global investigator 20100126

8/9/2019 Global Investigator 20100126

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1

Global Brands: Their Edge Over

Emerging Markets

There is a rare opportunity to buy the worlds leading brands

(mainly from the West) and short emerging markets to

finance the purchase. Why?

1) The relative valuation case is compelling.EMs sell at similarPBs to Global brands, they sold at an 80% PB discount at the depths

of the Asian crisis in 1998.

2) Emerging market firms with high ROEs suffer rapid decay

in these ROEs - they are fake growth stocks. Global brands have

persistentlyhigh ROEs with glacial decay that should command much

higher multiples.

3) Relative national capex growth rates between the

emerging markets and the US/Europe is the best long lead

indicator of future relative ROEs. It projects the US/Europe ROEs to

rise sharply relativeto emerging markets.

4) The differentials in excess returns on capital and free

cash flow between EMs and Global brands are largeandpersistent

and in favor of global brands. They are likely to widen given the

favorable capex differentials mentioned above.

5) US investors already have around 7.9% of their AUM in

emerging markets. EM investors have crumbs in US/European firms.

6) Aging Western baby boomers, struck twice by 50% plus

bear markets in a decade, are likely to be attracted to the

3.7% free cash flow yields of Global brands that they know well.

7) Growth areas in EMs are likely to be in areas like nutrition,healthcare, education, entertainment, travel, affordable

luxury, defense/security and the environment. We think

Global brands are dominant in these areas, while we

acknowledge that EM competitors exist (but are relatively expensive).

8) Policy tightening in emerging markets, especially China, India

and Brazil, should come well ahead of tightening in the US, Europe

and Japan.

Relative under-investment by the US, over-

investment by emerging markets projects lower EM

ROEs relative to the US in the next five years.

0.57

0.63

0.69

0.75

0.81

0.87

85 90 95 00 05 10 15

-12%

-8%

-4%

0%

4%

8%Capex/GDP Ratio(US/GEMS, pushed fwdby 7 yrs), LHS

ROE Gap (GEMS - US),6mma, RHS

Capex measured by gross capital formationCapex/GDP for GEMS = Simple average of individual countriesCapex/GDP. GEMS includes China, Hong Kong, India, Korea,Singapore, Taiwan, Brazil, Mexico, Russia, South Africa and Turkey.Source: Bloomberg, Worldscope, Mirae Asset Research

Global Equity Market Exposure Meter: Percent of equity portfoliowe recommend that should be invested in equities; the balance incash.

G L O B A L S T R A T E G Y

The Global Investigator | 26 Jan, 2010

See the last page for important disclosures

S&P 500 1096.78

Ajay Kapur,CFA, Global Strategist, +852 2295 2564 [email protected]

Priscilla Luk, Senior Analyst, +852 2295 2559 [email protected]

Ritesh Samadhiya, CFA, Analyst, +852 2295 2518 [email protected]

Sophie Jihye Yoo, Research Associate, +852 2295 2544 [email protected]

Global brands we like: IBM, Apple, YUM Brands,

Google, LOREAL, JPM, AMZN, HP, TIFF, AMEX,

Polo. Complete list inside.


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Ajay Kapur, CFA, Global Strategist, +852 2295 2564 [email protected] 26 Jan, 2010

2

Global brands: their edge over emerging markets

The current pro-emerging market consensus is quite stunning. The Financial Times ran a special on the BRICs

on a daily basis last week, it featured the creator of the term on the cover of the Weekend edition, almost

every sell-side house is overweight the asset class, and buy-side managers are predominantly overweight in

emerging markets. I carry an Indian passport, live in a city in China, and work for an emerging markets

expert firm with its HQ in South Korea. So I have imbibed large quantities of the emerging markets kool-aid

(or mango lassis, caipirinhas, vodka shots, maotais, soju shots, etc). However, valuation matters. The

groupthink is now suffocating, reaching the stubbornly bullish levels I witnessed on Japan in the late eighties,

East Asia in the mid-nineties, and the US in the late nineties. Normally, it is massive capital investment and

bulging bank balance sheets that draw in the new era herds. See Figure 1 for this effect. Until the curse of

the Austrians eventually strikes, and the gleaming capex turns out to be just another poor experiment in

malinvestment. (Of course, we remain long-term bullish on emerging markets -- to say otherwise would

probably be considered immoral and illegal, such is the pressure of current groupthink).

Figure 1: Rolling Capex Bubbles. Is China next? Or is it different this time?

-30%

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0%

10%

20%

30%

40%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11-30%

-20%

-10%

0%

10%

20%

30%

40%

Japan

Avg Capex/GDP = 20%

Far East x China x Jp

Avg Capex/GDP = 28%

US

Avg Equip. Capex/GDP = 8%

% Above/Below the

average Capex/GDP,

1980-08

China

Avg Capex/GDP = 33%

2009 and 2010

estimates*

Note: * Assume Real GDP % change = 8.5% for 2009 and 10% for 2010; Gross fixed capital % change = 14% for 2009 and 12% for 2010.

Source: Datastream, CEIC, IIF, IMF, Mirae Asset Research.

Our contention here is simple: there is a rare opportunity to buy the worlds leading brands (mainly from the

West) and short emerging markets to finance the purchase. Why?

1) The relative valuation case is compelling. EMs sell at similar PBs to Global brands, they sold at an

80% PB discount at the depths of the Asian crisis in 1998. Global brands sell at the cheapest relativevaluations (PB, PE, P/Cash and dividend yields) last seen in the mid-1980s and mid-1990s. Any upcoming

strength in the USD compresses EM margins, soaks up liquidity and de-rates emerging markets versus global

brands.

2)Emerging market firms with high ROEs suffer rapid decay in these ROEs - they are fake growth

stocks. Growth investing in EMs is dangerous and only for the nimble. Global brands have persistentlyhigh

ROEs with glacial decay that should command much higher multiples. Episodes when brands suffer low ROEs

are rare and short-lived ROEs bounce back quickly.

3) Relative national capex growth rates between the emerging markets and the US/Europe is the

best long lead indicator of future relative ROEs. It projects the US/Europe ROEs to rise sharply relative to

emerging markets. This is the opposite situation we projected in 2003. Financial crises wipe out excess capacity

and spurious competition, generating muscular oligopolies and leading to higher ROEs. We expect this in the

US/Europe going forward. EM capex growth (especially in China, India, South Africa, Indonesia, etc.) has risen


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sharply relative to the US/Europe, presaging lower prospective EM relative ROEs versus the US/Europe. The

consensus bulls on EMs might confuse superior relative GDP growth rates with superior relative ROEs. Two

completely different animals.

4)The differentials in excess returns on capital and free cash flow between EMs and Global brands are

largeand persistent and in favor of global brands. They are likely to widengiven the favorable capex

differentials mentioned above.

5)US investors already have around 7.9% of their AUM in emerging markets. EM investors the

guys with current account surpluses and excess cash have crumbs in US/European firms. As they lose their

home bias, they are likely to gravitate toward buying the stocks of the worlds best brands that they are familiar

with. Likewise, for Sovereign Wealth Funds.

6)Aging Western baby boomers, struck twice by 50% plus bear markets in a decade, are likely to

be attracted to the 3.7% free cash flow yields (FCF/market capitalization) of Global brands that they

know well. The FCF could be used for dividends, M&A, R&D, EM expansion and buybacks. Emerging markets

have positive FCF only accidentally. They are prone to crises, me-too competitors, secular declines in EBIT

margins, and are now possibly hitting export constraints from a populist US President.

7) Growth areas in EMs are likely to be in areas like nutrition, healthcare, education,

entertainment, travel, affordable luxury, defense/security and the environment. We think Global

brands are dominant in these areas, while we acknowledge that EM competitors exist (but are relatively

expensive). We think that it will be easier for Global brands to take market share in emerging markets than for

emerging market firms to do the same in the West (there are obviously exceptions). The politics of

protectionism in the West with high unemployment rates and the perception that emerging markets are

mercantilists with undervalued currencies are the key assumptions for this speculation.

8)Policy tightening in emerging markets, especially China, India and Brazil, should come well ahead of

tightening in the US, Europe and Japan. Relative policy settings favor global brands.

1. Valuation

Interbrand (www.interbrand.com), one of the leading brand consultancies, highlights the worlds top brands

every year. We have looked at the companies that own these brands and examined their valuations and

fundamentals. The vast majority come from the US and Europe. See Figure 2. On a sectoral basis, these brands

come mainly from the consumer discretionary, consumer staples, technology, financials and industrials sectors.

See Figure 3. To allow for an apples-to-apples comparison, we have constructed an emerging markets universe

with similar sector weights to the Global brands sector weights. If we looked at emerging markets without

making this adjustment we would over-represent materials, banks and telecoms. Lets get to the relative

valuation story. First we look at the usual valuation metrics PE, dividend yield, PB, and P/Cash Earnings.


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Figure 2: Superior Global brands: mainly fromthe US

Figure 3: Superior Global brands: consumerand tech-heavy

JP

5%

EU

27%

US

66%

AXJ

2%

Information

Technology

28%

Consumer

Discretionary

17%Consumer

Staples

17%

Financials

12%

Health Care

8%

Industrials7%

Energy

8%

Telecom

Services

3%

Source: Interbrand, Factset, Mirae Asset Research Source: Interbrand, Factset, Mirae Asset Research

Figures 4 and Figure 5 show that on a median relative forward PE, relative dividend yield, relative PB basis and

relative p/cash earnings Global brands are close to their cheapest levels versus the comparable sector-adjusted

emerging market universe. The EM euphoria of the mid-1990s period crashed and burned with the rolling East

Asian and Russian/Brazilian crises between 1997-1999. One should have bought those global brands. Of course,

around late 1998, and again in early 2003, emerging markets became exceptionally cheap versus global brands

and went on to multi-year outperformance. And now? The Global brands look ridiculously cheap vs EMs. Their

brand power gets no respect.

Figure 4: Global brands are relatively cheapversus emerging markets as in the mid-1980s,mid-1990s. Go West, young man

Figure 5: Global brands are relatively cheapversus emerging markets as in the mid-1980s,mid-1990s. Go West, young lady

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0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1/85 1/89 1/93 1/97 1/01 1/05 1/09

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5Global brands' fwd P/E to Global emerging marketsector adj. fwd P/EGlobal brands' PB to GEM sector adj. PB

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1/85 1/89 1/93 1/97 1/01 1/05 1/09

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Global brands' price to cash earnings to GEMsector adj. price to cash earnings, LS

Global brands' dividend yield to GEM sector adj.dividend yield, RS, reversed

(reversed)

Source: Interbrand, Factset, Mirae Asset Research Source: Interbrand, Factset, Mirae Asset ResearchNote: Emerging market sector weights aligned to match sector weights of Note: Emerging market sector weights aligned to match sector weights ofthe Global brands basket. the Global brands basket.

So far we have looked at valuation metrics without accounting for fundamentals. Cheap stocks could simply

reflect low excess returns on capital and/or little chance of seeing those low returns on capital ever bounceback. We need to connect valuations to the level and persistence of excess returns on capital. We look at PB

multiples for global brands and comparable emerging markets expressed as a function of their excess returns


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excess returns defined as 12-month prospective ROEs less the cost of equity. We would expect a positive

relationship between PBs and ROEs less the cost of equity. The cost of equity is defined as the sum of risk-

free 10-year government bond yields (short rates for emerging markets) and the equity risk premium. The

equity risk premium estimates we calculate are inspired by a seminal paper by Jacob Thomas and James

Claus.1 We estimate the equity risk premium for the US to be 3.8%, for Europe 3.2%, 2.2% for Japan. These

are much lower numbers than the consensus estimates - this is a controversial subject but we sympathize with

the Claus and Thomas approach of using the residual income model to calculate risk premia.

Figure 6 shows the relationship between PBs and excess returns for the global brands over the period 1985 to

20092. The thick diagonal line is the fair value line. If the PB is above it, excess returns do not justify this level,

using history as a guide. For a PB below the line, excess returns on equity are not getting enough respect. We

note that global brands look modestly undervalued here. However, these stocks are priced for excess returns at

the lower end of history. We need to have a view on where these excess returns are going to migrate to in the

coming years if we think that the current puny excess returns are an aberration and higher excess returns are

in the offing, then these global brands are highly likely to get re-rated. Conversely, as Figure 7 shows the

comparable emerging market excess returns are close to their historic highs, and stocks are priced fairly for

these high returns, not at bubble levels. The key question is: are these high excess returns compared to

emerging market history as sustainable as consensus seems to think? We will attempt to answer this

sustainability question in the next two sections (hint: no).

Figure 6: Global brands priced for low excessreturns on equity, expect a move up that line

Figure 7: Emerging markets priced for chunkyexcess ROEs, expect higher rates and excesscapex to lower future excess ROEs

y = 4.73x + 0.56

R2 = 0.38

0.0

0.5

1.0

1.5

2.0

2.5

0% 5% 10% 15% 20% 25% 30%

Global brands

Current

Avg

Linear (Global brands)

Global brands

12m fwd ROE - cost of equity

ln(P/B)

y = 1.13x + 0.75

R2 = 0.080.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

-15% -10% -5% 0% 5% 10% 15% 20%

AvgCurrent

Sector AdjustedLinear (Sector Adjusted)

GEMS

Sep

1987

ln(P/B)


Source: Interbrand, Factset, Mirae Asset Research Source: Factset, Mirae Asset ResearchNote: Emerging market sector weights aligned to match sector weights ofthe Global brands basket.

Figure 8 combines the data from Figure 6 and figure 7. As is clear, Global brands are valued at the most rotten

end of their history, while comparable EMs are valued at the more salubrious end of their experience. Believers

in mean reversion should be worried with this state of affairs. Figures 9 thru Figure 12 show these

computations for the key sectors involved. For consumer discretionary, EM stocks are pricing extremely high

excess returns and Global brands the exact opposite, and likewise for consumer staples and financials. For

technology, EM stocks seem to be fairly valued, while Global brands are undervalued. Later, we will look at

stock names from these two baskets to drill down on valuation and fundamental differences.

1 Equity Premia as Low as Three Percent? Empirical Evidence from Analysts Earnings Forecasts for Domestic and International Stock Markets, James Claus andJacob Thomas, Columbia Business School, March 2000, Tables II and VI, page 35.2Investing By The Numbers by Jarrod W. Wilcox, published by Frank J. Fabozzi Associates, 1999.


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Figure 8: Emerging markets priced formuscular excess returns, Global brands likepariahs

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0.5

1.0

1.5

2.0

2.5

-20% -10% 0% 10% 20% 30%

Global brands GEM

Global brands, Avg GEM, Avg

Global brands, Current GEM, Current


ln(P/B)

Sector adjusted*

Source: Interbrand, Factset, Mirae Asset ResearchNote: *Emerging market sector weights aligned to match sector weights of the Global brands basket.

Figure 9: Consumer Discretionary - Globalbrands priced for failure, EMs for glory

Figure 10: Consumer Staples Global brandsat historic low pricing, EMs at historic highs

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0.2

0.4

0.6

0.8

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1.2

1.4

1.6

1.8

2.0

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Global brands GEMGlobal brands, Avg GEM, Avg


Consumer Discretionary

ln(P/B)

Sector adjusted*


0.0

0.5

1.0

1.5

2.0

2.5

3.0

-20% 0% 20% 40% 60% 80% 100%

Global brands GEM



Consumer Staples

ln(P/B)

Sector adjusted*


Source: Interbrand, Factset, Mirae Asset Research Source: Interbrand, Factset, Mirae Asset ResearchNote: *Emerging market sector weights aligned to match sector weights of Note: *Emerging market sector weights aligned to match sector weights ofthe Global brands basket. the Global brands basket.


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Figure 11: Financials Global brands in thevaluation doghouse, EMs optimistically priced

Figure 12: Technology global brandsundervalued, EMs fairly valued

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0.0

0.5

1.0

1.5

2.0

-15% -10% -5% 0% 5% 10% 15% 20%

Global brands GEM



Financials

ln(P/B)

Sector adjusted*


0.0

0.5

1.0

1.5

2.0

2.5

3.0

-10% 0% 10% 20% 30%

Global brands GEM



Information Technology

ln(P/B)

Sector adjusted*


Source: Interbrand, Factset, Mirae Asset Research Source: Interbrand, Factset, Mirae Asset ResearchNote: *Emerging market sector weights aligned to match sector weights of Note: *Emerging market sector weights aligned to match sector weights ofthe Global brands basket. the Global brands basket.

2. The Persistence of Profits

We are believers in mean reversion. Paying high multiples for stocks where todays high ROEs might be illusory

and likely to regress to the mean is the nightmare of all growth managers. Conversely, today low PB multiple

stocks with current poor ROEs, should see the competition drop out, restructure themselves and strive to

deliver higher ROEs this is the implicit dream of any value manager. Consequently, finding out the

persistence of profitability for any market or sector is key. We do this for both global brands and comparable

emerging markets (FYI, the results aresimilar for emerging markets with no adjustment to make their sector

weights conform to the sector weights of global brands). 3

Figure 13 shows the persistence of profitability for the global brands over the period 1980 to 2008, divided into

quintiles. For the highest ROE quintile (which normally gets the highest PB multiple), the degradation in ROE

over time is glacial brand power accounts for something, entry barriers into these markets are often high,

margins can be persistently high driven by robust R&D and marketing budgets. Meanwhile look at the lowest

line in Figure 13. These are the worst/lowest ROE names among the global brands look how rapidly they

overcome their initial misery and muscle their way to better performance again, brand power helps them

wrestle their way forward, crushing competitors into submission, building moats around them and getting

ahead rapidly. A value managers dream. Implication: be prepared to pay high multiples for Global brands with

high ROEs these guys have persistently high ROEs, and are secure behind their brands with wide and deep

moats. Conversely, if you find a Global brand down on its luck with low ROEs (and low valuations) jump on itsince it will muscle its way back. (Isnt this sort of what Warren Buffet, Kirk Kerkorian and other great investors

do? We are stating the obvious here).

How about those emerging markets? Do their high ROEs that suck in so many growth-oriented investors often

at high multiples stay persistently high? Er, no. Figure 14 shows that the high ROE-achievers in emerging

markets are flash-in-the-pans. Their ROEs degrade rapidly, leaving their gullible investors holding the deflated

valuation bag. Consequently, emerging markets are a tough area for growth investors. Conversely, look at the

ROE-laggards, the lowest line on Figure 14. These losers see a remarkable jump in their ROEs over time. This is

why value investing works so well in emerging markets. The cheap, unloved, underperformers rise from the

living dead and deliver.

3 We use the methodology inspired by Stephan Penman, An evaluation of Accounting Rate-of-Return, Journal ofAccounting, Auditing & Finance 6(2), 1991, pages 233-255. The methodology is relegated to appendix 1.


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Figure 13: Global brands ROE decay for topperformers is very slow. Growth managersdream. Out-of-luck brands with low ROEsbounce back fast.

Figure 14: Emerging markets High ROEstocks decay rapidly. Growth managershorror. ROE dogs bounce back fast valuemanagers dream.

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35

0 1 2 3 4 5 6 7 8 9 10

-5

0

5

10

15

20

25

30

35Top Quintile 2nd Quintile

Middle Quintile 4th Quintile

Bottom Quintile

Years

Quintiles sorted by ROE

% %

Glacial decay

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35

0 1 2 3 4 5 6 7 8 9 10-5

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Bottom Quintile

Quintiles sorted by ROE

Years

% %

Rapid decay

The stock universe is sorted at each date into five quintiles, ranked by ROE. The median ROE of each quintile is tracked for the next several years. Seeappendix 1 for details. Data for both, Global brands and emerging markets start in 1980. Source: Worldscope, Mirae Asset Research

We can speculate about why high ROEs are hard to maintain in emerging markets. High ROEs attract

competitors like flies hovering around a sweet cappuccino, especially so in emerging markets. Conglomerates,

tycoons, provincial officials, helped by friendly bankers, large egos, government industrial policy-types and

quiescent shareholders cannot resist the lure of the new, new thing with (illusory) high ROEs. When every

tycoon/bureaucrat with a checkbook has the same idea, over-investment wipes out the super-normal ROEs.

Lack of brand power, and lack of oligopoly power also plays its part in degrading high ROEs. Cutting back

sectors with the temerity to earn super-normal ROEs is often a standard part of public policy. The people

need to be protected against any rapacious high-ROE sector getting too big for its boots. Regular crises do nothelp much. Going forward, EMs are more likely to see protectionist pressure from a more populist US President,

and a more divided Europe that needs to help its own beleaguered and uncompetitive periphery. This fashion-

driven investing thesis in emerging markets also might explain why low ROE-firms/sectors manage to climb out

of the hole rapidly. Exit from unfashionable areas is quick, tycoons and government industrial policy-mandarins

moving on to the next new endeavor.

3. The role of relative capital expenditure in driving prospective relative ROEs

So far we have demonstrated that Global brands are trading at similar multiples to their emerging market

counterparts, but on a relativebasis at the most attractive levels in history. Also, that these global brands are

trading at multiples reflecting low expected excess returns on equity, and the opposite for emerging markets.

Wedemonstrated that global brands do not spend too much time with low excess returns their brand power

re-asserts itself quickly. Conversely, high excess returns in emerging markets as embedded in todays multiples

are illusory. At least, history suggests that.

Is there any leading indicator which can help project relative ROEs between say, the US, where most of the

brands originate and emerging markets? We think we have one. We first published this in 2003 at Citigroup,

arguing that Asian markets, then selling at a 54% PB discount to US equities should see their relative ROE

versus the US rise and so get re-rated. Most laughed and said we were data-mining. Well, we updated the

same chart to see if the projection worked. It did, and to an extent that surprised us. Today Asian markets sell

at a PB premium to the US. And the ROEs have converged. So what drove our expectation that Asia ex-Japan

would see relative ROEs rise versus the US? Relative capital expenditures, which lead relative ROEs by about

five-seven years.


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After the 1997-99 emerging market crises, following a strong capex boom, emerging markets stepped back

from capex. They needed to digest the over-investment of the mid-1990s. Meanwhile, the baton was passed to

the US, where TMT capex took off as the emerging markets healed themselves. So by 2003, they had under-

invested compared to the US. This set the stage for relative ROEs for emerging markets to catch up with the

US in the subsequent years. This is where we find ourselves today.

However, as Figure 15 shows, the relative capex by the US is lagging well behind the capex by emergingmarkets, mainly China, India, Indonesia, South Africa, Mexico and Russia. This is baking into the cake, lower

relative EM ROEs versus the US for the next many years. We know you do not believe this. Hardly anyone

believed Figure 15 when we first published it in mid-2003. The same Figure 15 would have argued that EM

ROEs were about to plunge relative to the US in the mid-nineties and we assume it would have been laughed

off as the rantings of a misasianthorpe (pardon the pun).

Figure 15: Relative under-investment by theUS, over-investment by emerging marketsprojects lower EM ROEs relative to the US inthe next five years

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85 90 95 00 05 10 15

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-8%

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0%

2%

4%

6%

Capex/GDP Ratio(US/GEMS, pushedfwd by 7 yrs), LHS

ROE Gap (GEMS -US), 6mma, RHS

Global emerging

markets

underinvesting

US underinvesting,

global emergingmarkets overinvesting

Capex measured by gross capital formationCapex/GDP for GEMS = Simple average of individual countries Capex/GDP.GEMS includes China, Hong Kong, India, Korea, Singapore, Taiwan, Brazil, Mexico,Russia, South Africa and Turkey. Source: Bloomberg, Worldscope, Mirae Asset Research

4. Global brands have a persistent edge in Free cash flow and ROE

For over two decades now, Global brands have had better and/or improving EBIT margins, free cash flows and

ROEs than emerging markets (on a sector-comparable basis, and also on an unadjusted basis). There is just no

competition, more like a referee stops contest in favor of Global brands. So the key reason to switch between

the two is valuation extremes, not for any propaganda on the unbounded growth opportunities in emerging

markets. Figures 16 and Figure 17 shed some light. Figure 16 shows the differential between the ROEs for

Global brands (non-financials) versus emerging markets (sector-adjusted to mirror weights for global brands).

Global brands have been ahead of EMs since 1994, although there was some degradation on a relative basis

between 1998 and 2004. This chart simply re-states what we saw earlier it is the relative difference in relative

CAPEX that leads ROE differentials. It is NOT the relative differences in real GDP that most investors and

analysts tend to focus on. While EM real GDP growth rates should comfortably exceed that in the developed

markets, this is irrelevant information for investors. The relative over-investment in EMs versus developed

markets and Global brands has already been baked into the cake, relative ROE underperformance by the

emerging markets. Market valuations just do not reflect this, making it an exceptional opportunity. Figure 17

shows that Global brands almost always have higher free cash flow/sales ratios. Most emerging market sectorscurrently have negative free cash flow (an exception is telecoms), whereas Global brands have substantial

positive and rising free cash flow, especially in consumer staples, technology, and healthcare.


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Figure 16: Global brands maintain their ROEedge over emerging markets despite losing inthe GDP race

Figure 17: Global brands have substantial freecash flow/sales, EMs less impressive

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90 92 94 96 98 00 02 04 06 08

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8

ROE (%, LS)

US-EM Real GDP YoY (%, RS)

Global brands - global emerging markets,

sector adjusted*

% %

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0

2

4

6

8

85 87 89 91 93 95 97 99 01 03 05 07 09

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-2

0

2

4

6

8FCF/ Sales for global brands

FCF/ Sales for global emerging markets,sector adjusted*

% %

Source: Interbrand, Factset, Mirae Asset Research Source: Interbrand, Factset, Mirae Asset ResearchNote: *Emerging market sector weights aligned to match sector weights of Note: *Emerging market sector weights aligned to match sector weights ofthe Global brands basket. the Global brands basket. FCF means free cash flow.

5. US investors adequately positioned in GEMs, EM investors grossly underweight US equities

US investors have been subject to two decades of high growth propaganda by financial advisers, and despite

50% peak-to-trough declines THREE times since 1997, have succumbed. As Figure 18 shows, US investors

have 7.8% of their own market cap in emerging markets. Conversely, EM investors have a measly 3% of their

own market cap in the US market (Figure 19). These emerging markets have accumulated USD4.8 trillion in

international reserves (39% of US and European market capitalization), a lot of it sterilized and accumulating

on their obese central bank balance sheets. We expect this burden to be lightened by substantial easing of

restrictions in EM corporates, Sovereign Wealth Funds and retail investors investing in foreign equities. What do

you think the average EM investor will buy in the US and Europe? We think the brands he/she is familiar with,

not esoteric mid-caps or US/Europe-focused domestic market plays.

Figure 18: US investors adequately exposed toemerging markets

Figure 19: Emerging markets under-exposedto US equities, with huge investable foreignexchange reserves

0

1

2

3

4

5

6

7

8

9

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

0

1

2

3

4

5

6

7

8

9

US net holdings of emerging marketstocks / US market cap

% %

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

85 87 89 91 93 95 97 99 01 03 05 07 09 11

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%Estimate worth of US Stocks owned byemerging markets investors / Emerging marketsmarket value

Source: Treasury International Capital System, Mirae Asset Research Source: Treasury International Capital System, Mirae Asset ResearchIt is assumed that the total investment by emerging markets in the US was zerobefore 1977. Monthly net flow is adjusted by US equity market returns.


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6. US/European aging Baby Boomers need income, not excitement.

As Figure 20 shows, the Demi-Ashton ratio (folks in their 40s to those in their 20s) is the best leading indicator

of stock allocations versus total financial assets. This shows a secular decline in stock allocation from 2000

onwards to 2015. The boomers are getting older, and need more income from their investments. The

egregiously high free cash flow of key sectors within Global brands are potential sources for cash dividend

distributions. The boomers should move more of their dwindling stock allocation to these Global brands. SeeFigure 21. Emerging markets have paltry 3% FCF/Sales ratios, a 2% FCF/market cap ratio, most of that coming

from telecoms. Conversely, Global brands have twice the FCF/Sales ratio of around 6%, with consumer staples

and technology at around 12%.The boomers should see little potential cash distributions from this pittance, yet

potentially suffer 50% peak-to-trough declines as in the past 13 years. They do not need the excitement.

Figure 20: US households a demographicheadwind to buying stocks.

Figure 21: Emerging markets have paltry freecash flow aging boomers need income

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

1/52 1/67 1/82 1/97 1/12 1/27 1/42

50%

60%

70%

80%

90%

100%

110%

Stocks as a Percentage ofHousehold Financial Assets, LHS

Demi-Ashton Rat io, RHS

Average

28.9%

US

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.05.0

6.0

7.0

85 87 89 91 93 95 97 99 01 03 05 07 09

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.05.0

6.0

7.0GEM FCF/Market Cap(%)

FCF/ Sales (%)

% %

Demi-Ashton Ratio = Population between 40 and 49 years / population Source: Interbrand, Factset, Mirae Asset Researchbetween 20 and 29 years, Source: Population Division, UN Secretariat, Note: Emerging market sector weights aligned to match sector weightsWorld Population Prospects: The 2008 Revision, US Census Bureau of the Global brands basket.(http://esa.un.org/unpp), Federal Reserve Board, Mirae Asset Research

7. Global brands well positioned in new EM growth areas

We speculate that the substantial rise in capex/GDP ratios in China, India, Indonesia, South Africa, etc in the

past decade that focused on infrastructure and basic materials is close to its end, not its beginning. (Yes, we

know the arguments why this capex boom will continue into our adult lifetimes urbanization, efficiency, etc.

We heard the same for Japan, East Asia, and the US, etc). We think the next wave of growth areas in emerging

markets is going to be a function of critical income thresholds and government policy that aims at

voter/consumer satisfaction nutrition, healthcare, education, entertainment, affordable luxury, environmentalproducts and security/defense to protect it all. Global brands dominate this list of potential growth areas. We

had written earlier about how plutonomies are likely to migrate from the English-speaking developed markets to

emerging markets4 a positive for the luxury goods providers that mainly come from the US and Europe. Given

current unemployment rates in the West, and the perception that many emerging markets run mercantilist

policies, potential protectionism against the EMs should put a ceiling on EM gains in export share. Conversely,

expect the rhetoric from the US/Europe to fully participate in the EM growth area mentioned above to be

exceptionally vigorous. This, of course, is a speculation.

8. Policy Tightening in emerging markets comes earlier than in the US and Europe

From a short-term perspective, we think countries like China, India and Brazil are going to take increasingly

aggressive steps to pre-emptively check overheating. See Figures 22 for just how easy policy is in both China

4 Michael Moore, Misrepresentation and Migrating Plutonomies: A Secret Memo, Global Investigator, 7 October, 2009


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12

and India, signaling a sharp rise in food inflation. Conversely, in the US, President Obamas war on Wall St. has

opened a 1962 repeat of Kennedy versus the US steel industry (when the US market fell 24% from April 1962

to June 1962 thanks Walt Deemer for the parallel). This uncertainty toward business, everything else being

equal, means easier policy for longer. Europe has its peripheral issues that will keep policy easy there as well,

regardless of what the ghost of Hjalmar Schacht whispers in the corridors of the ECB. A prolonged easy policy

in the US and Europe, relative to emerging markets, should help Global brands recover their usual premium

multiples over emerging markets.

Appendix 2 highlights the key valuation and fundamental metrics of Global brand stocks versus emerging

market names in similar sectors. Figure 23 highlights 20 Global brand names that rank well on a combination of

value, ROE and free cash flow.

Figure 22: China and India policy is too easy,expect tightening

Composite Policy Indicator

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1/70 1/75 1/80 1/85 1/90 1/95 1/00 1/05 1/10

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

China

India

Easy Monetary/Fiscal Policy

Tight Monetary/Fiscal Policy

Dec 09

S.D.S.D.

Note: Composite Policy Indicator is an equal weighted index based on the realeffective exchange rate YoY growth, real broad money (M2) YoY growth, theshort term real interest rate and government fiscal deficit/surplus as a % of GDP.Source: CEIC, Datastream, Mirae Asset Research.

Figure 23: Most preferred Global brands

Ticker MarketCap(U$m)

NAME Industry PBV

TPE

DY

PFCF

PS

EVEB

EVEDA

EVS

EVFCF

ROE

EBITMGN

FCFSales

1 NSU GR 33,789 AUDI AG Automobiles 1.5 8.5 0.5 8.7 0.8 5.2 3.0 0.4 7.0 17.8 7.5 7.8

2 005380 KS 20,954 HYUNDAI MOTOR CO Automobiles 1.1 13.4 0.8 8.3 0.8 12.1 7.1 0.8 7.6 9.7 6.4 10.2

3 IBM US 164,857 INTL BUSINESS MACHINES CORP Computers & Peripherals 7.7 13.1 1.6 11.7 1.7 10.8 9.5 1.9 12.4 59.3 17.8 14.9

4 AAPL US 179,238 APPLE INC Computers & Peripherals 5.9 29.0 0.0 19.6 4.8 18.1 16.6 3.8 15.4 20.5 21.0 24.7

5 DELL US 26,679 DELL INC Computers & Peripherals 5.6 15.5 0.0 8.6 0.5 8.9 6.5 0.4 6.1 28.9 4.1 6.0

6 CPB US 11,241 CAMPBELL SOUP CO Food Products 11.4 13.7 3.1 14.6 1.5 10.2 8.5 1.8 17.1 81.9 17.7 10.5

7 YUM US 16,038 YUM! BRANDS INC Hotels Restaurants & Leisure 17.7 15.9 2.2 24.7 1.5 12.8 9.3 1.8 29.5 117.4 13.9 6.0

8 GOOG US 174,502 GOOGLE INC-CL A Internet Softw are & Services 5.4 30.4 0.0 20.4 7.4 20.7 17.5 7.3 20.2 18.1 35.1 36.0

9 EBAY US 30,488 EBAY INC Internet Softw are & Services 2.2 15.9 0.0 13.0 3.5 17.0 11.0 2.9 10.9 17.3 17.1 26.8

10 OR FP 65,344 L'OREAL Personal Products 2.7 17.5 2.7 20.9 2.6 14.1 10.8 2.1 16.3 15.2 14.6 12.6

11 PFE US 152,998 PFIZER INC Pharmaceuticals 2.0 7.5 5.9 7.7 2.8 5.9 4.7 2.2 6.1 12.3 37.4 36.1

12 VIA/B US 18,101 VIACOM INC-CLASS B Media 2.1 12.6 0.0 8.8 1.3 10.4 9.0 1.7 11.7 13.6 16.6 14.8

13 066570 KS 13,760 LG ELECTRONICS INC Household Durables 1.8 18.7 0.3 -39.4 0.6 15.3 10.8 0.7 -48.1 9.8 4.8 -1.5

14 JPM US 154,369 JPMORGAN CHASE & CO Diversif ied Financial Services 1.0 15.4 1.3 2.5 1.3 36.2 37.2 5.2 13.6 7.5 14.3 48.3

15 AMZN US 52,577 AMAZON.COM INC Internet & Catalog Retail 11.3 54.9 0.0 27.2 2.4 39.4 28.7 1.7 19.0 20.7 4.3 8.8

16 HPQ US 116,530 HEWLETT-PACKARD CO Computers & Peripherals 2.8 12.3 0.7 12.2 1.0 9.5 6.9 1.0 12.4 18.9 11.0 8.5

17 TIF US 5,076 TIFFANY & CO Specialty Retail 2.9 21.4 1.7 12.9 2.0 14.3 10.4 2.1 13.5 9.1 14.4 15.2

18 AXP US 45,999 AMERICAN EXPRESS CO Consumer Finance 3.5 27.4 1.8 6.5 1.7 30.3 16.1 3.2 11.6 15.2 10.6 26.3

19 GPS US 13,013 GAP INC/THE Specialty Retail 3.0 15.0 1.6 9.5 0.9 7.8 5.8 0.9 9.2 19.9 11.6 9.9

20 RL US 8,126 POLO RALPH LAUREN CORP Textiles, Apparel & Luxury Goods 2.4 16.1 0.3 14.7 1.7 10.1 7.9 1.3 11.8 13.5 13.3 11.4

Median 2.8 15.7 0.7 11.9 1.6 12.4 9.4 1.8 12.1 17.5 14.1 12.0 EM = Emerging market, PBV=Price to book value, TPE=12 month trailing Price to earnings ratio, DY=Dividend Yield, PFCF=Price to free cash flow, PS=Price tosales, EVEB= Enterprise value to earnings before interest and tax, EVEDA= Enterprise value to earnings before interest, taxes, depreciation and amortization,EVS= Enterprise value to sales, EVFCF= Enterprise value to free cash flow, ROE = Return on equity, EBIT = Earnings before interest and tax, EBITMGN= Earningsto sales, FCFSales = Free cash flow to sales. Source: Datastream, Bloomberg, Mirae Asset Research


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Risks to our view: Relative valuations can move to even more egregious levels if a bubble in emerging

markets develops. Emerging market firms develop their own brand power and rapidly move into the growth

areas at home, with governments keeping out US and European competitors. EM firms continue to take market

share in the US and Europe without running into any protectionist impediments. Restrictions on EM investment

into US/European equities remain formidable and US/Europe investors continue their quest for growth by

investing even more in the emerging markets, unfazed by regular 50% drawdowns.

In sum, we think the current pro-emerging market consensus chorus is missing the relative unattractiveness of

EMs versus the worlds best Global brands. The emerging markets are at relatively unattractive multiples

compared to Global brands, have persistently lower ROEs and free cash flow which decay a lot faster, and have

seen a relative boom in capex versus the US and Europe that is likely to depress their relative ROEs. Also, US

investors have enough exposure to emerging markets and need income from the bulbous free cash flow of

Global brands, not the heart-stopping excitement of free cash-free emerging markets. Buy Global brands, short

the EEM to finance the purchase.


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Appendix 1

Measuring the Persistence of Profitability

Our calculations are motivated by an academic paper An Evaluation of Accounting Rate-of-Return, Journal

of Accounting, Auditing & Finance 6(2), 1991, pp 233-255.

The objective is to measure the Persistence of Profitability (PoP) using the ROE. We divide the universe ofstocks, in this case, say 100 Global brand names in 1990 into five quintiles, ie 20 stocks in each group ranked

by ROE. These five portfolios are frozen and their median ROE is calculated for each subsequent year. For each

such quintile we have a time series of ROEs for 1991,1992,1993.2007,2009. The analogy is like tracking the

salary of the graduating class of 1990, sorted by quintiles of their academic grades. How did the top quintile of

this batch do in 1990,19912008,2009, etc. We then do the same for the class graduating in 1991, say this

time the class size is 110, so we divide these graduates into five quintiles of 21 each, based on their academic

grades. We then calculate the salaries of each of these quintiles for 1992, 1993,2008,2009. We do this for

each batch until the 2008 batch. We now can calculate what happens to the average top quintile one year after

graduating over all of the graduating classes since 1990, ie how do the bright kids do one year after graduating

this would require the average 1991 salary (ROE) of the 1990 batch, the average 1992 salary (ROE) of the

1992 batchthe average 2009 salary (ROE) of the 2008 batch. We now have the one-year ahead ROE of the

brightest kids (and the other four quintiles). The base year salary (ROE) of the brightest quintile is simply the

average of the top quintiles for each year. We can also calculate the two year ahead salary (ROE) we average

the 1992 salary for the 1990 batch, the 1993 salary (ROE) of the 1991 batch the 2009 salary (ROE) of the

2007 batch. The outer year calculations will be based on fewer observations. For example the 15-year ahead

salary would be based on the 2005 salary of the initial 1990 batch, the 2006 salary of the 1991 batch.the

2009 salary of the 1994 batch, ie only five observations.

The Persistence of Profitability (PoP) for a given quintile is structured to quantify the rate at which the ROE of

any quintile approaches the middle (third) quintile. Do the high and mighty top quintiles see their high ROEs

erode to the level of the mediocre middling quintile? Or do they have tremendous staying power and manage

to hold on to their superior ROEs as the years go by? The Persistence of Profitability (PoP) is the value of the

coefficient M in the equation y=n*exp(M*t), where t is time =0,1,2,3,4 and 5, and y is the absolute value ofthe difference in the ROE of the quintile under consideration and the middle quintile. The more negative the

PoP, the greater the reversion to mean, and the lower the persistence of ROE. As Figure 24 shows, for the

Global brands, the top quintile of ROE stocks has a PoP of only -0.1, compared with the top quintile ROE stocks

from emerging markets (see Figure 25), where the PoP is -0.17, i.e. the top dogs in emerging markets see

ROEs degrade a lot faster. So, growth investing works fine for expensive global brands, but not for expensive

emerging market stocks where high ROEs are illusory and degrade fast. For the worst of the class ie the

bottom quintile of ROE stocks in Global brands and emerging markets, the reversion to mean is rapid, both

have PoPs around -0.25. ie, buying these low ROEs dogs is worthwhile in both categories, since they tend to

recover and garner higher ROEs. Value investing works in both emerging markets and Global brands.

Figure 24: Persistence of Profitability for Global brandsDifference between Middle Quintile and the Rest over the nex t 5 years (Sorted by ROE)

Yr0 Yr1 Yr2 Yr3 Yr4 Yr5 POP

Bottom Quintile -13.0 -9.5 -7.3 -4.7 -4.4 -4.1 -0.24

4th Quintile -5.0 -4.5 -4.1 -3.5 -3.8 -4.1 -0.05

Middle Quintile 0.0 0.0 0.0 0.0 0.0 0.0

2nd Quintile 6.3 5.3 4.6 4.7 4.4 3.8 -0.08

Top Quintile 17.3 15.3 13.6 12.3 11.9 10.0 -0.10 Source: Worldscope, Mirae Asset Research

Figure 25: Persistence of Profitability for global emerging marketsDifference between Middle Quintile and the Rest over the nex t 5 years (Sorted by ROE)

Yr0 Yr1 Yr2 Yr3 Yr4 Yr5 POP

Bottom Quintile -14.7 -10.4 -8.5 -7.0 -5.0 -4.1 -0.25

4th Quintile -5.4 -5.2 -4.9 -4.1 -3.1 -3.2 -0.13

Middle Quintile 0.0 0.0 0.0 0.0 0.0 0.02nd Quintile 6.6 5.4 4.7 4.0 4.2 3.5 -0.12

Top Quintile 19.7 14.5 11.4 10.2 9.0 8.3 -0.17 Source: Worldscope, Mirae Asset Research


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Appendix 2

Stocks are arranged according to their attractiveness within each industry. Most preferred stocks at thetop.

Ticker Basket MarketC

ap(U$m)

NAME Industry PBV

TPE

DY

PFCF

PS

EVEB

EVEDA

EVS

EVFCF

ROE

EBITMG

N

FCFSale

s

NSU GR Brand 33,789 AUDI AG Autos 1.5 8.5 0.5 8.7 0.8 5.2 3.0 0.4 7.0 17.8 7.5 7.8

000270 KS EM 6,620 KIA MOTORS CORPORATION Autos 1.1 7.3 0.0 3.7 0.5 15.4 8.1 0.7 5.4 12.3 4.3 12.4

005380 KS Brand 20,954 HYUNDAI MOTOR CO Autos 1.1 13.4 0.8 8.3 0.8 12.1 7.1 0.8 7.6 9.7 6.4 10.2

HH IN EM 7,133 HERO HONDA MOTORS LTD Autos 8.6 18.6 1.2 51.6 2.5 18.4 16.7 2.7 51.4 47.3 15.6 5.2

7203 JP Brand 155,365 TOYOTA MOTOR CORP Autos 1.2 10.9 3.2 11.6 0.6 16.6 8.6 1.0 19.9 10.5 6.2 5.2

489 HK EM 11,418 DONGFENG MOTOR GRP CO LTD-H Autos 2.1 11.9 0.8 35.1 1.1 8.3 5.6 0.6 34.0 17.7 7.3 2.6

7201 JP Brand 37,676 NISSAN MOTOR CO LTD Autos 0.8 7.2 4.4 -16.9 0.3 13.2 5.7 0.8 -37.3 11.1 5.8 -2.0

ASII IJ EM 14,627 ASTRA INTERNATIONAL TBK PT Autos 3.5 15.1 2.6 40.4 1.7 15.2 10.1 1.9 44.8 21.1 12.2 4.1

HOG US Brand 5,531 HARLEY-DAVIDSON INC Autos 2.8 25.0 1.6 13.0 1.1 22.0 12.1 2.1 23.5 -2.6 9.4 8.8

VOW GR Brand 37,654 VOLKSWAGEN AG Autos 1.3 27.0 1.7 NA 0.3 30.9 8.3 1.0 NA 4.4 3.1 -0.1

BJAUT IN EM 5,599 BAJAJ AUTO LIMITED Autos 14.3 7.4 3.2 NA 3.1 30.3 26.5 3.3 NA 29.7 10.7 -1.6

7267 JP Brand 65,856 HONDA MOTOR CO LTD Autos 1.2 10.6 2.8 -17.4 0.6 12.2 7.7 0.8 -24.7 11.0 6.9 -3.4

PAH3 GR Brand 10,748 PORSCHE AUTOMOBIL HLDG-PFD Autos 0.5 -2.2 5.9 3.5 0.1 -1.9 -2.2 1.9 49.4 -14.6 -100.6 3.9

DAI GR Brand 50,633 DAIMLER AG-REGISTERED SHARES Autos 1.2 -9.1 1.7 9.5 0.4 -64.4 35.3 1.2 23.0 -11.5 -1.8 5.1

MM IN EM 6,867 MAHINDRA & MAHINDRA LTD Autos 4.4 21.8 0.9 -29.4 1.2 14.0 11.2 1.6 -41.0 20.1 11.7 -4.0MSIL IN EM 9,038 MARUTI SUZUKI INDIA LTD Autos 4.3 33.9 0.5 NA 2.0 23.1 16.4 2.0 -165.1 12.8 8.5 -1.2

BMW GR Brand 27,726 BAYERISCHE MOTOREN WERKE AG Autos 1.1 -21.6 0.9 -2.1 0.4 -112.0 8.5 1.5 -7.7 -4.3 -1.4 -20.1

200869 CH EM 5,097 YANTAI CHANGYU PIONEER-B Beverages 8.7 22.2 2.7 19.0 8.3 20.8 22.9 7.6 17.3 39.1 36.4 43.7

AMBV4 BZ EM 56,984 CIA DE BEBIDAS DAS AME-PREF Beverages 4.2 17.7 2.6 19.4 6.4 14.9 12.0 5.2 15.9 19.9 35.2 33.0

BF/B US Brand 7,736 BROWN-FORMAN CORP-CLASS B Beverages 3.8 16.0 2.4 14.3 3.2 11.3 10.4 3.3 14.8 25.2 29.6 22.6

KOFL MM EM 10,835 COCA-COLA FEMSA SAB-SER L Beverages 1.9 18.4 1.1 9.4 1.5 9.6 7.4 1.3 8.3 10.2 13.5 15.6

KO US Brand 125,684 COCA-COLA CO/THE Beverages 5.2 17.8 3.0 20.3 4.1 15.8 13.8 4.2 20.6 26.2 26.3 20.2

FEMSAUBD EM 14,682 FOMENTO ECONOMICO MEXICA-UBD Beverages 2.4 27.5 0.5 10.4 1.1 9.0 6.5 1.2 11.4 8.6 13.0 10.3

PEP US Brand 94,235 PEPSICO INC Beverages 5.9 15.6 3.0 20.7 2.2 13.3 11.0 2.3 21.1 34.3 16.9 10.7

GMODELOC EM 17,011 GRUPO MODELO S.A.B.-SER C Beverages 2.3 19.9 0.0 22.3 2.9 8.4 7.1 2.1 16.0 11.6 24.4 12.8

DEO US Brand 42,972 DIAGEO PLC-SPONSORED ADR Beverages 8.0 16.4 2.9 34.2 2.8 14.3 12.9 3.8 45.3 48.8 26.4 8.3

168 HK EM 7,153 TSINGTAO BREWERY CO LTD-H Beverages 2.0 9.0 0.6 11.5 1.2 30.5 26.9 2.7 21.0 21.7 15.1 10.5

HEIA NA Brand 24,822 HEINEKEN NV Beverages 2.6 44.1 2.3 16.6 1.2 17.5 8.9 1.5 21.2 5.7 8.8 7.2

CARLB DC Brand 11,470 CARLSBERG AS-B Beverages 1.0 15.5 0.9 NA 1.0 12.8 8.9 1.8 NA 5.8 14.1 -0.8

BUD US Brand 77,034 ANHEUSER-BUSCH INBEV SPN ADR Beverages 3.0 25.4 0.0 NA 2.2 17.9 19.5 4.4 NA 11.7 24.7 0.5

IBM US Brand 164,857 INTL BUSINESS MACHINES CORP Comp. & Peri. 7.7 13.1 1.6 11.7 1.7 10.8 9.5 1.9 12.4 59.3 17.8 14.9

2498 TT EM 9,138 HTC CORP Comp. & Peri. 4.6 11.0 7.3 15.4 2.0 8.7 8.5 1.5 12.1 40.4 17.7 12.7

AAPL US Brand 179,238 APPLE INC Comp. & Peri. 5.9 29.0 0.0 19.6 4.8 18.1 16.6 3.8 15.4 20.5 21.0 24.7

DELL US Brand 26,679 DELL INC Comp. & Peri. 5.6 15.5 0.0 8.6 0.5 8.9 6.5 0.4 6.1 28.9 4.1 6.0

2382 TT EM 7,633 QUANTA COMPUTER INC Comp. & Peri. 2.6 12.8 5.1 9.4 0.4 12.8 12.6 0.3 7.9 19.8 2.4 3.9

992 HK EM 6,919 LENOVO GROUP LTD Comp. & Peri. 2.5 9.0 4.7 -20.2 0.4 7.4 4.7 0.2 -17.4 27.8 2.4 -2.2

STX US EM 9,162 SEAGATE TECHNOLOGY Comp. & Peri. 3.9 14.9 0.2 8.1 0.9 13.1 6.1 0.9 8.5 15.3 7.3 11.1

HPQ US Brand 116,530 HEWLETT-PACKARD CO Comp. & Peri. 2.8 12.3 0.7 12.2 1.0 9.5 6.9 1.0 12.4 18.9 11.0 8.5

2324 TT EM 5,589 COMPAL ELECTRONICS Comp. & Peri. 1.7 10.4 4.0 46.0 0.4 9.7 9.1 0.3 36.8 15.6 2.9 0.8

2357 TT EM 8,541 ASUSTEK COMPUTER INC Comp. & Peri. 1.4 58.5 3.6 8.4 1.4 -93.2 NA 1.0 6.3 2.4 -1.1 16.5

2353 TT EM 7,685 ACER INC Comp. & Peri. 2.4 20.3 2.4 10.7 0.6 23.4 22.2 0.5 9.7 11.5 2.1 5.2

3481 TT EM 5,437 INNOLUX DISPLAY CORPORATION Comp. & Peri. 1.4 -35.7 0.5 -12.8 1.2 -21.0 74.2 0.9 -9.5 -5.1 -4.2 -9.3

200725 CH EM 5,695 BOE TECHNOLOGY GROUP CO LT-B Comp. & Peri. 0.8 -4.0 0.0 -2.6 1.8 -15.9 na 5.0 -8.1 -9.8 -31.6 -61.9

CPB US Brand 11,241 CAMPBELL SOUP CO Food Products 11.4 13.7 3.1 14.6 1.5 10.2 8.5 1.8 17.1 81.9 17.7 10.5

HNZ US Brand 13,238 HJ HEINZ CO Food Products 6.6 15.1 4.2 11.0 1.3 11.5 9.7 1.7 14.3 44.6 14.8 11.9

606 HK EM 6,039 CHINA AGRI-INDUSTRIES HLDGS Food Products 1.2 8.9 2.8 13.0 1.1 7.0 6.0 0.6 14.1 13.0 8.9 9.2

IOI MK EM 10,781 IOI CORPORATION BHD Food Products 3.4 26.4 1.5 15.1 2.7 18.0 16.2 2.9 16.6 12.7 16.2 17.5

KFT US Brand 41,205 KRAFT FOODS INC-CLASS A Food Products 1.8 13.2 4.4 11.2 1.0 10.8 9.2 1.4 15.4 9.8 13.0 9.1

151 HK EM 9,262 WANT WANT CHINA HOLDINGS LTD Food Products 8.5 29.4 3.5 37.5 5.6 24.9 22.2 4.4 29.6 29.1 17.8 15.0

K US Brand 20,618 KELLOGG CO Food Products 10.1 14.8 2.9 23.3 1.6 11.8 9.9 1.9 26.4 59.9 15.8 7.1NESN VX Brand 177,292 NESTLE SA-REG Food Products 3.0 8.4 3.4 22.0 1.8 12.5 10.2 1.7 20.5 34.4 13.5 8.2

KLK MK EM 5,221 KUALA LUMPUR KEPONG BHD Food Products 2.6 24.0 4.7 24.6 2.8 15.6 13.0 2.4 21.1 10.6 15.4 11.4

PEP MK EM 5,861 PPB GROUP BERHAD Food Products 1.3 11.2 1.5 40.3 6.2 57.2 57.2 5.5 36.1 11.4 9.7 15.4

BIMBOA MM EM 7,968 GRUPO BIMBO SAB- SERIES A Food Products 2.3 16.0 0.6 11.4 1.0 11.7 8.9 1.1 12.9 14.4 9.5 8.6

NEST IN EM 5,281 NESTLE INDIA LIMITED Food Products 51.3 38.1 2.1 257.4 5.0 31.4 28.0 5.6 NA 140.1 17.7 2.2

BN FP Brand 39,129 DANONE Food Products 1.8 12.7 3.2 19.5 1.4 13.3 10.7 2.0 27.2 10.6 15.3 7.4

WIL SP EM 30,317 WILMAR INTERNATIONAL LTD Food Products 2.7 15.8 1.6 35.7 1.3 16.6 14.9 1.6 42.2 17.2 9.4 3.7

JBSS3 BZ EM 12,486 JBS SA Food Products 2.6 -41.4 0.1 -93.2 0.4 28.2 17.7 0.6 -112.1 -5.8 2.0 -0.5

322 HK EM 13,456 TINGYI (CAYMAN ISLN) HLDG CO Food Products 8.2 31.4 1.1 NA 2.7 18.8 13.5 2.3 -148.2 26.2 12.3 -1.8

BRFS3 BZ EM 11,239 BRF - BRASIL FOODS SA Food Products 1.6 NA 0.0 NA 1.0 159.7 34.4 2.2 -95.4 0.6 1.4 -2.3

CSAN3 BZ EM 5,125 COSAN SA INDUSTRIA COMERCIO Food Products 1.7 NA 0.0 -6.8 0.5 32.7 9.0 0.9 -11.7 0.8 2.8 -7.8

2319 HK EM 5,655 CHINA MENGNIU DAIRY CO Food Products 4.7 -39.0 0.9 -28.7 1.6 -22.8 -63.9 1.1 -27.9 -16.5 -4.6 -5.1

Stocks with market cap above 5 billion USD.EM = Emerging market, PBV=Price to book value, TPE=12 month trailing Price to earnings ratio, DY=Dividend Yield, PFCF=Price to free cash flow, PS=Price tosales, EVEB= Enterprise value to earnings before interest and tax, EVEDA= Enterprise value to earnings before interest, taxes, depreciation and amortization,EVS= Enterprise value to sales, EVFCF= Enterprise value to free cash flow, ROE = Return on equity, EBIT = Earnings before interest and tax, EBITMGN= Earnings

to sales, FCFSales = Free cash flow to sales. Source: Datastream, Bloomberg, Mirae Asset Research


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16

Appendix 2 (continued)

Stocks are arranged according to their attractiveness within each industry. Most preferred stocks at thetop.

Ticker Basket MarketCap(

U$m)

NAME Industry PBV

TPE

DY

PFCF

PS

EVEB

EVEDA

EVS

EVFCF

ROE

EBITMGN

FCFSales

YUM US Brand 16,038 YUM! BRANDS INC Hotels Rest. 17.7 15.9 2.2 24.7 1.5 12.8 9.3 1.8 29.5 117.4 13.9 6.0

GENM MK EM 5,057 GENTING MALAYSIA BHD Hotels Rest. 1.6 27.0 2.6 12.5 3.5 5.9 5.2 2.2 8.1 5.7 37.9 27.6

MCD US Brand 68,410 MCDONALD'S CORP Hotels Rest. 5.2 15.7 3.3 42.6 3.1 11.2 10.0 3.3 48.2 31.7 29.8 7.2

SBUX US Brand 16,960 STARBUCKS CORP Hotels Rest. 5.6 23.9 0.0 23.9 1.7 18.4 11.6 1.8 23.7 12.7 9.6 7.3

MAR US Brand 9,806 MARRIOTT INTERNATIONAL-CL A Hotels Rest. 8.9 25.5 0.7 22.5 0.9 24.3 17.4 1.0 25.9 -46.9 4.1 3.8

GENT MK EM 7,937 GENTING BERHAD Hotels Rest. 1.9 37.4 1.0 -11.9 3.1 11.8 9.7 4.0 -15.1 4.8 33.8 -26.4

69 HK EM 5,327 SHANGRI-LA ASIA LTD Hotels Rest. 1.1 43.8 2.1 -12.3 4.4 46.5 19.0 5.3 -14.7 2.4 11.3 -35.7

1928 HK EM 11,266 SANDS CHINA LTD Hotels Rest. 8.9 63.0 0.0 -7.1 3.6 47.4 24.5 4.6 -9.1 14.1 8.7 -62.3

GENS SP EM 10,227 GENTING SINGAPORE PLC Hotels Rest. 4.0 -65.4 0.0 -7.4 23.7 NA NA 28.7 -9.0 -6.7 0.4 NA

KCHOL TI EM 7,727 KOC HOLDING AS Indust. Congl. 0.9 24.8 0.0 5.9 0.3 5.6 4.5 0.5 10.1 4.1 8.8 4.8

BVT SJ EM 5,973 BIDVEST GROUP LTD Indust. Congl. 2.1 10.4 3.8 32.2 0.4 9.0 6.5 0.4 29.6 17.5 4.2 1.3

MMM US Brand 57,684 3M CO Indust. Congl. 4.2 16.9 2.8 14.5 2.5 12.8 10.1 2.4 13.8 22.6 18.8 17.5

003550 KS EM 9,703 LG CORP Indust. Congl. 1.9 12.2 0.9 79.5 0.1 13.5 13.5 0.5 96.5 13.9 5.4 4.7

KEP SP EM 9,352 KEPPEL CORP LTD Indust. Congl. 2.3 8.0 4.4 25.8 1.1 12.7 11.2 1.1 27.5 27.1 8.9 4.1

GCARSOA1 EM 7,212 GRUPO CARSO SAB DE CV-SER A1 Indust. Congl. 1.7 15.7 1.4 10.8 1.5 16.6 13.1 1.8 13.4 14.5 10.9 13.4

ENKAI TI EM 8,409 ENKA INSAAT VE SANAYI AS Indust. Congl. 2.1 17.1 1.0 13.8 1.5 11.4 9.3 1.4 14.3 11.9 12.0 11.0

363 HK EM 5,411 SHANGHAI INDUSTRIAL HLDG LTD Indust. Congl. 1.4 14.6 2.6 25.1 3.5 15.1 12.1 3.6 26.3 9.4 24.1 13.8

ANTAR CI EM 9,015 ANTARCHILE SA Indust. Congl. 1.3 48.2 1.9 13.3 2.8 30.6 14.6 4.2 19.8 2.7 13.7 21.2

SIE GR Brand 83,345 SIEMENS AG-REG Indust. Congl. 2.1 24.5 2.5 20.2 0.8 12.3 8.1 0.9 24.5 8.0 7.5 3.8

GE US Brand 171,531 GENERAL ELECTRIC CO Indust. Congl. 1.4 12.2 4.0 17.0 1.1 54.6 13.5 3.6 57.8 9.4 6.5 6.3

COPEC CI EM 21,035 EMPRESAS COPEC SA Indust. Congl. 1.9 54.8 1.6 23.4 2.3 30.0 20.6 2.1 21.4 3.5 7.0 9.8

PHIA NA Brand 27,985 PHILIPS ELECTRONICS NV Indust. Congl. 1.1 -14.5 4.2 11.5 0.8 206.0 11.9 0.8 10.6 -9.1 0.4 7.3

1402 TT EM 5,395 FAR EASTERN NEW CENTURY CORP Indust. Congl. 2.0 36.6 2.1 30.8 4.4 NA 147.2 5.5 38.2 5.3 -1.0 14.3

13 HK EM 29,923 HUTCHISON WHAMPOA LTD Indust. Congl. 0.8 16.9 3.4 -39.0 1.1 33.0 11.1 2.1 -78.1 4.7 6.5 -2.7

SIME MK EM 15,740 SIME DARBY BERHAD Indust. Congl. 2.3 24.4 5.8 -116.4 1.9 18.8 14.6 1.8 -113.4 9.2 9.7 -1.6

392 HK EM 8,224 BEIJING ENTERPRISES HLDGS Indust. Congl. 1.4 17.9 1.7 NA 2.9 22.8 14.3 2.4 NA 7.9 10.4 0.0

267 HK EM 8,347 CITIC PACIFIC LTD Indust. Congl. 1.1 -2.6 1.9 -4.6 1.4 31.4 23.4 3.0 -9.9 -26.2 9.5 -30.1

JPA IN EM 6,743 JAIPRAKASH ASSOCIATES LTD Indust. Congl. 4.0 72.8 0.4 -4.4 5.5 25.7 21.0 8.8 -7.1 5.4 34.5 -125.4

GOOG US Brand 174,502 GOOGLE INC-CL A Inter. Soft. & Srvs. 5.4 30.4 0.0 20.4 7.4 20.7 17.5 7.3 20.2 18.1 35.1 36.0

EBAY US Brand 30,488 EBAY INC Inter. Soft. & Srvs. 2.2 15.9 0.0 13.0 3.5 17.0 11.0 2.9 10.9 17.3 17.1 26.8

700 HK EM 35,292 TENCENT HOLDINGS LTD Inter. Soft. & Srvs. 16.4 37.3 0.4 127.1 25.0 31.3 28.3 14.4 124.4 43.6 45.9 26.1BIDU US EM 14,461 BAIDU INC - SPON ADR Inter. Soft. & Srvs. 21.5 69.0 NA 74.7 24.1 61.2 54.0 21.7 71.9 31.2 35.4 32.8

035420 KS EM 7,717 NHN CORP Inter. Soft. & Srvs. 8.4 19.0 0.0 27.2 7.8 17.8 16.7 7.4 26.4 39.2 41.4 23.6

1688 HK EM 12,125 ALIBABA.COM LTD Inter. Soft. & Srvs. 11.1 59.8 0.0 80.8 25.1 42.2 39.4 16.3 74.3 18.6 38.6 30.8

YHOO US Brand 22,249 YAHOO! INC Inter. Soft. & Srvs. 2.0 41.4 0.0 26.9 3.4 32.4 15.1 3.2 25.7 1.2 10.0 12.6

OR FP Brand 65,344 L'OREAL Personal Products 2.7 17.5 2.7 20.9 2.6 14.1 10.8 2.1 16.3 15.2 14.6 12.6

HYPE3 BZ EM 5,669 HYPERMARCAS S.A Personal Products 2.9 72.5 0.0 29.0 5.8 23.9 18.1 4.9 30.0 3.0 20.7 17.2

EL US Brand 10,461 ESTEE LAUDER COMPANIES-CL A Personal Products 4.0 16.9 1.5 16.2 1.4 11.1 8.2 1.1 12.3 16.8 9.8 8.9

BEI GR Brand 15,210 BEIERSDORF AG Personal Products 4.0 20.4 2.2 20.9 1.7 16.2 13.5 1.6 19.4 16.5 10.0 8.4

AVP US Brand 13,597 AVON PRODUCTS INC Personal Products 13.8 20.6 2.4 35.9 1.4 16.5 14.0 1.6 42.3 55.9 9.7 3.8

NATU3 BZ EM 8,358 NATURA COSMETICOS SA Personal Products 14.5 21.6 4.0 NA 4.3 19.7 17.7 4.1 NA 56.2 20.9 -0.8

1044 HK EM 8,119 HENGAN INTL GROUP CO LTD Personal Products 5.2 25.1 2.0 NA 6.4 21.2 18.3 4.4 NA 19.8 21.0 -0.4

PFE US Brand 152,998 PFIZER INC Pharma 2.0 7.5 5.9 7.7 2.8 5.9 4.7 2.2 6.1 12.3 37.4 36.1

SUNP IN EM 6,388 SUN PHARMACEUTICAL INDUS Pharma 4.2 10.5 1.0 20.6 7.3 14.5 13.6 6.8 19.7 20.2 46.7 34.2

JNJ US Brand 174,375 JOHNSON & JOHNSON Pharma 3.3 13.3 3.1 13.8 2.9 10.2 8.7 2.7 13.1 25.4 26.9 20.9

NOVN VX Brand 142,564 NOVARTIS AG-REG Pharma 2.1 14.8 3.9 13.4 3.0 14.1 11.7 3.2 14.5 14.3 22.6 22.0

MRK US Brand 118,728 MERCK & CO. INC. Pharma 2.9 9.5 4.8 93.9 3.5 9.0 7.0 2.4 64.1 35.1 26.6 3.7

TEVA IT EM 52,873 TEVA PHARMACEUTICAL IND LTD Pharma 2.4 51.0 1.2 17.8 3.7 16.1 12.8 3.9 18.6 4.8 24.1 20.8

CIPLA IN EM 5,743 CIPLA LTD Pharma 5.9 33.3 0.6 119.5 5.2 28.9 24.4 5.4 123.6 17.7 18.5 4.3

2454 TT EM 17,833 MEDIATEK INC Semis 5.8 18.6 2.6 14.1 7.7 26.3 23.4 7.3 13.3 29.8 27.8 55.0

2303 TT EM 7,190 UNITED MICROELECTRONICS CORP Semis 1.0 -9.8 5.2 10.2 3.0 -40.1 5.7 2.2 7.4 -11.4 -5.4 29.3

2330 TT EM 49,500 TAIWAN SEMICONDUCTOR MANUFAC Semis 3.6 24.0 4.6 15.9 6.3 22.0 10.9 6.3 15.8 14.4 28.6 40.0

TXN US Brand 28,954 TEXAS INSTRUMENTS INC Semis 3.2 25.2 1.9 12.4 3.0 16.7 10.3 2.7 11.4 9.8 16.4 23.9

005935 KS EM 10,517 SAMSUNG ELECTRONICS-PFD Semis 2.0 21.4 1.9 31.4 0.6 12.0 5.0 0.7 35.0 9.6 6.0 2.0

INTC US Brand 109,943 INTEL CORP Semis 2.7 16.9 2.8 19.7 3.1 11.9 7.2 2.9 17.9 10.5 24.6 16.3

005930 KS Brand 105,570 SAMSUNG ELECTRONICS CO LTD Semis 1.6 18.3 0.7 35.6 1.5 41.1 11.6 1.5 36.8 9.2 3.7 4.1

000660 KS EM 13,375 HYNIX SEMICONDUCTOR INC Semis 2.5 -2.7 0.0 -6.6 1.9 -168.9 -14.2 2.6 -10.4 -93.5 -1.5 -28.5 Stocks with market cap above 5 billion USD.EM = Emerging market, PBV=Price to book value, TPE=12 month trailing Price to earnings ratio, DY=Dividend Yield, PFCF=Price to free cash flow, PS=Price tosales, EVEB= Enterprise value to earnings before interest and tax, EVEDA= Enterprise value to earnings before interest, taxes, depreciation and amortization,EVS= Enterprise value to sales, EVFCF= Enterprise value to free cash flow, ROE = Return on equity, EBIT = Earnings before interest and tax, EBITMGN= Earningsto sales, FCFSales = Free cash flow to sales. Source: Datastream, Bloomberg, Mirae Asset Research


17/17


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