Global Equity Strategy: Upgrade Mining, Benchmark Oil

5 July 2017
Global
Equity Research
Strategy
Global Equity Strategy

Research Analysts
STRATEGY
Andrew Garthwaite
44 20 7883 6477
andrew.garthwaite@credit-suisse.com Upgrade mining, benchmark oil
Marina Pronina
44 20 7883 6476 Mining upgrade to overweight: We see some upside to the oil price, and
marina.pronina@credit-suisse.com mining stocks tend to be more correlated with oil than IOCs; mining has
Robert Griffiths abnormally lagged the performance of GEM equities; the best lead indicators
44 20 7883 8885
robert.griffiths@credit-suisse.com of industrial commodity prices (China PMI and global IP) now imply modest
Nicolas Wylenzek upside; valuations look attractive on P/B and P/E relatives and Rio Tinto has a
44 20 7883 6480 6.6% FCF yield even on a $40/t iron ore price, a level which would put 25% of
nicolas.wylenzek@credit-suisse.com
production below cash cost; we don’t see a slowdown in Chinese infrastructure
Alex Hymers
investment from here (Chinese loan growth has slowed only moderately); the
44 20 7888 9710
alex.hymers@credit-suisse.com sector is structurally better positioned than oil; the sector is oversold; and
Mengyuan Yuan speculative positions in metals on SHFE are below their average. Our top pick
44 20 7888 0368 is Rio Tinto, which is on the Credit Suisse European Focus List. However, in
mengyuan.yuan@credit-suisse.com
spite of our more positive stance on mining, we remain underweight non-
financial cyclicals, having upgraded defensives to benchmark in February.
Upside to the oil price: While we might not be quite as optimistic on the oil
price as our house view ($62pb by the end of 2017), we see the following
supports: i) speculative positions are close to 18-month lows; ii) at current
levels of compliance by OPEC and non-OPEC signatories to the supply deal,
and assuming supply disruptions move up closer to average levels, 2.3mb/d
would be taken off the market, and we don’t expect US shale (which accounts
for c.7% of global supply) or demand growth disappointments to fully offset
this; and iii) the current oil price is below the average inflation-adjusted oil price
of $55pb. In our opinion, the two key catalysts for higher prices will be the
Baker Hughes rig count (where the second derivative of growth is slowing) and
the energy high-yield spread (which has started to rise). The risk is that Saudi
Arabia may wish to preserve a degree of volatility in the oil market thereby
making planning decisions for higher-cost producers more difficult.
How to play a higher oil price: We would focus on i) banks, as inflation
expectations are positively correlated with the oil price; ii) GEM equities in
aggregate, which are positively correlated with the oil price; and iii) Russia,
which has the highest correlation with the oil price of any country (our GEM
equity strategy team upgraded Russia on 23 June). We like non-Russian
stocks with high Russian exposure (e.g. Japan Tobacco). The most correlated
trades with the oil price (in order): Russia, E&P, OFS, mining, IOCs and banks
(the second most correlated non-energy sector).
IOCs – stay benchmark: Despite the worst 1H performance for US energy for
40 years, an oil price of above $60pb is needed to deliver an attractive FCF
yield (at $50pb the oil majors' 2018E average FCF yield is only 3.6%
compared to 5.8% for the global market). Furthermore, the sell side's earnings
estimates appear to price in an oil price of $58pb, and the industry is
structurally more challenged than that of mining. We prefer OFS companies to
IOCs.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision.
5 July 2017
Table of contents
Mining: raise to overweight ....................................................................................... 3
Where next for the price of oil? .............................................................................. 14
What are the risks? 19
We remain benchmark IOCs .................................................................................. 20
A few clear supports for the sector 20
However, we choose to remain benchmark 22
OFS: a play on oil capex 26
US OFS: more expensive but better quality 28
How to play a rebound in the oil price beyond the oil sector? ................................ 29
Banks: If oil rises, bond yields rise and banks outperform 29
GEM equities 31
Appendix ................................................................................................................. 38
Appendix 1 38
Appendix 2 39
Appendix 3 39
Appendix 4 40
Appendix 5 40
Appendix 6 41
Appendix 7 41
The team wishes to acknowledge the contributions made to this report by Pranali Deshmukh,
Neeraj Chadawar, and Swati Ramachandran employees of CRISIL Global Research and
Analytics, a business division of CRISIL Limited, a third-party provider of research services to
Credit Suisse.
Global Equity Strategy 2

5 July 2017
Upgrade mining, benchmark oil

In this report, we focus on four main issues: 1) why we upgrade mining to overweight; 2)
why the oil price should rise; 3) why we stay benchmark IOCs; and 4) our view that the
best way to a play a rise in the oil price is via OFS, Russia (in particular international
companies exposed to Russia) and banks.
Mining: raise to overweight

We remain underweight non-financial cyclicals in aggregate primarily because they have
decoupled significantly from the yield curve and have priced in PMI new orders of c59
(which would equate to annual GDP growth of around 3%, a level we think is overly
optimistic, as illustrated in the two charts below). We raised defensives to benchmark in
early February (see Four areas of complacency, 2 February).
Figure 1: There has been a sharp divergence

between cyclical to defensives and the yield curve Figure 2: The European cyclical to defensive ratio is
consistent with PMI manufacturing new orders at 59
3.5 US Yield curve 1.40
55%
Cont Europe cyclicals rel defensive 70
US cyclicals/defensive rel. performance, 1.35
3.0 rhs
Euro area PMI manufacturing new orders, rhs 65
50%
1.30
2.5 60
1.25 55
2.0 45%
1.20 50
1.5 45
1.15 40%
40
1.0
1.10
35% 35
0.5 1.05 30
0.0 1.00 30% 25

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 2000 2002 2004 2007 2009 2012 2014 2017
Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Markit, Credit Suisse research
We now opt to upgrade mining to overweight from benchmark, however, believing this to
be one of the best plays on a rise in the oil price.
1. Mining and oil are closely correlated

Around 20% to 30% of mining costs are energy related (more so for aluminum), and thus a
rise in energy costs tends to push up industrial commodity prices. As a result, there tends
to be a strong positive correlation between industrial commodity prices and oil prices, and
a weaker but still positive correlation between industrial commodity stocks and the oil
price. In recent months, metal and oil prices have diverged significantly and as explained
later on we think that the oil price can rise.

5 July 2017
Figure 4: …and hence so too are mining stocks and

Figure 3: Metals and oil are closely correlated… oil
1200.0 150
140
Metals MSCI Met & Mining rel
130 2.0
1000.0
Brent oil, rhs Brent oil, rhs 120
110
800.0 1.5 100
90
80
600.0 70
1.0
60
50
400.0
30 40
0.5
200.0
10 20
0.0 -10 0.0 0

1999 2002 2005 2009 2012 2015 1999 2002 2005 2009 2012 2015
Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research
Interestingly, the correlation coefficient between the performance of mining relative to the
market and the oil price is higher than for US and European IOCs.
Figure 5: Correlation of different potential oil plays Figure 6: There has been a decoupling between
with the oil price GEM and mining
0.7
1500 MSCI EM 1400
10yr correlation coefficent with the oil price (rel.
0.6 perfromance)
1350 MSCI Met & Mining rel
1200
0.5
1200
0.4 1000
1050
0.3 800
900
0.2
750 600
0.1
600
400
0
450
Eur IOCs
MSCI Russia
MSCI Mexico
Global OFS
Global Mining
US IOCs
MSCI Brazil
Global E&P Comp
Dev market banks
200
300
150 0
1997 1999 2002 2004 2007 2009 2012 2014 2017
2. There has been a significant decoupling between emerging markets and mining
There are explanations for this decoupling (namely, commodities have become less
important for GEM performance), but nevertheless the decoupling is worthy of note.

5 July 2017
3. Rising yields and inflation expectations could be good for mining

Mining tends to be one of the most sensitive sectors to bond yields and inflation
expectations, both of which we think rise further.
Figure 7: Europe sector correlation with bond yields Figure 8: European sector correlation with inflation
(adj. for volatility of correlation) expectations
2.0 0.5
Correlation divided by standard deviation of the12m rolling
1.5
correlation of Cont European sectors relative perf versus 10 10yr correlation of Cont European sectors relative perf
1.0 yr German bund yields (over 10 years) 0.3 with European inflation expectations
0.5
0.1
0.0
-0.5
-0.1
-1.0
-1.5 -0.3
-2.0
-2.5 -0.5
Consumer services
Metals & Mining
Food Retail
Div Fin
Real estate
Banks
Media
Chemicals
Telecoms
Construction Materials
Insurance
Automobiles
Energy
Transport
Semiconductors
Utilities
Food Producers
Consumer Durables
Beverages
Healthcare Equip
Capital Goods
Pharmaceuticals
Technology Hardware
Commercial Services
Pulp & Paper
Software
Tobacco
Retailing
Household Products
Europe Infrastructure
German Real estate cos
Pharmaceuticals
Pulp & Paper

Div Fin
Media
Metals & Mining
Banks
Chemicals
Automobiles
Utilities
Energy
Insurance
Consumer services
Transport
Telecoms
Semiconductors
Technology Hardware
Food Retail
Food Producers
Consumer Durables
Beverages
Healthcare Equip
Real estate
Capital Goods
Software
Commercial Services
Household Products
Tobacco
Retailing
4. Industrial commodity prices now seem to be back to far more realistic levels
Industrial commodity prices tend to correlate with global IP, as shown in the first chart
below. At the start of this year, industrial commodity prices appeared to have overshot
global IP momentum by c.20%. Now, global IP momentum is consistent with a small
increase in metals prices. Additionally, the change in the copper price is closely correlated
to the level of China PMI, which likewise suggests no downside for copper prices, having
pointed to significant downside at the start of the year.
Figure 9: Global IP is consistent with more or less a Figure 10: …as well as Chinese PMIs
flat metal price…
15% 40% 50
30% 60
10% 30
20%
55
10%
5% 10
0%
50
0% -10% -10
-20%
45
-5% -30
Global IP momentum -30%
(3m/3m % ann.) with
forecast -40%
-10% 40 China PMI New orders -50
3m % change in metals -50% Copper price, 3-month % change, rhs
prices, rhs
-15% -60% 35 -70
2000 2002 2004 2006 2008 2010 2012 2014 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Markit, Credit Suisse research

5 July 2017
Recently, the iron ore price has decoupled from the Shanghai rebar price, although our
Australian mining analysts point out that underpinning this has been divergent supply
dynamics, with the Chinese government closing steel mills to prevent oversupply,
supporting the rebar price.
Figure 11: Iron ore price has decoupled sharply Figure 12: Global mining stocks have tracked iron
from Shanghai rebar price ore prices
250
MSCI Met & Mining rel
700
2.0 Iron ore, rhs
Shanghai rebar price, USD 150
650 200
Iron ore price, rhs
600 130
1.5
550 150
110
500
1.0
450 90 100
400
70
0.5 50
350
50
300
0.0 0
250 30 2007 2010 2014 2017
2013 2014 2015 2016 2017
5. The valuation of the sector is attractive

The PB relative of the sector to the market is now back to one standard deviation below its
average. The FCF yield on a $40/tonne iron ore price is 6.6% for Rio (even assuming a
level of capex at maintenance levels).
Figure 13: The mining sector is cheap on P/B Figure 14: Even on our base case commodity
relative to the market forecasts, FCF yields are elevated
25% 2017E FCF yield on varying metal prices
Base Case Spot
190%
20%
170%
150%
15%
130%
110%
10%
90%
70% European mining stocks P/B rel 5%

mkt
50% Average (+/- 1 stdev)
30% 0%
1996 1999 2002 2005 2008 2011 2014 2017 RIO BHP Glen AAL

5 July 2017
On a PE relative basis, too, the mining sector is actually back close to its cheapest
valuation post the global financial crisis.
Figure 15: On a PE relative basis, the mining sector is almost back to its post
crisis low
1.8 MSCI UK Mining 12m Fwd PE rel mkt
Average (+/- 1 sd)

1.6
1.4
1.2
1.0
0.8
0.6
0.4
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Source: Thomson Reuters, Credit Suisse research
6. We see only a small slowdown in China

The Chinese economy has slowed a little (although the latest move in new orders less
inventories was up, as the chart below shows), but in our view there are four reasons not
to become overly concerned:
Figure 16: PMI new orders versus inventories suggest a small slowdown in IP
20
15 10%
10
5%
5
0%
0
-5 -5%
-10
-10%
-15 Chinese manufacturing PMI new orders - inventory
-20 Chinese IP, y/y, rhs -15%

2006 2008 2010 2012 2014 2017
i. Infrastructure investment growth is likely to remain resilient. As observed by our

economists, infrastructure investment growth has been steady at 15-20% since the
current administration came into power, and will likely to be around 18% this year
(China: State of the economy, 28 June 2017). We have already seen state and local

5 July 2017
government spending slow from 24% to around 14%, something that is unlikely to
continue.
Figure 17: State and local government FAI has Figure 18: The broad measure of infrastructure
slowed down from its peak, while private FAI has investment growth has been steady at around
picked up 15-20% since 2013
65% 60
Infrastructure investment growth,3mma, yoy
FAI, % chg Y/Y 3 m.m.a.
55%
50
SOE & Central government
FAI
45%
Private sector FAI 40
35%
30
25%
20
15%
10
5%
0
-5% 2004 2006 2008 2010 2012 2014 2016
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Thomson Reuters, Credit Suisse Source: Credit Suisse China Economics research
ii. Policy has been tightened only modestly. There has been only a small tightening of
policy if we look at total credit growth and prime lending rates. Credit growth has
remained reasonably resilient, while the prime lending rate has not moved higher
(unlike interbank rates).
Figure 19: Total social financing including local

government debt swaps has slowed only slightly Figure 20: Prime lending rate in China has not risen
8
TSF, yoy Shanghai 6m interbank rate
40.0%
China prime lendinf rate, 1yr and below
TSF (including local government debt 7
35.0% swaps), yoy
30.0%
5
25.0%
4
20.0% 3
15.0% 2
10.0% 1
2006 2008 2010 2012 2014 2016 2007 2009 2011 2013 2015 2017

5 July 2017
iii. China still has policy flexibility. China continues to have policy flexibility with a loan
to deposit ratio of just 83% and a net government debt to GDP between -23% and 0%,
according to IMF estimates. Indeed, with net foreign assets of 14% of GDP, almost all
of the Chinese debt is domestic.
iv. House prices are stable. We think the biggest threat to the Chinese economy would
be a collapse in house prices. However, monthly house price data is now moving
higher once again, and listed property developers have been outperforming.
Figure 21: MoM house price changes have stayed Figure 22: … and the property developers have
positive… outperformed
2.5 15 15
China 70 cities house price
MSCI China real estate, relative to market
Month-on-month
2.0
Year-on-year 14
10
1.5
13
1.0
5
0.5 12
0
0.0
11
-0.5
-5 10
-1.0
-1.5 -10 9
2012 2013 2014 2015 2017 2013 2014 2015 2016 2017
7. Consensus numbers are not factoring in a rise in industrial commodity prices

Sector EPS forecasts, using the UK mining sector as a proxy, are now consistent with
current commodity prices, having previously priced in a significant rise in metals prices.
This stands in contrast to the oil sector, which continues to price in a recovery in the oil
price, as we discuss later on.

5 July 2017
Figure 23: The UK mining sector's consensus EPS is consistent with current
commodity prices
190
38 MSCI UK Materials, 12-month forward EPS
180
33 Commodities ex energy in £, 24-week lead, rhs
28 170
23
160
18
150
13
140
8
3 130
Sep-14 Jun-15 Mar-16 Dec-16 Oct-17
Source: Thomson Reuters, Credit Suisse
8. China continues with its supply-side cuts

The steel and coal sectors in China have seen significant administrative closures: 93m
tonnes of steel capacity closed in 2016, with another 50m tonnes due to close in 2017. By
the end of June, all facilities producing inferior-quality steel bars will be dismantled. For
coal, 350mt closed in 2016, and another 150mt is planned to close in 2017.
We think it would be logical for these to continue, not only for environmental reasons but
also to help improve the profitability of the state-operated enterprises, and in turn improve
the asset quality of Chinese banks. This is especially true for aluminium, which has very
high energy content; China does not have an advantage in low cost energy.
9. Speculative positioning in metals has declined from its peak

SHFE futures contract turnover and the scale of open interest in copper have both
declined back to much lower levels than seen in 2016.

5 July 2017
Figure 24: Open interest in copper has declined Figure 25: Contract turnover has declined to low
significantly from its peak levels
1,000,000 Copper SHFE no. of open interest 2,500,000 Copper SHFE future
contract turnover
900,000 Latest
2,000,000
800,000
700,000
1,500,000
600,000
1,000,000
500,000
400,000
500,000
300,000
200,000 0
2010 2011 2012 2013 2014 2015 2016 2017 2010 2012 2014 2016
10. Scope for a steel re-stock and speculative positions are low
Our European steels team highlight that there is a good case for an inventory restock, with
global IP picking up at a time when steel production has been flat-lining, and inventories
(as measured by our team's inventory proxy and using data from inventories in major
Chinese cities) are now declining.
Figure 26: Our steel inventory proxy suggests Figure 27: Chinese steel inventories have declined
scope for a rebuild almost back to recent lows
Global steel production, Mt
8% 160000 25,000
Implied restock/(destock), 12-m rolling as % of production
6% Fitted from global IP (rhs) 150000
4% Actual (rhs) 140000 20,000
2% 130000
0% 120000 15,000
-2% 110000
-4% 100000 10,000
-6% 90000
-8% 80000 5,000 Total Steel Inventories in Major China Cities (kt)
-10% 70000
-12% 60000 0
2001 2003 2005 2007 2009 2011 2014 2016 2008 2010 2012 2014 2016
ource: Credit Suisse European Metals and Mining team Source: Thomson Reuters, Credit Suisse research

5 July 2017
11. Structurally, the mining sector is now more attractive and is less disrupted than
oil
The European mining sector's capex to depreciation ratio has declined sharply to at least
a 35-year low. This has helped support free cash flow and also implies scope for supply
shortfalls going forward.
The metals cost curve is very steep (at least in iron ore), with the quoted producers
operating at the bottom end of the cost curve, which is not the case with the major oil
producers. In some areas, the very concentrated market structure allows potentially more
benign corporate behavior. The global top four seaborne producers account for nearly
70% of the market.
Clearly in the long run, as highlighted in the section above, there is a big concern over
peak oil and EV culminating with companies such as Total targeting 20% of revenue to be
from renewables. Meanwhile, demand for copper might actually benefit from the rise of
EV, with the International Copper Association estimating that electric vehicles typically use
40kg of copper, in contrast to 23kg of copper for cars using internal combustion engines.
12. The mining sector is more than 1 standard deviation oversold

The sector is currently very oversold. Thus it stands to potentially benefit from the reversal
of momentum which appears to be underway (and which we wrote about in our piece
Price momentum and bonds, 26 June 2017).
Figure 28: Capex-to-depreciation for the mining Figure 29: The mining sector is now c.1.2 s.d.
sector, at c.0.8x, has fallen to 30 year lows oversold
40% European Metals and Mining rel to mkt % dev from 6mma
Europe mining, capex / depreciation Overbought
2.7 30% Average
20%
2.2 10%
0%
1.7
-10%
-20%
1.2
-30%
-40%
Oversold
0.7
1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 -50%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
13. A worse-case scenario would have the iron ore price at $40pt
The iron ore price is now approaching a level that will start to impact on the cost curve:
any meaningful decline in the iron ore price from here could easily (although as always
with a lag) lead to capacity shutdowns, according to our European mining team. If the iron
ore price were to fall to $50/t (from c.$61/t), 15% of global production would be below cash
cost (with the cost curve below from our mining team showing the all-in cash cost of
production). In our experience in a bear market, around a quarter of production can fall
below the cash cost of production temporarily before prices trough. That would require an
iron ore price of around $40pt.

5 July 2017
Figure 30: The listed producers are largely at the lower end of the iron ore cost
curve
Source: Credit Suisse European Mining team
Our preferred European mining name is Rio, which is on the European Focus List. We
highlight below the European Outperform-rated mining and steel companies. The following
are cheap on HOLT with positive earnings revisions: Glencore, Aurubis, Acerinox,
Aperam, Acacia Mining, Evraz and SSAB.
Figure 31: European mining stocks that are Outperform-rated by CS analysts

-----P/E (12m fwd) ------ ------ P/B ------- 2017e, % HOLT 2017e Momentum, %
rel to mkt % rel to mkt % Price, % Consensus

rel to Credit Suisse
Name Abs above/below Abs above/below FCY DY change to 3m EPS 3m Sales recommendation
Industry rating
average average best (1=Buy; 5=Sell)
Fresnillo 28.1 230% -7% 5.4 4% -0.1 1.3 -32.5 3.7 1.5 3.2 Outperform
Glencore 11.0 90% -28% 0.7 -31% 14.1 3.4 69.2 3.4 -1.5 2.0 Outperform
Rio Tinto 9.7 79% -15% 2.0 1% 12.3 6.6 104.8 -0.8 0.6 2.4 Outperform
Thyssenkrupp 16.2 133% 7% 6.8 160% -1.0 0.9 15.2 -7.2 0.1 2.5 Outperform
Aurubis 14.0 114% 16% 1.6 69% 5.3 2.3 76.4 3.0 1.2 2.6 Outperform
Acerinox 'R' 14.3 117% -33% 1.6 8% 4.1 3.6 79.9 14.3 1.8 2.4 Outperform
Aperam 10.7 87% -71% 1.4 89% 10.7 4.2 52.6 2.4 0.4 2.2 Outperform
Acacia Mining 8.3 67% -38% 0.8 -6% 10.3 2.3 222.8 3.0 -1.2 2.8 Outperform
Evraz 5.6 46% -81% 4.4 32% 25.2 4.2 38.3 11.7 1.5 2.8 Outperform
Kaz Minerals 7.3 60% -67% 5.9 171% 1.4 0.0 -63.7 14.9 5.1 2.4 Outperform
Ssab 'A' 17.3 141% -20% 0.7 -7% 9.8 1.4 74.2 17.7 2.2 2.7 Outperform
Source: Thomson Reuters, Company data, IBES, MSCI, HOLT, Credit Suisse estimates

5 July 2017
Where next for the price of oil?

We believe that the buy-side consensus on the price of crude is too bearish. Speaking to
our clients, we got the impression the buy side is much more bearish on oil than the sell
side (with the Bloomberg end-2017 consensus at $58pb). While the oil price might not
reach the CS house view of $62pb by end-2017 (see Oil Sense: Opec deal shores up H2-
2017 and full year 2018, 1 June 2017), we see upside to the oil price from here from the
current $47pb for the following reasons:
1. Speculative positions have fallen back sharply
Net long positions in oil have fallen close to an 18-month low, and a level which has
represented a trough on a number of occasions over the last five years. The oil price has
tended to correlate with speculative positions, with the latter actually troughing in advance
of the oil price in 2014 and 2016.
Figure 32: Net long positions are lower than they Figure 33: Net long positions are rolling over
were
ICE Brent&WTI managed money net long positions, % open 115% ICE Brent&WTI managed money net long 80
interest positions, % open interest
100% Brent price, rhs
Brent, 3m chg % rhs 60
90% 140 95%
80% 40
120
75%
70%
100 20
60%
55%
50% 0
80
40% 35%
60 -20
30%
20% 15%
40 -40
10%
0% 20 -5% -60
2010 2011 2012 2013 2014 2015 2016 2017 2009 2011 2012 2014 2015 2017
2. There is more to oil markets than just US shale production

There are four major offsets we think to the much talked about ramp-up in US shale
production.
i. We think that there has been a shift by Saudi Arabia to act as a swing producer
OPEC and Saudi Arabia remain firm in their commitment to, in the words of the statement
accompanying the output cut agreement, 'restore a global oil demand and supply balance'.
These words are being accompanied by actions: data from the EIA suggest that
compliance with the output cut among OPEC members has been 100%, with Saudi having
cut production by 570kbd compared with last November when the agreement was reached
(or 117% of their targeted cut). The Kingdom continues to more than pull its weight, in
other words.
Saudi Arabia was also an important actor in broadening the agreement beyond OPEC.
The recently appointed Crown Prince Mohammed bin Salman has, according to our oil
economists, a good relationship with Russia, and was key in bringing Russia on board with
the OPEC output cut agreement. Although compliance among the non-OPEC signatories

5 July 2017
has been lower (at around 60% on our estimates, using EIA production data), Russia has
cut their production by c.300kbd since the agreement. As a result, since last November,
OPEC together with the non-OPEC agreement signatories have cut supply by c.1.5mbd
over a period in which US production has increased by 440kbd.
The simple table below lays out a possible scenario for the oil market in 2017. We assume
first of all that the current level of compliance with the OPEC deal by both OPEC and non-
OPEC signatories persists, that unplanned outages rise halfway back to their May 2016
peak and that US output rises in line with EIA forecasts. Those assumptions would see net
supply decline by c.1.4mbd from its pre-deal level in Q4 last year. If we further assume
demand growth in line with EIA assumptions, then by the end of 2017 oversupply in the oil
market would have declined by c.260kbd.
Figure 34: On some simple assumptions, oil oversupply would decline by

260kbd by the end of 2017
Thousands of
Demand/supply change in 2017
barrels/day
OPEC cut (assuming 100% compliance continues) -1,169
Non-OPEC cut (assuming 60% compliance continues) -336
Assuming unplanned outages rise half w ay back to May 16 peak -800
US increase ('lower 48 states') 910
Net supply change from these factors -1,395
Demand grow th (EIA assumption) 1,135
Potential deficit -260
Source: EIA, Thomson Reuters, Credit Suisse research
Saudi Arabia's market share policy continues to wrestle with two challenges, however.
First, the breakeven price for US shale appears to be continuing to move lower. When the
market share war began in 2014, it appeared an oil price below $60 would be sufficient to
price out much of US shale production. Now it appears the breakeven has fallen closer to
$40. Second, Saudi Arabia does not have an unlimited ability to sustain the potential social
costs of its policy. Already non-oil GDP growth is flat (at 0.3% in 2016), with a budget
deficit of 9.8% of GDP in 2017, according to the IMF's Fiscal Monitor. Recently, Saudi
Arabia has had to reverse some of the cuts to civil service pay, with state employees
around two-thirds of the population.
As a result, we doubt Saudi Arabia can afford the social cost of an oil price needed to price
out US shale (i.e. $40pb). Moreover, there may be less of a political prerogative to prevent
the US from becoming self-sufficient in oil now, with US foreign policy having become
more critical of Iran. Back in 2015, there appeared to be more of a risk that if the US
became self-sufficient in oil, it might be less willing to support Saudi Arabia militarily.
At the margin, the planned float of Saudi Aramco could perhaps incentivise Saudi Arabia
to support the oil price.
ii. Supply side disruption owing to political difficulties is unusually low

By definition, the outlook for unplanned disruptions on the supply side is something of a
known unknown. What we do know is that unplanned outages among OPEC and non-
OPEC countries are currently around 1.6mbd below their peak of last May. If it returns
halfway back to those levels (i.e. closer to the average level of unplanned outages over
the last 4 years), then c800kbd could be taken off the market. In particular, the negative
surprise recently has been Libya and Nigeria which, together, have increased output by

5 July 2017
over 400kbd over the last two months, and by nearly 850kbd since the low of these two
countries' production last August.
Figure 35: The scale of unplanned outages has declined sharply to a very low
level by recent standards
4.00 Unplanned outages (mbd)
OPEC Non-OPEC
3.50
1.6mbd fall in
outages in 1 year
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2013 2014 2015 2016 2017
Source: EIA, Credit Suisse research
iii. A pick-up in demand

OECD oil demand growth has moderated slightly in recent months. We continue to
believe, however, that global GDP growth this year will be c0.5p.p. above that achieved
last year. A simple model regressing US petroleum demand against ISM manufacturing
new orders and miles driven suggests that petroleum demand growth should pick up
toward 1.5% from its current 0.2% Y/Y (3mma), as shown in the second chart below.
Figure 36: Global macro momentum remains a key Figure 37: US petroleum demand growth should
demand driver pick up given ISM and miles driven
US ISM & European PMI new orders average
70 5.0
OECD oil demand, y/y chg 3mma rhs
65 3%
3.0
60
1% 1.0
55
50
-1.0
-1%
45 -3.0
-3%
40
-5.0
35 Manufacturing/miles driven
-5% model output
-7.0
30 US petroleum products
demand, % chg Y/Y
25 -7% -9.0
2003 2005 2007 2009 2011 2013 2015 2017 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Thomson Reuters, Markit, Credit Suisse research Source: Thomson Reuters, Credit Suisse research
iv. Decline rates

5 July 2017
According to our oil team, the decline rates are typically 4% to 5% p.a. This halved
recently as oil companies were able to become more efficient at extracting oil from existing
reserves. Nevertheless, the $740bn decline in upstream capital spending from 2015 out to
2020 (according to Wood Mackenzie) should at some point mean that the decline rate
starts to revert to its norm.
3. Has the role of US shale been overestimated?

The CEO of Pioneer has pointed out that the Permian basin could end up producing c8-
9mbd against current production of 2.4mbd. Similar pronouncements have been made by
Continental and EOG. Thus it could be almost as important as Saudi Arabia.
The question is one of speed. The EIA forecast that output from the 'lower 48' US states
will rise by around half a million barrels per day by the end of this year, and by a further
300kbd in 2018. There are much larger estimates however: the CEO of Rosneft has stated
that he believes shale could add 1.5mbd by the middle of 2018.
Even if this is right, then it would serve to offset the entire planned cut by OPEC and its
non-OPEC partners. But that is before also taking into consideration the prospective rise in
demand discussed above, a possible normalisation of supply side disruptions and of
course the decline rates.
The question is: when do we start to see a slowdown in the Baker Hughes rig count and
permits, or some stress start to emerge in the oil high yield market?
The monthly pace of new rigs has slowed a little, but not by as much as implied by the
decline in the oil price, as shown in the first chart below. This simple chart suggests that a
WTI price of $45 represents the 'breakeven level' as far as rigs are concerned; below this
price, the number of rigs starts to contract.
The pressure to reduce drilling has perhaps been limited because stress in the high yield
market has been limited, thus far. The energy HY spread has started to edge higher, but
only modestly. Stress in the HY oil market is likely to be a critical catalyst, in our opinion.
Figure 38: The Baker Hughes rig count is yet to roll Figure 39: Energy high yield spreads have started to
over widen
57
21
70
19 US HY spread energy %
52
17
20 47 15
13
42
-30 11
9
37
Monthly change in Baker Hughes 7
-80 rig count (land rigs)
32 5
WTI, rhs
3
-130 27 1
Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 2012 2013 2014 2015 2017

5 July 2017
4. The impact of EVs on oil demand may be exaggerated

BP forecast that electric vehicle numbers will rise from 1.2m today to 70m by 2035.
However, the overall fleet, on their forecasts, will double to 1.8bn, and thus oil demand for
vehicles will still rise significantly (they assume by 5mbd) by 2035, just at a much slower
pace than the expansion of the vehicle fleet (a 26% rise in oil demand underpinning a
100% rise in the number of vehicles due to improving efficiency and rising EV penetration).
In all, BP forecast that the growth of electric vehicles will reduce the increase in oil
demand by less than 1mbd over the next 20 years (see Back to the future: electric
vehicles and oil demand, 5 December 2016).
5. A dollar bear market helps

We continue to be dollar bears, noting that bull markets in the dollar tend to peak in their
seventh year. A dollar bear market tends to help commodities in general. Year-to-date,
however, this relationship has weakened: both the oil price and the dollar have declined
together.
Figure 40: This USD bull market has now lasted for Figure 41: Oil and the dollar are clearly inversely
a 'typical' period related, although the relationship has weakened
180 6 yrs 140 73

6 yrs 10 yrs 7 yrs 9.5 yrs
+67% -47% +40% -39% 41%
78
160 120
83
140 100
88
120 80 93
100 98
60
Oil Brent
103
80 USD TWI, rhs inverted
40
108
60
1975 1979 1983 1987 1991 1996 2000 2004 2008 2012 2017 20
2010 2011 2012 2013 2014 2015 2016 2017
Trade weighted US dollar First Fed Rate hike
6. The ratio of oil to copper is at the low end of its historical range
The ratio of oil to copper is now close to the bottom of its 20-year range.

5 July 2017
Figure 42: The ratio of oil to copper
Brent Oil / Copper Average

210
190
170
150
130
110
90
70
50
1992 1997 2002 2007 2012 2017
7. History
The inflation-adjusted oil price since 1979 has been $55pb. It is interesting to note that the
average oil bear market has been 11 to 28 years. The bull market peaked in May 2008
(i.e. just over 9 years ago).
Figure 43: The average real oil price is $55pb since 1979
150
3 yrs 9 yrs
120 Real oil price (2013 US$)
Average
9 yrs
90 35 year
average = 55$
60
3 yrs 5 yrs
30
28 years 20 yrs 19 yrs

11 yrs
0
1861 1874 1887 1900 1913 1926 1939 1952 1965 1978 1991 2004 2017
What are the risks?

1. Increased volatility may be the answer for Saudi Arabia
We think Saudi Arabia needs to have a higher average oil price for social reasons, but a
low price to slow the rate of US shale production. The answer may be to have a sufficiently
volatile oil price to make it hard for US producers to plan for a particular oil price (e.g. if the

5 July 2017
oil price would fluctuate between $35pb to $75pb, it would be very hard to plan for "short
cycle" wells).
2. The key worry is whether Saudi makes one last attempt to price out US shale
Saudi Arabia can afford a price war, in our view. Government debt to GDP is just 19%,
and Saudi Arabia has FX reserves of around of 78% of GDP. It might decide for purely
economic reasons to have one last attempt to slow down non-OPEC production growth
and the rise of alternatives by pushing the price to the mid-$30pb. With the 18-month
forward oil price at $51.6pb, US shale continues to be economic, so such a battle could
generate significant further oil price downside.
We remain benchmark IOCs

A few clear supports for the sector
In our opinion, European and US integrateds have three supports:
1. The oil price – the key driver of IOCs’ performance
The performance of European and US integrateds closely follows the oil price. The
correlation seems to be slightly higher between IOCs and the spot price rather than the
three year forward price, which should be a better indicator of medium term profitability.
We expect the three year forward price as well as the spot price to pick up from here (see
above), which should clearly help the performance of European and US energy stocks.
Figure 44: The performance of European

integrateds relative to the market closely follows the
oil price… Figure 45: …this is also the case in the US
108% 78 US integrated oil price relative

Europe integrated oil price relative ($) Oil price (WTI, rhs) 115
103% 1.7
Oil price (EUR/BBL, rhs)
68
98% 95
58 1.5
93%
75
88% 48
1.3
83% 55
38
78% 1.1
35
28
73%
68% 18 0.9 15
2013 2014 2015 2016 2017 Jan-13 Aug-13 Apr-14 Nov-14 Jul-15 Mar-16 Oct-16 Jun-17
This is at a time when for reasons above we would expect the oil price to rise.
2. A good place to be as yields rise and PMIs roll over
We would argue that the energy sector offers an attractive combination of sensitivities in
the current macro-economic environment in which we expect lead indicators to roll over
and bond yields to pick up. Energy is the only sector that tends to outperform as PMIs roll
over and bond yields rise.

5 July 2017
Figure 46: Energy tends to do well when yields rise and PMIs roll over
2.0
rolling correlation of Cont European sectors relative perf

Banks
Correlation divided by standard deviation of the12m
versus 10 yr German bund yields (over 10 years)

1.5 Metals & Mining Div Fin
1.0
Semis
0.5 Chemicals Insurance Cap Goods
Energy Cons. Mat.
Auto
Transport
0.0 IT Cons Durab.
Utilities Com Serv.
Software Pulp & Paper
-0.5
Pharma Real estate
-1.0 Media Food Retail
Tobacco Telecoms Beverages Retail
-1.5
HH Prod HC equip
-2.0
Food Producers
-2.5
-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8
10 Year European sectors correlation with Europe Manufacturing PMI new orders
3. The oil sector is oversold

Both the European and the US energy sector are now more than one standard deviation
oversold on our price momentum indicator and at a level where they have historically
bounced.
Figure 47: The US energy sector is more than nearly

two standard deviations oversold... Figure 48: …and the case is very similar in Europe
25% 20%
MSCI US Energy, deviation from 6mma rel mkt (In $) MSCI Europe Energy, deviation from 6mma rel mkt (In $)
20% 15%
Average (+/- 1 SD) Average (+/- 1 SD)
15%
10%
10%
5%
5%
0%
0%
-5%
-5%
-10%
-10%
-15% -15%
-20% -20%
1998 2000 2002 2005 2007 2010 2012 2014 2017 1996 1998 2000 2003 2005 2007 2010 2012 2014 2017
European energy had its worst performance in more than 35 years in the first 6 months of
this year (underperforming by c.18%). When the sector last underperformed by more than
15% in the first half of the year, it outperformed by more than 18% in the second half
(1986).

5 July 2017
However, we choose to remain benchmark

1. Valuations are not clearly attractive
In our opinion, the most important valuation measure for the energy sector is FCF yield.
We believe that we need to see an oil price of at least $60pb to give the oil sector a
sufficiently attractive FCF to compensate for all the risks associated with the oil price and
the wider industry.
On a $50pb oil price and using 2018E numbers, the average FCF yield of the oil majors is
only at c.3.3%, which wouldn't cover dividends. This compares to a market FCF yield of
5.8% on 2018 numbers. While the FCF yield would more than double to a clearly attractive
7.6% on a $65pb oil price, we currently struggle to see an oil price much above $60pb
over the medium term.
Moreover, in the case of the US, the capex to depreciation ratio has fallen below 0.8x, a
level that suggests clear underinvestment and consequently an overstatement of free cash
flow. We would also note that the FCF yield on a $65pb oil price assumes no changes in
capex, with capex likely to pick up as the oil price recovers.
Figure 49: The 2018E FCF yield of the major IOCS

on $50pb… just 3.6% Figure 50: …and $65pb
7% 14%
6% 12%
FCF (2018) Yield to Current Market Cap FCF (2018) Yield to Current Market Cap
(at $50/bbl Brent) (at $65/bbl Brent)
5% 10%
4% 8%
3% 6%
2% 4%
1% 2%
0% 0%
RDS CNQ CVX BP SU TOT XOM COP ENI OXY CNQ SU RDS CVX COP BP ENI TOT XOM OXY
Source: CS US Energy research team Source: CS US Energy research team
While we would argue that earnings multiples are maybe not the most important measure
when valuing energy companies, we would highlight that European integrated oil
companies continue to trade above their norm relative to the market on this basis. This is
at a time when consensus earnings have not yet adjusted to the recent fall in the oil price,
and are likely to be revised down (see below for more details).

5 July 2017
Figure 52: European integrateds trade slightly

Figure 51: Capex to depreciation for IOCs has fallen above their norm on 12m forward P/E relative to the
sharply market
2.3 135%
2.1 125%
Europe IOCs 12m fwd P/E rel market
1.9 115% Average
1.7 105%
1.5 95%
1.3 85%
1.1
Capex to depreciation 75%
0.9 Europe IOC
65%
US IOC
0.7
2003 2005 2007 2010 2012 2014 2017 55%
1995 1999 2003 2008 2012 2017
We do acknowledge that the sector looks cheap on metrics which look at concepts of
normalised earnings (i.e. dividend yield and P/B). However, we would highlight that
earnings and profitability are unlikely to return to historical norms and given that the
dividends are currently uncovered, they are more vulnerable than usual.
Figure 53: The P/B relative of European IOCs is Figure 54: European IOCs are offering a DY
1.2 sd below neutral levels significantly above the market
120% Europe IOCs P/B rel market (ex financials)

230% Europe IOCs DY rel market
Average
110%
210% Average (+/- 1sd)
100%
190%
90%
170%
80%
70% 150%
60% 130%
50% 110%
40%
1995 1998 2001 2004 2007 2010 2013 2017 90%
1995 1999 2003 2008 2012 2017
2. More earnings downgrades

Sell-side earnings forecasts tend to lag the oil price and have not yet reflected recent
weakness. This makes the sector very vulnerable to further earnings downgrades, with
earnings momentum already negative and below that of the market. We note that the
Bloomberg 2017 and 2018 year-end median consensus forecast for Brent is still $58pb

5 July 2017
and $62pb, respectively, and the chart below would also suggest that analysts are using
an oil price of around $56-58pb in their earnings models.
Figure 55: Historically, earnings have followed the Figure 56: The earnings momentum of European
oil price with a lag of 8 weeks energy stocks is weak and likely to worsen
125 Europe Energy 3m breadth Rel mkt
17
115 30%
MSCI Europe Energy, 12-
month forward EPS 105
15
Oil brent, 8-week lead, rhs 20%
95
13 85 10%
75
11
0%
65
9 55 -10%
45
7 -20%
35
5 25 -30%
Aug 14 Apr 15 Nov 15 Jun 16 Feb 17 Sep 17 1996 1999 2003 2006 2010 2013 2017
3. The sector is unusually levered

Furthermore, the rise in corporate leverage has made the sector more vulnerable to a rise
in the cost of debt than has been the case historically and requires the sector to make a
FCF yield above the dividend yield to avoid further increasing leverage.
Figure 57: The US and European IOCs are now highly levered
15% US & European integrateds Net debt as % of total assets
13%
11%
9%
7%
5%
3%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
4. Peak in capex reductions has passed

Global integrateds have already been through a period of unprecedented cost and capex
cuts. According to IHS Markit, upstream capex and opex costs have fallen by 26% and
17%, respectively, while capex is down 21% year-on-year. We are not expecting many
further cuts from here, which is in line with our energy team's expectation: they expect

5 July 2017
capex levels to pick up from here, but with more capital moving towards short cycle
projects (especially in the case of US oil majors).
Figure 58: Operating costs are down 17% from peak Figure 59: Upstream capital costs have fallen 26%
from peak
210 Upstream Operating Costs Index Upstream Capital Cost Index
230
190
210
170 190
Currently 17% below peak

170
150 Currently 26% below
peak
150
130
130
Cost index (2000=100)
110 Cost index (2000=100) 110
90 90
2000 2002 2004 2006 2008 2010 2012 2014 2017 2002 2004 2005 2007 2008 2010 2011 2012 2014 2015 2017
Source: IHS Markit, Credit Suisse research Source: IHS Markit, Credit Suisse research
5. Severe structural risks are facing the sector

There is a wide range of structural risks facing the sector:
i. IOCs are not able to control the oil price. The large listed mining companies control
a significant part of the global production in industrial commodities. This gives them a
significant amount of control over commodity prices (i.e. when they cut capacity, supply
drops enough to impact prices). For example, the top four quoted iron ore producers
control 70% of the seaborne iron ore market.
However, this is not the case in the oil space, where state-owned producers control
around three quarters of the global oil production and capacity cuts by listed IOCs tend
to have only a very limited impact on the price of oil. Furthermore, IOCs tend be
exposed to the high end of the cost curve and are therefore the first to feel the pain
when the oil price drops.
ii. Saudi Aramco – a big competitor for funds. Owing to its significant exposure to low
cost oil, Saudi Aramco could be a competitor for funds.
iii. Cost cuts – the low-hanging fruit is gone. Oil companies have already gone through
significant cost cuts (see above), suggesting that most self-help has been seen and the
potential for further cost cuts is very limited.
iv. A structurally inefficient industry: On the back of increasing costs, higher taxes,
inefficiencies and overinvestment, the CFROI® per USD on the oil price has sharply
fallen and is now 92% below its peak in the late 1990s.
v. The role of gas might be overstated. With the rise of renewables and battery storage
technologies, the long term role of gas and LNG could be overstated. Our team
currently sees the cost of a megawatt hour at c€51-66/MWh for gas and coal, while
offshore wind projects being sanctioned now and coming online in 2021 have a
€70/MWh all-in cost. However, Mark Freshney on our utilities team sees this falling to

5 July 2017
€48-52/MWh (nominal) for projects commissioning in 2024/25. This matters for those
companies that have been heavily investing in LNG and gas exploration.
vi. Peak oil is approaching. There are several "industry experts" that are predicting oil
demand to peak in the next 15 years. For example, Shell expects oil demand to peak in
the next 5 to 15 years, the World Energy Council expects the use of petroleum to peak
in 2030 and Michael Liebreich, founder of Bloomberg New Energy Finance, predicts a
peak in 2025 (source: Bloomberg, 2 November 2016).
Figure 60: The CFROI per USD on the oil price has fallen sharply over the last
two decades
0.5%
0.4% CFROI (used in valuation)/Brent
0.3%
0.2%
0.1%
0.0%
1995 1997 2000 2002 2004 2006 2008 2010 2013 2015 2017
Source: Credit Suisse HOLT®, Thomson Reuters, Credit Suisse research
The screen below shows European IOCs that are either Outperform- or Underperform-
rated by Credit Suisse analysts.
Figure 61: Outperform- and Underperform-rated European IOCs


rel to
Name Abs above/below Abs above/below FCY DY change to 3m EPS 3m Sales recommendation Credit Suisse rating
Industry
Bp 15.5 81% 39% 0.8 -29% 4.6 6.7 29.8 -9.5 -1.0 2.5 Outperform
Eni 18.3 95% 31% 0.9 -14% 10.4 5.9 107.4 0.2 -3.3 2.2 Outperform
Galp Energia Sgps 19.7 103% -19% 2.2 -16% 2.6 3.8 -6.1 -8.5 -8.6 2.6 Outperform
Royal Dutch Shell 13.5 70% 20% na na 8.1 7.0 61.1 -4.3 -0.8 2.3 Outperform
A(Lon)
Omv 12.7 66% 35% 1.7 85% na 2.7 52.6 36.6 -1.8 3.1 Underperform
Statoil 13.9 72% 10% 1.5 0% 0.6 5.3 78.5 6.1 -0.7 2.8 Underperform
OFS: a play on oil capex

We would argue that OFS is a more attractive way to gain exposure to the energy sector
than IOCs for the following reasons:
i. A pick-up in capex: While OFS stocks were at the center of opex and capex cost
cutting, we would argue that if anything energy companies are now underinvesting
and capex should pick up from here. This is at a time when the capex to depreciation
ratio is way below its norm in the US (see Figure 20). Furthermore, the current year-

5 July 2017
on-year change in the oil price suggests stabilisation in the year-on-year growth in
capex.
ii. Cheap on P/B and P/E: European OFS trade on a similarly low P/B multiple relative
as the integrateds do; however the sector looks much cheaper than the IOCs on 12m
forward P/E relative to the market.
Figure 63: The P/B relative of European OFS

Figure 62: Capex seems to have troughed companies is at a 17-year low
180% Oil price, % chg y/y Europe OFS P/B rel market Average
63%
185%
Global oil & gas capex, % 53%
chg y/y, 18 month lag, rhs 165%
130%
43%
145%
33%
80%
23% 125%
13% 105%
30%
3%
85%
-20% -7%
65%
-17%
-70% -27% 45%

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2000 2002 2004 2007 2009 2012 2014 2017
iii. Higher-beta play on the oil price: OFS companies tend to have a higher beta on the
oil price than IOCs, making them better plays on a small rise in the oil price.
Figure 64: European OFS companies are trading Figure 65: OFS have a higher beta on the oil price
below their norm on 12m forward P/E than IOCs
Europe OFS 12m fwd P/E rel market 1.2 12m rolling Beta Global of IOCto oil price
Average (+/- 1SD)
12 m rolling Beta of Global OFS to the oil price
160% 1.0
140% 0.8
120% 0.6
100% 0.4
80% 0.2
60% 0.0
-0.2
40%
1999 2002 2005 2008 2011 2014 2017
2000 2002 2004 2006 2008 2010 2013 2015 2017
The screen below shows European OFS companies that are Outperform-rated by Credit
Suisse analysts.

5 July 2017
Figure 66: Outperform-rated European OFS companies


Industry rating
Petroleum Geo -5.4 nm na 0.4 -71% -7.8 0.0 -14.7 nm -2.0 2.4 Outperform
Services Geophs.
Tgs-Nopec 24.8 129% 32% 1.7 -2% 4.7 3.0 141.4 -0.5 0.6 2.5 Outperform
Hunting 72.3 377% 132% 0.9 -33% 1.1 0.0 32.6 nm 0.6 2.7 Outperform
Weir Group 17.6 103% 7% 2.8 17% 4.9 2.6 -36.3 5.2 4.1 2.6 Outperform
Technipfmc (Par) 16.3 85% -24% na na 5.9 1.3 47.1 13.7 3.4 2.6 Outperform
US OFS: more expensive but better quality

Similarly to IOCs and European OFS companies, US OFS companies trade significantly
below their norm on P/B relative to the market (though we would note that they look
expensive relative to European OFS companies on P/B).
However, as Phil Lindsay, our European OFS analyst, highlights, the US OFS companies
tend to be of higher quality than their European peers for several reasons – quality of
earnings, through-cycle returns, and contracting risk. US OFS are typically ‘shorter cycle’
and more leveraged to a recovery in oil prices. Hence we believe, in a global context, we
would prefer OFS companies to IOCs and US OFS to European OFS.
Figure 67: US OFS companies are cheap on P/B Figure 68: … but European OFS companies look
relative to the market… cheap relative to their US peers
1.5
175%
US OFS P/B rel market Average
Europe OFS P/B rel US market
155% 1.3
Average (+/- SD)
135%
1.1
115%
95% 0.9
75%
0.7
55%
0.5
35%
1991 1993 1996 1999 2002 2005 2008 2011 2014 2017
0.3
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
The screen below shows US OFS companies that are Outperform-rated by Credit Suisse
analysts.

5 July 2017
Figure 69: Outperform-rated US OFS companies


Industry rating
Halliburton 22.8 119% -1% 3.8 40% 0.6 1.7 -30.5 -16.6 6.7 1.8 Outperform
Schlumberger 30.1 157% 29% 2.2 -28% 1.7 3.1 -38.6 -18.2 -3.2 2.0 Outperform
Weatherford Intl. -6.6 nm na 2.0 17% 2.0 0.0 -77.0 nm 0.1 2.1 Outperform
Rpc 19.5 102% -54% 5.1 71% 6.2 0.1 2.7 254.1 28.7 2.2 Outperform
Us Silica Holdings 12.4 65% -69% 2.2 -35% -2.0 0.7 29.3 33.7 4.1 1.7 Outperform
Fairmont Santrol Hdg. 7.8 41% -88% 3.3 -86% 3.9 0.0 42.1 71.5 7.6 1.8 Outperform
Forum Energy Techs. 337.9 1761% 635% 1.2 -16% -2.6 0.0 -45.6 nm 6.7 2.4 Outperform
Helix Energy Sltn.Gp. -845.0 nm na 0.5 -57% -1.5 0.0 54.7 nm -3.6 1.9 Outperform
Mammoth Energy 23.8 124% -74% 1.9 13% -0.4 0.0 7.1 nm 5.1 1.9 Outperform
Services Resources
Newpark 23.7 124% -34% 1.1 -1% na 0.0 16.9 520.0 7.1 2.0 Outperform
Superior Energy Svs. -8.4 nm na 1.1 -18% -1.3 0.0 19.2 nm 5.4 2.3 Outperform
Tetra Technologies -149.2 nm na 1.3 -23% 1.5 0.0 -51.7 nm 1.5 2.1 Outperform
How to play a rebound in the oil price beyond the oil

sector?
Beyond the oil sector itself, we think there are three key ways to play a rebound in the oil
price that are arguably more attractive than the integrated oil sector itself: through banks,
emerging market equities and mining (as shown in the section on mining above).
Banks: If oil rises, bond yields rise and banks outperform

The oil price has historically had a significant effect on inflation expectations. While the two
series disconnected somewhat in the aftermath of the US presidential election, the decline
in inflation expectations year-to-date has served to restore the old relationship. Thus if the
oil price rises, we would expect inflation expectations to follow.
Around 75% of the decline in nominal US bond yields from their peak in March has been
accounted for by inflation expectations, with the real yield component actually relatively
stable. The decline in inflation expectations has, in turn, matched the fall in the core CPI,
as highlighted in Price momentum and bonds, 26 June 2017. Our economists are of the
view that core CPI will rebound over the coming months; also therefore placing some
upward pressure on inflation expectations.

5 July 2017
Figure 70: Inflation expectations and the oil price Figure 71: The fall in bond yields has been driven by
have 'reconnected' in recent months a fall in inflation expectations, which have in turned
followed the fall in core CPI
3.0% 3.0
116 2.8%
2.5
2.6%
96
2.4%
2.0
76
2.2%
1.5
2.0%
56
Brent - 10 days lead 1.8%

1.0
36 US 10Y inflation swap,rhs US 5y5y breakeven inflation
1.6%
Core CPI, y/y
16 1.4% 0.5
2011 2012 2013 2014 2015 2016 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
If these forces do serve to continue to place upward pressure on bond yields, banks, as
the sector with the highest positive correlation with bond yields, will stand to benefit. We
would also note in this context that European banks have only priced in the current level of
bond yields.
Figure 72: Banks have one of the highest Figure 73: European banks have only priced in
correlation with bond yields current bond yields
2.0
Correlation divided by standard deviation of the12m rolling 3.8
1.5 0.60
correlation of Cont European sectors relative perf versus 10 yr
1.0 German bund yields (over 10 years) 3.3
10 year bund yield (%)
0.5 0.55
2.8 European banks relative (rhs)
0.0
-0.5 2.3 0.50
-1.0
1.8 0.45
-1.5
-2.0 1.3
0.40
-2.5
0.8
Energy
Media
Banks
Div Fin
Telecoms
Insurance
Chemicals
Automobiles
Metals & Mining
Semiconductors
Technology Hardware
Utilities
Food Producers
Transport
Consumer services
Pharmaceuticals
Food Retail
Healthcare Equip
Consumer Durables
Capital Goods
Beverages
Pulp & Paper
Software
Commercial Services
Real estate
Retailing
Tobacco
Europe Infrastructure
Household Products
0.35
0.3
0.30
-0.2
-0.7 0.25
2009 2010 2011 2012 2013 2014 2015 2016 2017

5 July 2017
Banks have performed well in recent weeks, but we think they could continue to
outperform because: (i) they are not particularly overbought, as shown in the first chart
below; and (ii) their P/E relatives remain mid-range.
Figure 74: On price momentum, European banks are Figure 75: …and are trading near to their historical
neutral relative to the market… norm on 12m forward PE relative to the market
30% European Banks rel to mkt % dev from 6mma 112%

Overbought Pan Eur banks 12m fwd PE rel mkt
Average
Average (+/- 1 sd)
20% 102%
10% 92%
0% 82%
-10% 72%
-20% 62%
Oversold
-30% 52%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 1997 2000 2004 2007 2010 2014 2017
Indeed, the price reversal seen in the past three weeks has probably not yet run its course
(see Price momentum and bonds, 26 June).
Figure 76: Momentum as a style is very overbought in the US …
10%
5%
0%
-5%
US
-10%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
GEM equities
Despite a significant decline in the commodity weighting of GEM equities, they remain
overweight commodities relative to developed markets, with commodities accounting for
14% of market cap in GEM (17% if we exclude US-listed GEM technology names)

5 July 2017
compared to 11% in DM. As a result, their relative performance continues to correlate with
oil, as shown in the first chart below.
On a country basis, 26% of GEM countries are net commodity exporters, compared to just
6% in the developed world (i.e. Australia, Canada and Norway).
Figure 77: GEM relative performance has been Figure 78: GEM's exposure to energy sectors is still
correlated with oil prices higher than those of developed markets
150 Resource-realted sectors (energy & materials), %
3.8 MSCI EM / MSCI AC 40% market cap
World 130 GEM Developed
Brent oil, rhs 35%
3.3
110
30%
2.8 90
25%
70
2.3
50 20%
1.8
30 15%
1.3
10 10%
0.8 -10 5%
1999 2002 2005 2009 2012 2015 2002 2004 2006 2008 2010 2012 2014 2016
The declining commodity share of market cap also serves to mask the ongoing fiscal and
trade dependence on commodities in a number of large emerging market economies, as
shown in the second chart below.
Figure 80: Commodity dependence of national

Figure 79: It is the rise of tech that has weighed on income, exports and government revenues in major
the commodity share emerging markets
Energy + Materials as % of EM market cap
40% Tech as % of EM market cap
35% % of total
Commodity % of fiscal
merchandise
30%
exports % GDP revenues
exports
25%
Brazil 7% 57% 10%
Indonesia 13% 55% 25%
20% Malaysia 28% 36% 33%
15% Mexico 7% 21% 15%
Russia 20% 78% 50%
10%
5%
0%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

5 July 2017
The broader attractions of GEM equities remain in place: (1) GEM currencies ex the RMB
are c28% cheaper than their export market share would imply; (2) valuations remain
attractive, with the sector adjusted PE at a c19% discount relative to DM; and (3) our
structural view of a weaker dollar helps (92% of the time the dollar weakens over a five-
year view, GEM equities have outperformed). We increased our overweight of GEM in
April (see Changes to Regional Strategy, 19 April 2017).
Figure 81: GEM currencies are, in aggregate, around

28% cheap when compared to their global export Figure 82: GEM equities trade near their 10-year low
market share on sector-adjusted P/E relative to DM
-35% GEM currency valuation (ex China) vs US on PPP
GEM export market share, ex China, rhs 15% GEM sector-adjusted 12m fwd P/E rel Dev.World
110%
-40% Average (+/- 1SD)
14% 100%
-45%
90%
13%
-50%
80%
12%
-55%
70%
11%
-60% 60%
-65% 10% 50%
-70% 9% 40%
1998 2000 2003 2006 2008 2011 2014 2017 1996 1999 2003 2006 2010 2013 2017
Among the emerging market economies, Russian and Brazilian equities have the highest
positive correlation to the oil price.
Figure 83: Russia and Brazilian equities have had the strongest positive
correlation with oil prices over the last 10 years
0.55
0.45
Emerging markets relative performance (in $ terms) correlation with oil prices
0.35
0.25
0.15
0.05
-0.05
-0.15
-0.25
Russia
Colombia
Korea
Indonesia
Brazil
Mexico
Turkey
Poland
Taiwan
India
Chile
Philippines
Malaysia
Hungary
China
South Africa

5 July 2017
Russia
Russia stands out as the country with the highest exposure to the oil price. Oil exports
account for 9.4% of GDP, 28% of fiscal revenues and nearly half of merchandise exports.
If we assume an oil price of $51/bbl, the Russian current account surplus would be 2.1%
of GDP, the budget deficit 2.6% of GDP and government debt just 10.4% of GDP,
according to our economists.
Our GEM strategists are overweight of Russia (see their piece, Russia: a tactical
overweight trade, 23 June), and we would agree for the following reasons:
i. Russia ranks the top on our GEM composite country scorecard, with one of the world's
cheapest currencies and reasonably strong fundamentals (see our GEM country
scorecards in the appendix).
ii. It may be the case that sanctions-related anxiety is near a peak (with the US Senate
recently passing much more aggressive sanction measures that require the HoR to
vote on and in turn the president to approve).
iii. Our GEM equity strategy team's model shows c30% upside potential to Russian
equities.
iv. The payout ratio in Russia is rising, as the second chart below illustrates.
Figure 84: Our GEM strategists' model suggests Figure 85: Russia's dividend payout ratio has been
c30% upside potential rising
Model inputs Coeff. P-value Current Scenario Upside 70
21 Jun y/e 2017 from

60
current
Oil (Brent) 0.39 0.000 45.9 60.0 30.9% DM
50
Govt. 10 year BY % -2.83 0.002 7.8 8.0 20 bps
M2 growth % yoy 0.37 0.000 10.1% 7.5% -2.61 ppt Russia
40
IFO business expec. 1.88 0.000 107 104 -2.3%
EM
30
MSCI Russia
21 Jun y/e 2017 20
Adj R square: 0.74 Current 498 498

10
Observations: 162 Predicted 536 644
Intercept 0.00 Upside % 7.7 29.2
0
Jan 01 Jan 04 Jan 07 Jan 10 Jan 13 Jan 16
Source: Credit Suisse GEM Equity Strategy research Source: Credit Suisse GEM Equity Strategy research
v. Usually the banks embody the country risk, and in our view the Russian bank sector
appears relatively attractive. The P/B - RoE trade-off is amongst the most attractive
globally at a time when private sector credit growth has already started to recover and
NPLs have peaked.

5 July 2017
Figure 86: Emerging market banks price-to-book

multiple versus profitability Figure 87: Russia: non-performing loans (% of total
2.5
Indonesia
Price-to-book ratio (x)
9%
2.3
2.1 8%
Chile
India Mexico Household
1.9
Philippines
Hungary 7%
1.7 Total
Malaysia Czech Brazil
Poland South Africa
1.5
Thailand 6% Corporate
1.3
MSCI EM Russia
1.1 5%
Taiwan Turkey
0.9
China
4%
0.7
Korea
ROE (%)
0.5
6 8 10 12 14 16 18 3%
Jan 09 Jan 11 Jan 13 Jan 15 Jan 17
Source: Credit Suisse GEM Equity Strategy research Source: Credit Suisse GEM Equity Strategy research
The screen below shows non-Russian stocks with high Russian exposure that
consequently might benefit from a bounce in the oil price.
Figure 88: European and Japanese companies with high exposure to Russia

Sales Exposure to rel to Credit Suisse
Russia (%) Industry rating
Nokian Renkaat 26% 17.1 189% 5% 3.4 25% 3.8 4.3 5.5 1.0 1.9 2.8 Not Covered
Fortum 20% 19.5 118% 20% 0.9 -35% 1.1 6.1 55.9 4.1 6.7 3.4 Neutral
Telia Company 19% 12.8 90% 3% 1.9 17% 3.5 5.3 23.7 0.8 1.2 2.8 Neutral
Carlsberg 'B' 18% 20.4 93% 29% 2.1 67% 4.2 1.8 -39.5 1.0 0.2 3.1 Underperform
Japan Tobacco 15% 16.9 83% -10% 2.9 36% 5.1 3.5 -10.2 -0.3 -1.6 2.2 Outperform
Adidas 10% 25.2 142% 35% 5.3 127% 1.7 1.4 -15.0 1.9 1.6 2.5 Neutral
Renault 8% 5.4 59% -68% 0.8 28% 7.5 4.2 195.4 4.3 4.4 2.3 Not Covered
Telenor 7% 13.5 95% 2% 4.1 78% 3.3 5.8 44.9 -7.4 -3.4 2.9 Underperform
Henkel 6% 19.3 85% 23% 3.2 59% na 1.7 na -1.2 1.5 1.8 Not Covered
Jcdecaux 4% 25.4 142% -4% 2.6 35% 7.4 2.0 -23.9 -4.1 0.8 2.9 Not Covered
Unilever (Uk) 3% 21.6 94% 17% 38.3 378% 4.0 2.9 -11.6 5.9 0.2 2.4 Neutral
Source: Thomson Reuters, Company data, IBES, MSCI, HOLT, Credit Suisse research
Brazil: the second most oil-sensitive market, but…

Brazil is more tricky because as above it no longer has a clearly cheap currency, and the
currency has been the key driver of Brazilian equities. Statistically, it is a less oil sensitive
equity market than Russia.

5 July 2017
Figure 89: The BRL is almost trading at the level Figure 90: BOVESPA relative performance moves in
implied by its global export market share line with the BRL
1.5% Brazil exports % of World exports 0% 240 1.0

Currency deviation from PPP, rhs
-10% 220
1.4% 1.5
200
-20%
1.3% 2.0
180
-30%
1.2% 160 2.5
-40%
140 3.0
1.1%
-50%
120
1.0% 3.5
-60% 100
0.9% BRAZIL BOVESPA / S&P500, lhs 4.0

-70% 80
USDBRL, rhs (inv)
0.8% -80% 60 4.5

2000 2002 2004 2007 2009 2012 2014 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Both our GEM strategists and we on the Global Equity Strategy team are benchmark of
Brazil (having downgraded earlier this year).
Malaysia
Our GEM equity strategy colleagues are overweight Malaysia (see Buying Malaysia: the
ultimate contrarian trade, March 2017), which also has one of the cheapest currencies
within GEM on our scorecard.
Mexico... no longer much of an oil play
In Mexico, c80% of exports go to the US, and exports are 35% of GDP. Hence the
Mexican stock market has one of the highest correlations with ISM in spite of MSCI
Mexico's low US sales exposure (c12%).
The equity market's sensitivity to oil is quite low, as shown above, which is not that
surprising given that the economy's reliance on oil has declined somewhat. In particular,
oil's contribution to government fiscal revenue has dropped significantly from nearly 40%
in 2012 to 16% in 2016.

5 July 2017
Figure 91: EM countries' price performance 10y

correlation with ISM new orders (lc terms) Figure 92: Mexico's reliance on oil has decreased
0.55 45%
0.50 40%
35% Mexico
0.45
30% 2012
0.40 2016
25%
0.35
20%
0.30 15%
0.25 10%
5%
0.20
Colombia
Hungary
UAE
Poland
India
MSCI EM
Qatar
Thailand
Peru
Greece
Taiwan
Russia
South Korea
Mexico
China
Chile
Brazil
Malaysia
Egypt
Czech Rep.
Indonesia
Turkey
South Africa
Philippines
0%
Oil exports as a % of Oil exports as a % of Oil as a % of fiscal
GDP total merchandise revenues
exports
Source: Credit Suisse GEM Equity Strategy research Source: Credit Suisse Latin American Economics team

5 July 2017
Appendix
Appendix 1
Figure 93: Emerging markets composite scorecard

Currency Overheating External/Internal Net commodity
Equity valuation (z- Exposure to China Weighted z-
Country valuation (z- (Unemployment dev vulnerability (z- exports (% of
score) as % of GDP score
score) from average) score) GDP)
Weight 25% 25% 10% 25% 10% 5% 100%

Russia 1.10 0.81 -14% 0.22 2% 17% 0.59
Turkey 0.50 0.88 25% -0.90 0% -2% 0.29
Malaysia -0.14 1.12 7% 0.24 9% 5% 0.26
Taiwan 0.37 0.25 -16% 1.50 17% -8% 0.25
Hungary -0.17 0.42 -50% 0.95 1% -3% 0.19
Mexico 0.22 1.19 -27% -0.64 1% 0% 0.14
Czech Republic 0.40 0.11 10% -0.28 1% -4% 0.14
Poland 0.39 0.87 -33% -0.44 1% 0% 0.13
Korea 0.86 -0.54 16% 0.66 11% -8% 0.10
India -0.61 0.24 44% -0.15 1% -4% 0.06
South Africa -0.62 0.66 13% -0.50 4% 4% -0.03
Brazil -0.11 -0.70 33% -0.26 3% 4% -0.07
China 0.77 -0.24 -2% -0.07 na -3% -0.07
Indonesia -0.87 0.74 -20% -0.60 2% 4% -0.20
Chile -0.12 -0.22 -10% -0.42 8% 16% -0.23
Philippines -0.95 -0.07 -4% -0.23 5% -3% -0.37
High z-scores are desirable: cheap markets, cheap currency, low overheating risk, open economy, low exposure to China with a modest upside bias to the oil (commodity)
price (All z-scores are capped at +/- 1.5 standard deviation)

5 July 2017
Appendix 2
Figure 94: Currency valuation scorecard (all factors equal weighted)

Deviation of GDP-adjusted big
Big mac, std IMF PPP IMF PPP, std from
REER from long Real bond yield mac deviation from Avg Z-score Rank
from 10y avg deviation (%) 10y avg
term trend PPP (%)
Turkey -19.5% 10.2% -11.0 -2.2 -60.2 -2.4 -1.4 1
Mexico -16.6% 7.3% -27.3 -1.9 -52.1 -2.7 -1.1 2
Malaysia -8.6% 3.9% -42.1 -1.8 -66.3 -2.1 -1.0 3
Russia -11.3% 7.5% -30.0 -1.1 -58.7 -1.2 -0.8 4
Indonesia -4.6% 7.0% -17.8 -1.3 -68.5 -0.7 -0.7 5
Poland -11.1% 3.3% -28.5 -1.5 -53.4 -1.8 -0.7 6
South Africa 8.6% 8.5% -35.6 -1.8 -52.1 -1.2 -0.6 7
Colombia -12.4% 6.2% 12.3 -1.3 -55.8 -1.3 -0.5 8
Hungary -13.1% 3.2% -4.7 -1.5 -52.1 -1.6 -0.5 9
Czech Republic -10.8% 0.7% -15.0 -1.2 -42.8 -1.7 -0.2 10
India 8.2% 6.6% -9.7 1.2 -72.2 -1.2 -0.2 11
Taiwan 17.7% 1.1% -40.5 -1.7 -50.2 -1.6 -0.1 12
Philippines 16.7% 5.0% -4.5 -0.5 -63.2 -0.7 0.0 13
Chile -5.0% 3.9% 11.9 -1.0 -41.7 -0.9 0.0 14
Brazil -12.4% 10.8% 67.6 0.0 -36.0 -0.6 0.2 15
China 1.0% 3.6% -6.5 0.8 -48.5 0.0 0.4 16
South Korea 11.3% 2.2% -4.3 -1.1 -24.1 -1.0 0.5 17
Appendix 3
Figure 95: GEM fundamental scorecard

2017&18F avg current Net foreign assets, Portfolio inflows FX reserves less Private sector debt to GDP
Weighted z-
Country account, % GDP % GDP 2016 & 2017F avg, % GDP financing needs, % GDP deviation from trend (in pp)
score
30% weight 17.5% weight 17.5% weight 17.5% weight 17.5% weight
Taiwan 11.4 200.7 -10.7 63.2 2% -2.4
Hungary 5.3 76.7 0.2 9.3 -39% -1.0
South Korea 5.6 -2.6 -4.7 20.4 5% -0.7
Russia 2.0 12.0 0.6 22.0 0% -0.2
Malaysia 2.4 2.1 -3.4 19.7 17% -0.2
China 1.7 15.8 -0.7 23.2 28% 0.0
India -1.5 -16.2 0.5 8.3 -7% 0.2
Brazil -2.0 -43.7 -0.4 13.7 0% 0.2
Philippines -0.7 -10.5 0.3 15.0 13% 0.2
Czech Republic 0.6 -43.0 0.4 3.0 6% 0.3
Chile -2.2 -16.8 1.1 2.2 2% 0.4
Poland -1.9 -80.4 0.2 -3.0 -4% 0.5
South Africa -3.7 -9.9 1.6 -3.0 -3% 0.5
Indonesia -1.6 -38.8 0.2 -4.5 14% 0.6
Mexico -3.1 -46.1 2.1 11.3 13% 0.6
Turkey -4.8 -41.5 1.5 -10.8 7% 0.9

5 July 2017
Appendix 4
Figure 96: The current account deficit in Brazil has closed from in excess of 4%
of GDP to almost zero
8.0 Russia current account as % of GDP
Brazil current account % of GDP
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
May-13 Mar-14 Jan-15 Nov-15 Sep-16
Appendix 5
Figure 97: The OPEC production cut has essentially returned the global oil
market close to balance
Production at Production Targeted cut, Change
Country Compliance
time of deal May '17 000's b/d 000's b/d
Saudi Arabia 10,600 10,030 -486 -570 117%
Iraq 4,620 4,385 -210 -235 112%
Iran 3,720 3,800 90 80 89%
UAE 3,100 2,900 -139 -200 144%
Kuwait 2,920 2,710 -131 -210 160%
Venezuela 2,080 1,980 -95 -100 105%
Angola 1,680 1,640 -78 -40 51%
Nigeria 1,500 1,520 20
Algeria 1,050 1,030 -50 -20 40%
Qatar 670 610 -30 -60 200%
Libya 580 780 200
Ecuador 544 530 -26 -14 54%
Gabon 220 200 -9 -20 222%
OPEC 33,284 32,115 -1,164 -1,169 100%
Non-OPEC deal participants 18,749 18,413 -558 -336 60%
of which Russia 11,450 11,150 -300
United States 14,956 15,399 444
Global oil supply 99,080 97,871 -1,209
Global oil demand 97,834 97,673 -161
Supply/demand imbalance -1,246 -198 1,048
Source: EIA, OPEC, Credit Suisse research

5 July 2017
Appendix 6
Figure 98: Chinese corporate bond yields are now Figure 99: …as are Chinese government bond
declining yields
5.0 4.7
8.0 Chinese corporate bond yields (5y AA)
7.5 4.5 China government bond yields 4.2
7.0 10-year
4.0 3.7
1-year
6.5
3.5 3.2
6.0
5.5 3.0 2.7
5.0
2.5 2.2
4.5
4.0 2.0 1.7
3.5
1.5 1.2
Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
Source: Thomson Reuters, Credit Suisse Source: Thomson Reuters, Credit Suisse
Appendix 7
Figure 100: Pan European sector weightings

Over/underweighting Benchmark Recommended Difference from Change from
score weight (a) weight (b) benchmark (bps) (b-a) previous (score)
Software & Services 1.48 2.3 3.4 105
Commercial Services & Supplies 1.31 1.8 2.3 52
Telecoms 1.24 3.9 4.8 86
Banks 1.21 12.0 14.2 222
Pharmaceuticals & Biotechnology 1.17 11.4 13.1 171
Media 1.15 1.7 1.9 22
Insurance 1.07 6.1 6.4 32
Metals & Mining 1.05 2.5 2.55 8 5
Transportation 1.05 1.8 1.8 6
Construction Materials 1.05 0.8 0.9 3
Energy 1.00 6.6 6.5 -11
Consumer Durables & Apparel 1.00 3.4 3.3 -6
Tobacco 1.00 2.0 2.0 -3
Health Care Equipment & Services 1.00 1.6 1.5 -3
Semiconductors & Semiconductor Equipment 1.00 1.4 1.3 -2
Hotels & Leisure 1.00 1.2 1.2 -2
Food & Staples Retailing 1.00 1.1 1.0 -2
Technology Hardware & Equipment 1.00 0.9 0.8 -1
Pulp & paper 1.00 0.4 0.4 -1
Chemicals 0.92 3.9 3.5 -37
Household & Personal Products 0.91 3.9 3.5 -41
Diversified Financials 0.90 3.3 2.9 -38
Utilities 0.88 3.6 3.1 -49
Retailing 0.85 1.2 1.0 -19
Automobiles & Components 0.84 3.1 2.6 -56
Capital goods 0.80 9.9 7.8 -211 -1
Beverages 0.80 2.8 2.2 -60
Real Estate 0.80 1.3 1.0 -28
Food Products 0.70 4.3 2.9 -134
Total 100.0 100.0
Source: Thomson Reuters, Credit Suisse

5 July 2017
Companies Mentioned (Price as of 03-Jul-2017)

Acacia Mining (ACAA.L, 287.3p)
Acerinox (ACX.MC, €11.77)
Adidas AG (ADSGn.F, €168.73)
Anglo American Plc (AAL.L, 1065.0p)
Aperam (APAM.AS, €41.22)
Aurubis (NAFG.F, €68.7)
BHP Billiton (BHP.AX, A$23.23)
BHP Billiton (BLT.L, 1214.5p)
BP (BP.L, 451.3p)
Carlsberg (CARLb.CO, Dkr691.0)
Continental Resources, Inc (CLR.N, $32.33)
DONG Energy A/S (DENERG.CO, Dkr291.6)
ENI (ENI.MI, €13.32)
Evraz (EVRE.L, 220.0p)
Fairmount Santrol Holdings, Inc. (FMSA.K, $3.9)
Ferrexpo Plc (FXPO.L, 208.8p)
Fortescue Metals Group Ltd (FMG.AX, A$5.26)
Fortum (FORTUM.HE, €13.97)
Forum Energy Technologies, Inc. (FET.N, $15.6)
Fresnillo plc (FRES.L, 1466.0p)
Galp Energia (GALP.LS, €13.5)
Glencore (GLEN.L, 301.6p)
Halliburton (HAL.N, $42.71)
Helix Energy Solutions (HLX.N, $5.64)
Hunting Plc (HTG.L, 491.3p)
Japan Tobacco (2914.T, ¥3,950)
KAZ Minerals Plc (KAZ.L, 539.0p)
Kumba Iron Ore (KIOJ.J, R174.62)
Mammoth Energy Services (TUSK.OQ, $18.6)
Naspers (NPNJq.L, $1.75)
Newpark Resources, Inc. (NR.N, $7.35)
OMV (OMVV.VI, €46.02)
Petroleum Geo Services (PGS.OL, Nkr15.1)
Pioneer Natural Resources (PXD.N, $159.58)
RPC, Inc. (RES.N, $20.21)
Rio Tinto (RIO.AX, A$63.6)
Rio Tinto (RIO.L, 3374.5p)
Rosneft (ROSNq.L, $5.5)
Royal Dutch Shell plc (RDSa.L, 2071.5p)
SSAB (SSABa.ST, Skr39.63)
Schlumberger (SLB.N, $65.84)
Statoil (STL.OL, Nkr139.5)
Superior Energy Services, Inc. (SPN.N, $10.43)
TGS-NOPEC Geophysical (TGS.OL, Nkr176.4)
TechnipFMC (FTI.PA, €24.62)
Telenor (TEL.OL, Nkr139.2)
Telia Company (TELIA.ST, Skr38.94)
Tencent Holdings (0700.HK, HK$280.8)
Tetra Technologies, Inc. (TTI.N, $2.79)
Thyssenkrupp (TKAG.F, €24.8)
Total (TOTF.PA, €44.16)
U.S. Silica (SLCA.N, $35.49)
Unilever (ULVR.L, 4172.5p)
Unilever (UNc.AS, €48.5)
Vale (VALE.N, $8.75)
Weatherford International, Inc. (WFT.N, $3.87)
Weir (WEIR.L, 1774.0p)
Disclosure Appendix
Analyst Certification
The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views
expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European rati ngs are based on a stock’s total
return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the
most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings
are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian
ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relat ive attractiveness of a stock’s total return potential within
an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An
Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned

5 July 2017
where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of a ssociated risks. Prior to 18
May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July
2011.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.
Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the
company at this time.
Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment
view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or
valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 44% (65% banking clients)
Neutral/Hold* 40% (59% banking clients)
Underperform/Sell* 14% (53% banking clients)
Restricted 2%
*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely
correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to
definitions above.) An investor's decision to buy or sell a security should be based on inve stment objectives, current holdings, and other individual factors.
Important Global Disclosures
Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products
may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made
available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the
frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with
the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely
manner, please contact your sales representative or go to https://plus.credit-suisse.com .
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the
market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer
to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-
suisse.com/sites/disclaimers-ib/en/managing-conflicts.html .
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot
be used, by any taxpayer for the purposes of avoiding any penalties.
Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the
development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see
https://www.credit-suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf .
See the Companies Mentioned section for full company names
Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): PGS.OL, FET.N, RDSa.L, OMVV.VI,
0700.HK, 2914.T, BHP.AX, SLB.N, BP.L, TELIA.ST, TUSK.OQ, TEL.OL, HTG.L, ADSGn.F, KIOJ.J, STL.OL, FXPO.L, ULVR.L, TGS.OL, FMG.AX,
GALP.LS, HLX.N, RIO.AX, FMSA.K, HAL.N, NR.N, TTI.N, FORTUM.HE, ENI.MI, BLT.L, UNc.AS, SPN.N, VALE.N, AAL.L, GLEN.L, ROSNq.L,
PXD.N, KAZ.L, ACAA.L, NAFG.F, RIO.L, FTI.PA, WEIR.L, TOTF.PA
Credit Suisse provided investment banking services to the subject company (RDSa.L, 2914.T, BHP.AX, SLB.N, BP.L, TUSK.OQ, TEL.OL, KIOJ.J,
STL.OL, ULVR.L, TGS.OL, FMG.AX, HLX.N, RIO.AX, FMSA.K, HAL.N, NR.N, BLT.L, UNc.AS, SPN.N, AAL.L, GLEN.L, ROSNq.L, PXD.N, ACAA.L,
RIO.L, TOTF.PA) within the past 12 months.
Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-
banking, securities-related: RDSa.L, SLB.N, BP.L, TEL.OL, STL.OL, WFT.N, RIO.AX, HAL.N, ENI.MI, VALE.N, AAL.L, GLEN.L, ROSNq.L, FRES.L,
RIO.L, TOTF.PA
Credit Suisse has managed or co-managed a public offering of securities for the subject company (2914.T, BP.L, TUSK.OQ, TEL.OL, FMG.AX,
HLX.N, NR.N, AAL.L, TOTF.PA) within the past 12 months.
Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): RDSa.L, 2914.T,
BHP.AX, SLB.N, BP.L, TUSK.OQ, TEL.OL, KIOJ.J, STL.OL, ULVR.L, TGS.OL, FMG.AX, HLX.N, RIO.AX, FMSA.K, HAL.N, NR.N, BLT.L, UNc.AS,
SPN.N, AAL.L, GLEN.L, ROSNq.L, PXD.N, ACAA.L, RIO.L, TOTF.PA
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (PGS.OL, FET.N, RDSa.L,
OMVV.VI, 0700.HK, 2914.T, BHP.AX, SLB.N, BP.L, TELIA.ST, TUSK.OQ, TEL.OL, HTG.L, ADSGn.F, KIOJ.J, STL.OL, CARLb.CO, FXPO.L,
ULVR.L, TGS.OL, WFT.N, FMG.AX, GALP.LS, HLX.N, RIO.AX, FMSA.K, HAL.N, NR.N, TTI.N, FORTUM.HE, RES.N, ENI.MI, BLT.L, UNc.AS,
5 July 2017
SPN.N, VALE.N, AAL.L, GLEN.L, DENERG.CO, CLR.N, ROSNq.L, PXD.N, KAZ.L, EVRE.L, ACAA.L, FRES.L, NAFG.F, RIO.L, FTI.PA, WEIR.L,
TOTF.PA) within the next 3 months.
Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s):
RDSa.L, SLB.N, BP.L, TEL.OL, STL.OL, WFT.N, RIO.AX, HAL.N, ENI.MI, VALE.N, AAL.L, GLEN.L, ROSNq.L, FRES.L, RIO.L, TOTF.PA
As of the date of this report, Credit Suisse makes a market in the following subject companies (0700.HK).
A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of
Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (PGS.OL, FET.N, RDSa.L, OMVV.VI,
0700.HK, 2914.T, BHP.AX, SLB.N, BP.L, SLCA.N, TUSK.OQ, TEL.OL, HTG.L, ADSGn.F, KIOJ.J, STL.OL, FXPO.L, ULVR.L, TGS.OL, WFT.N,
FMG.AX, GALP.LS, HLX.N, FMSA.K, NR.N, TTI.N, FORTUM.HE, RES.N, ENI.MI, BLT.L, UNc.AS, SPN.N, VALE.N, AAL.L, GLEN.L, DENERG.CO,
CLR.N, ROSNq.L, PXD.N, ACX.MC, KAZ.L, EVRE.L, APAM.AS, ACAA.L, FRES.L, NAFG.F, FTI.PA, TOTF.PA) within the past 12 months.
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (FXPO.L, KAZ.L,
WEIR.L).
Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (KAZ.L).
Credit Suisse beneficially holds >0.5% short position of the total issued share capital of the subject company (ADSGn.F, NR.N).
Credit Suisse has a material conflict of interest with the subject company (VALE.N) . The analyst Ivano Westin has a relationship with a natural
person who may provide remunerated services to one or more of the companies covered in this report.
Credit Suisse has a material conflict of interest with the subject company (ROSNq.L) . Economic sanctions imposed by the United States and
European Union prohibit transacting or dealing in new equity of Rosneft issued on or after the date when the Company became the target of such
sanctions. This report should not be construed as an inducement to transact in any such sanctioned securities.
Credit Suisse has a material conflict of interest with the subject company (WEIR.L) . Richard Menell, a Senior Advisor of Credit Suisse, is a board
member of Weir Group Plc (WEIR.L).
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject
company (FXPO.L). Credit Suisse Securities (Europe) Limited is acting as Dealer Manager to Ferrexpo on the announced exchange offer for its
outstanding US$500,000,000 7.875% notes due 2016
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-
suisse.com/disclosures or call +1 (877) 291-2683.
For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated
within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=307747&v=-7nf5m12vc6xapd3jmhmpikft .
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse
does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events.
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares;
SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not
contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-
suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.
The following disclosed European company/ies have estimates that comply with IFRS: (RDSa.L, OMVV.VI, BP.L, TELIA.ST, TEL.OL, ADSGn.F,
STL.OL, CARLb.CO, ENI.MI, BLT.L, UNc.AS, AAL.L, SSABa.ST, ACX.MC, KAZ.L, EVRE.L, WEIR.L).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (RDSa.L, 0700.HK, 2914.T,
BP.L, TUSK.OQ, TEL.OL, FXPO.L, TGS.OL, FMG.AX, HLX.N, HAL.N, NR.N, AAL.L, GLEN.L, PXD.N, TOTF.PA) within the past 3 years.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
This research report is authored by:
Credit Suisse International ............... Andrew Garthwaite ; Marina Pronina ; Robert Griffiths ; Nicolas Wylenzek ; Alex Hymers ; Mengyuan Yuan
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important
disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research
analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the
FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a
research analyst account.
Credit Suisse International ............... Andrew Garthwaite ; Marina Pronina ; Robert Griffiths ; Nicolas Wylenzek ; Alex Hymers ; Mengyuan Yuan
Important MSCI Disclosures
The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of
MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create and financial products,
including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI,
its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of
originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of
the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any
liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.
The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and
Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Credit Suisse.

5 July 2017
Important Credit Suisse HOLT Disclosures

With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this
report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the
specific views disclosed in this report.
The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative
algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the
companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default
algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data
vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The
adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national
borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a
user then may adjust the default variables to produce alternative scenarios, any of which could occur.
Additional information about the Credit Suisse HOLT methodology is available on request.
The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT
valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The
default variable may also be adjusted to produce alternative warranted prices, any of which could occur.
CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered
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and valuation advisory service of Credit Suisse.
Important disclosures regarding companies or other issuers that are the subject of this report are available on Credit Suisse’s disclosure website at
https://rave.credit-suisse.com/disclosures or by calling +1 (877) 291-2683.

5 July 2017
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Global Equity Strategy: Upgrade Mining, Benchmark Oil

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Global Equity Strategy: Upgrade Mining, Benchmark Oil

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5 July 2017

Global Equity Strategy

Global Equity Strategy 2

Upgrade mining, benchmark oil

Mining: raise to overweight

Figure 1: There has been a sharp divergence

0.0 1.00 30% 25

1. Mining and oil are closely correlated

Global Equity Strategy 3

Figure 4: …and hence so too are mining stocks and

0.0 -10 0.0 0

Dev market banks

Global Equity Strategy 4

3. Rising yields and inflation expectations could be good for mining

German Real estate cos

Pulp & Paper

Global Equity Strategy 5

5. The valuation of the sector is attractive

70% European mining stocks P/B rel 5%

Global Equity Strategy 6

1.8 MSCI UK Mining 12m Fwd PE rel mkt

Average (+/- 1 sd)

Source: Thomson Reuters, Credit Suisse research

6. We see only a small slowdown in China

-20 Chinese IP, y/y, rhs -15%

Source: Thomson Reuters, Credit Suisse research

i. Infrastructure investment growth is likely to remain resilient. As observed by our

Global Equity Strategy 7

Figure 19: Total social financing including local

Global Equity Strategy 8

7. Consensus numbers are not factoring in a rise in industrial commodity prices

Global Equity Strategy 9

Source: Thomson Reuters, Credit Suisse

8. China continues with its supply-side cuts

9. Speculative positioning in metals has declined from its peak

Global Equity Strategy 10

4% Actual (rhs) 140000 20,000

-4% 100000 10,000

Global Equity Strategy 11

12. The mining sector is more than 1 standard deviation oversold

Global Equity Strategy 12

Source: Credit Suisse European Mining team

Figure 31: European mining stocks that are Outperform-rated by CS analysts

rel to mkt % rel to mkt % Price, % Consensus

Global Equity Strategy 13

Where next for the price of oil?

2. There is more to oil markets than just US shale production

Global Equity Strategy 14

Figure 34: On some simple assumptions, oil oversupply would decline by

Source: EIA, Thomson Reuters, Credit Suisse research

ii. Supply side disruption owing to political difficulties is unusually low

Global Equity Strategy 15

Source: EIA, Credit Suisse research

iii. A pick-up in demand

iv. Decline rates

Global Equity Strategy 16

3. Has the role of US shale been overestimated?

Global Equity Strategy 17

4. The impact of EVs on oil demand may be exaggerated

5. A dollar bear market helps

180 6 yrs 140 73

Global Equity Strategy 18

Figure 42: The ratio of oil to copper