Global, GEM & Indonesia Equity Strategy! (update1) - Credit Suisse

1) GLOBAL EQUITY STRATEGY Report: Stay Overweight Japan

iSay: The Japan’s Fukushima Nuclear power plant is still experiencing issues and the Nuclear situation is still not clear as no substantial facts have emerged from the authorities.

· Andrew Garthwaite (Report attached): Friday’s tragic events do not alter our view that investors should be overweight of Japan. We note that our Japanese strategist Shun Maruyama has cut his Nikkei target from 13,000 to 11,000 in response to the disaster (which, though, still leaves him with around 15% upside from current levels) and thinks the Nikkei may trough at 9,000. 1) The stage of the cycle benefits Japan as Japan historically has been a high beta play on the recovery in global growth. 2) Valuation on 2011 FCF yields, Japan is by far the cheapest of any region, with a FCF yield of 10.4%, compared to 6% for global markets. On price/earnings and price to book relative, the Japanese market is trading close to its record lows. 3) The USD/JPY two-year note yield differential is widening suggesting a weaker Yen. 4) Macro policy is less reactive, even before the earthquake and tsunami last Friday, fiscal and monetary policy were going in the right direction. 5) There are some signs of encouraging corporate change. 6) Positioning is bearish as Investors are still around 20% underweight Japan on EPFR data (0.2 standard deviations below average). 7) Drag from oil unlikely to be much worse. 8) Some of the long run issues are to some extent exaggerated.

2) GEM EQUITY STRATEGY Report: Japan impact – valuation is different this time!

iSay: Indonesia is still trading at a 20% premium to APAC ex- Japan—the most expensive market in the region, in terms of relative PBR-RoE. For now, we do not anticipate permanent impact from Japan Tsunami to Indonesian Economy and stock market, however we see short-term impact to supply chain or export demand to a few stocks, among others the largest stock ASII and it subsidiary UNTR (Komatsu heavy equipment distributor). However, positive sentiment to exporters of thermal coal as Japan is having nuclear power plant supply cut therefore need to import more LNG and thermal coal, we continue to like both ITMG (20% sales to Japan) and PTBA (10% sales to Japan), while ADRO has 10% sales to Japan, HRUM 15% sales to Japan, SAR SP 12% to Japan, and INDY’s coal mine (10% sales to Japan).

· Sakthi Siva (Report attached): Valuations are very different from Kobe in January 1995. With our Japan and global strategy teams using the Kobe earthquake in January 1995 as a rough guide, we do note that from a GEM perspective, valuations are very different. During the 1995 Kobe earthquake, the TOPIX fell by 21% while MXEF (MSCI Emerging) fell by 15%. But Figure 1 highlights that in January 1995, our 4 factor GEM valuation indicator was 87% overvalued compared with 8% undervalued currently. The four factors used are historic P/E, P/E adjusted by inflation, dividend yield and the earnings yield versus the bond yield. The historic P/E is currently 14.1x versus 22x in January 1995. The historic dividend yield (DY) is currently 2.4% versus 1.5% then.

· GEM 4 factor valuation indicator has fallen to 10% to 15% undervalued in non-recession corrections. While our 4 factor valuation indicator has dropped to around 25% undervalued in recessions (1998 and 2001), we note that it has fallen towards 10% to 15% undervalued in non-recession corrections including in last year’s correction.

3) INDONESIA STRATEGY: Indonesia Macro Panel discussion next week AIC in HK

iSay: Teddy Oetomo, PhD is our new Indonesia Strategist, Bank & Plantation Analyst. Teddy lowers Indonesia Index Target to JCI 4,150pts at end-2011F (vs 4,400pts previously). Teddy’s stock screening, Top-Buy stocks are BMRI, INDF, SMGR and BBNI, while Top-Sell stocks are KLBF and UNVR due to valuation mainly!

· Teddy Oetomo (Daily attached): Dr M Chatib Basri and Wishnu Wardhana will be the keynote speakers on the Indonesia panel at the Credit Suisse Asian Investment Conference in Hong Kong at 3 p.m. on 22 March 2011 on the topic of ‘Indonesian economic growth and its challenges’. For more information on this Indonesia macro panel discussion, please contact Teddy Oetomo at teddy.oetomo@credit-suisse.com or your CS sales representatives. We have an interesting line-up of Indonesian companies attending AIC in Hong Kong, including: Adaro, Astra International, Danamon, Borneo Lumbung Energi, Bumi Resources, Ciputra Group, Delta Dunia Makmur, XL Axiata, Gajah Tunggal, Indika Energy, Indofood, Sampoerna Agro, Sarana Menara Nusantara, and Semen Gresik.

· Teddy Oetomo (Report attached): After achieving 27% CAGR in 2003-2010, a 16% premium over the risk-free rate, we expect the Indonesian market’s 12M return to normalise to 15%, 6–7% ahead of its current risk-free rate. Thus, the strategy of “buying the market” which has worked well in the past may be less effective in the future, with stock selection being key to generate future outperformance. Our new index target of 4150 is based on 16x 2011E P/E, in line with the average P/E during the pre-1998 Asian financial crisis period.

· Why do we expect a normalised return? (1) While it has corrected from a peak 41% premium, Indonesia is still trading at a 20% premium to APAC ex- Japan—the most expensive market in the region. (2) Consensus earnings momentum is subsiding with March 2011 seeing the largest MoM downgrade in the region. Why not just sell the market? (1) Indonesia is not over-owned, with net foreign inflow as percent of market cap being 0.3%, the second lowest in the region and below its historical average of 1.5%. (2) We believe that the central bank is not as “behind the curve” as the market perceives, running the second-highest real interest rate and highest YTD currency appreciation in the region and (3) we believe that Indonesia will be able to sustain its current ROE in the next 18 months.

· Stocks selection is key. Our Top Longs (BMRI, INDF, SMGR, BBNI) are geared towards stocks that are: (1) trading at a discount to both Indonesia and APAC ex-Japan; (2) are laggards in the Indonesian market and (3) have robust consensus earnings momentum. Our Top Shorts (KLBF and UNVR) are stocks that are: (1) trading at premium to Indonesia and APAC ex-Japan (2) with subsiding consensus earnings momentum and (3) exposed to risk of profit taking due to their recent outperformance.