Economics Europe . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 332 09 69
Tobias Merath, Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 333 13 62
Zoltan Szelyes, International Real Estate . . . . . . . . . . . . . . . . . . . . .(1) 334 83 22
Technical Research
Rolf Bertschi, Director, Global Strategy, Fixed Income, Commodities . .(1) 333 24 05
Beat Grunder, Assistant Vice President,
Equities Switzerland and Asian Pacific . . . . . . . . . . . . . . . . . . . . . . .(1) 333 53 58
Sigisbert Koch, Assistant Vice President
Europe Equities excl. Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 333 94 64
Mensur Pocinci, Assistant Vice President, US Equities, Currencies . . .(1) 333 20 69
Equity Trading Research
Lars Kalbreier, Director, Head of Equity Trading Research . . . . . . . . .(1) 333 23 94
Sadik Akkoka, Quantitative Analysis . . . . . . . . . . . . . . . . . . . . . . . .(1) 334 78 07
Hervé Prettre, Vice President, Trading Strategist . . . . . . . . . . . . . . .(1) 334 88 57
Roger Signer, Trading Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .(1) 335 72 98
Harald Zahnd, Vice President,
Consumer and Luxury Goods, Retail, Emerging Markets . . . . . . . . . .(1) 334 88 53
Asia Research
Arjuna Mahendran, Director,
Chief Economist and Strategist, Asia-Pacific . . . . . . . . . . . . . . . .(+65) 6212 6727
Uetlibergstrasse 231, CH-8070, Zurich Dialing Code (Country/Area): +41

GLOBAL INVESTOR 1.05 Imprint — 46
This document was produced by and the opinions expressed are those of Credit Suisse
as of the date of writing and are subject to change. It has been prepared solely for information
purposes and for the use of the recipient. It does not constitute an offer or an
invitation by or on behalf of Credit Suisse to any person to buy or sell any security.
Any reference to past performance is not necessarily a guide to the future. The
information and analysis contained in this publication have been compiled or arrived at
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arising from the use hereof. The issuer of the securities referred herein or a Credit
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financing transactions with the issuer of the securities referred herein, perform services
or solicit business from such issuers, and/or have a position or effect transactions in the
securities or options thereof.
An investment in the funds described in this document should be made only after careful
study of the most recent sales prospectus and other fund regulations and basic legal
information contained therein. The sales prospectuses and other fund regulations may
be obtained free of charge from the fund management companies and/or from their
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Alternative investments, derivative or structured products are complex instruments, typically
involve a high degree of risk and are intended for sale only to investors who are
capable of understanding and assuming the risks involved. Investments in Emerging Markets
are speculative and considerably more volatile than investments in established markets.
Some of the main risks are Political Risks, Economic Risks, Credit Risks, Currency
Risks and Market Risks. Furthermore, investments in foreign currencies are subject
to exchange rate fluctuations. Before entering into any transaction, you should consider
the suitability of the transaction to your particular circumstances and independently
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Neither this document nor any copy thereof may be sent to or taken into the United
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This document may not be reproduced either in whole, or in part, without the written
permission of Credit Suisse. © 2005, Credit Suisse
Publisher
Credit Suisse
Global Research
P.O. Box 300, CH - 8070 Zürich
Leiter: Giles Keating
Editors
Ulrich Kaiser
Peter Christoph, Infel AG, Zürich
Editorial deadline
7 January 2005
Technical coordinators
Ross Hewitt, Beatrice Eigenmann (G),
Robert Anderson (E)
Design and concept
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Renata Hanselmann, Alice Kälin, Andrea Studer,
Michael Suter
Layout
gdz AG, Zürich
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Printer
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Translations
Robert Anderson (E)
Beatrice Eigenmann (G)
Mark Rabinowitz (E)
Stefan Bersal (G)
Regula Zweifel (G)
Andreas Weber (G)
Übersetzer Gruppe Zürich (F/Sp)
Alleva Übersetzungen (I)
Language editors
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Alleva Übersetzungen (I)
Photographs
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Corbis (20), Philippe Bourseiller/Agentur Focus (21),
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(27), Caro/ Meyerbroeker (27), Franco Vogt/Corbis (28),
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