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Special Report ‐ Sleeping Beauties ‐ Prime Prospects for 2011
December 2010
Sleeping Beauties ‐ Prime Prospects for 2011 Richard Curr – Head of Dealing

Although a considerable amount of uncertainty remains over the economy and prospects for 2011, our team of analysts have been scouring
the markets seeking out opportunities for our members. We have identified 5 sleeping beauties ‐ stocks that we believe will explode into life
and deliver stellar returns for traders during the year.

‐ Markets to date
5,412 ‐ The opening price for the FTSE100 on the
first trading day of 2010, which against much
adversity it has gone on to deliver a near 10% gain
for the year. Many market observers and those
closely tracking leading UK stocks will regard this
as quite an achievement, especially given the
economic and indeed political backdrop of the
past 12 months. While modest growth combined
with accelerating inflation was perhaps
anticipated, the massive spending cuts in public
sector by the UK government and two major
European bailouts were perhaps less visible in
most crystal balls at the start of 2010. Other
helpful developments such as a forthcoming VAT
hike to 20 percent in January, and a UK housing
market which seems to be accelerating to the
downside are also a couple of bullets that
investors have had to dodge in recent months.

Resource stocks provided a major opportunity for investors in 2010, with the fate of most sector constituents currently intertwined with the
fate of the emerging market economies such as China, Brazil, and India. While inflation developed into more of a threat in China than many
perhaps had anticipated, the ability of these nations to boost the resources sector in the UK cannot be underestimated. Indeed, cynics would
argue that much of the game in leading blue chips stems from a near vertical rise in oil & gas, and mining stocks which if stripped out of the
equation leave the FTSE100 at no better than flat on the year. There may be a degree of truth in such a view, but we are now without doubt in
the early stages of a post financial crisis recovery and company profits are starting to rebound. While the BRIC nations remain on an even keel
it is unlikely that there will be any relapse in the incipient uptrend, and if 2010 has proved anything, the ability of the stock market to climb a
so‐called wall of worry remains very much intact.

Financial media journalists seeking content for their respective publications during 2010 frequently highlighted the “lost decade” that followed
the dot‐com boom when buy and hold investors in the stock market withdrew their funds when they were by and large unable to get a
significant return on their money. Indeed, in August 2010 it was widely reported that we were supposedly looking at the death of equities.
Ironically, this period was supposed to start in September, inspired by the likely breakdown of the Euro zone, followed by an autumn
bloodbath for stocks. And as ever, “expect the unexpected” proved the best strategy as the result of all this doom mongering was the best
September for the Dow Jones for 71 years. It may very well be that a positive approach could be one of the secrets to success in 2011.

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research@primemarkets.co.uk
www.primemarkets.co.uk
‐ Prospects for 2011
For 2011, perhaps more than many other recent
years, investors and traders are led to believe that
certain major events, both in the markets and
economy are likely to occur. For instance, it has now
become conventional wisdom that the Euro will not
survive the year; a tale of woe that is being touted
with Nostradamus like certainty among many
leading pundits. The trigger for such a currency
implosion is said to be the likely domino effect
following bailouts for Greece and Ireland, a runaway
debt express train which will shortly pass through
Portugal, Spain and Italy, calling at all stops. The
implication is that while the current €750 billion EU
bailout facility will be expanded, it will never be
enough to fill the financial hole, and it may well be
that Germany, the strongest Euro nation will
eventually decide that saving the single currency is
simply not worth the bother.

Meanwhile, panicked investors and speculators will be rushing into buying Gold, the only true currency of any value, especially as it is highly
likely that the US will have reached QE3 or even QE4 by the middle of the year in a desperate attempt to avoid its own debt / default
nightmare. December 2010 is already providing a foretaste of things to come: the US economy froze as bond yields soared and like peripheral
Euro zone countries, the cost of servicing public sector debt will lead to swinging fiscal tightening. This last aspect will be the key factor in
determining investment / trading strategy over the next year, over and above the issue of the super cycle in commodities and the benefits to
resources companies.

Of course, the fiscal squeeze will continue in the
UK, and there are still a few unknowns for those in
the market to grapple with. The first is exactly what
the effect of a 2.5 percent rise in VAT to 20 percent
will have on the already hard‐pressed consumer. At
the very least we’ll see a dip early in 2011 on the
High street as the artificial pre Christmas rush is
worked out of the system.

Perhaps even more serious will be the
consequences of any further housing market
weakness. The latest Right move (RMV) survey may
be a rather volatile one, but the 3 percent decline
in asking prices between November and December
was no less shocking than the 3 percent fall in
house prices reported by the Halifax in September.
While such data may not necessarily take cash out
of wallets, it will be a major psychological blow,
given that one of the consolation factors from the
banking bailouts of 2008 / 9 were that at least
house prices were expected to remain stable.

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And house prices may be even less stable if the logical action following the November CPI data follows, following the rise to 3.3 percent. This is
bad enough even before the effect of the forthcoming VAT hike, and would normally mean that an interest rate hike was inevitable. The only
salvation here is that the Bank of England almost certainly will push rates up as it would lead to a profits relapse for part nationalised banks
and possible further bailouts. All the more galling when one considers the record bonuses earned by bankers during 2010. Nevertheless, if
food / clothing prices continue to soar there may be little option even though the BoE is caught between a rock and a hard place. A falling
housing market with record low mortgage rates is not going to get any better with a 0.5 or 1 percent rate rise for the part nationalised banks
in H1 2010.

‐ Opportunity Knocks ‐ How our analysts identified the sectors
It is clear as far as the prospects for 2011 and the economy are concerned, we have a quite heady mix to grapple with when considering what
sectors to back and which to avoid or go short of. Additionally, taking the view that 2011 will be much like 2010, only more so is a good
starting point. The sectors that have suffered due to public sector cuts such as drugs, defence and selected support services groups are in the
process of, or have by now delivered cost efficiencies and cut away any fundamental deadwood. For 2011 the sacred cows of margins and
subsequent pressure on profits will be to the fore. We have already evidence of this with such examples as Connaught (CNT), Xchanging (XCH)
and even bigger fish reliant on Government contracts such as Capita (CPI). If one lesson from the last 3 years stands out, it is that the markets
do not suffer fools / companies with weak balance sheets, or painfully bad PR in the case of Autonomy (AU.).

Looking Back To Look Forward – The Best and Worst Sectors of 2010

The winners’ list for 2010 turns up a few surprises. Given all the hype surrounding the mining sector, it is a surprise to learn that out of the top
th
performing sectors, miners have been able to reach only 12 place in a year where record prices for precious metals have vied with massive
economic growth for commodities hungry China. It would appear that despite the gains for the likes of Rio Tinto (RIO) and Billiton (BLT) in
share price terms, investors may have been holding back.

This idea gains traction especially when one compares the performance of the miners with the General Industrials who are placed above
them. This list may in fact provide a salutary lesson for 2011: disregard the gloom and doom reported in the financial media and remember
that the UK manufacturing index hit a 16 year high this December. Other cyclical sectors making the grade among the leaders include
industrial engineering and automobiles, and these sectors would be nowhere in sight, least of all at such dizzy heights had there not been at
least a reasonable degree of momentum in the economy. Personal Goods at the head of the table suggests that there has been an active push
towards the combination of growth with safety, although it could very well be that the perceived emerging markets prospects for the likes of
Burberry (BRBY) and 2010’s IPO hero Supergroup (SGP) have been no less popular, with shares of the latter having tripled in a matter of
months.

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The laggards of the past year also provide valuable strategy lessons for the next 12 months. General retailers have stood out to the downside ‐
even before the hike in VAT coming up in January, and they are joined by food and drugs retailers in a broad based High Street downturn. Cash
hoarding banks are being undermined by exposure to debt contagion fears in the EU, and with mortgage lending at 30 year lows they are
shooting themselves in the foot at the same time in stifling any business that could generate fresh organic growth. There is

Little surprise that the plight of BP (BP.) in the Gulf of Mexico has ensured that its sector of oil & gas producers has been “artificially”
depressed.

5 Sleeping Beauties

The Winning Candidates Will Include:

Companies from weak sectors where the market has oversold to the downside – Aerospace / Defence, Pharmaceuticals, Real estate.
Companies from strong sectors where temporary technical weakness and profit taking makes them attractive
– Mining / Industrial Metals
Standalone opportunities related to special market conditions or company specific news flow
– Volatile markets, low interest rates, geopolitical uncertainty.

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GlaxoSmithkline: Pharmaceuticals Target 1,500p

Bull Points:
– Shifting from developed world to emerging
markets like China
– High new products sales growth
– Perennial over reaction by the market to “star”
drug delays / upsets

Technicals:
Shares in GlaxoSmithkline have been in a rising
trend channel in place on the daily chart since the
beginning of 2009. The support line of the channel
currently runs level with the 200‐day moving
average at 1,221p. The implication is that while this
support level is held, the 2‐year resistance line
projection target for GlaxoSmithkline at 1,500p
could be hit during 2011.

Recent News flow:
th
December 7 : GlaxoSmithkline is to increase its exposure to the fast growing Chinese pharmaceuticals market by paying $70m in cash for
MeiRui, a company with a strong portfolio of urology and allergy products.

October 21st: GlaxoSmithkline reported better than expected earnings per share before restructuring cost, although it admitted that the
operating environment is challenging. Revenues were similar to expectations at £6.81bn in the three months to September 2010, similar to
the same period last year. Revenues were knocked by 2 percent due to US healthcare reform and European government austerity measures.
Underlying sales growth, adjusting for Avandia and Valtrex, is estimated at 6 percent. GSK says this represents the successful refocusing of
investment on key areas. New product sales grew 44 percent to £448m in the quarter.

September 24th: Singapore is to restrict GlaxoSmithkline’s anti‐diabetes drug Avandia, following the EU’s suspension of the marketing of the
drug. The FDA in the US has also decided that Avandia will have to have additional safety labelling but it can continue to be prescribed to new
patients if other treatments do not work.

Fundamental Argument:
Drug stocks remain perennially unfashionable and suffer the perennial problem of the market over reacting with 5 ‐ 10 percent share price
losses when a well‐known drug has problems. In the case of Glaxo this point is underlined very well when in the aftermath of all the Avandia
issues as well as healthcare spending cuts in Europe and the US has amounted to only a 2% fall in revenues at the time of the latest update.
There is clearly a difference between financial media hype and fundamental realities. But nevertheless, to keep the momentum positive
Glaxo’s recent China acquisition illustrates the way that the drugs giant is perfectly able to focus away from debt burdened developed
economies on to cash rich emerging areas.

Recommendation Summary:
Drugs giant GlaxoSmithkline may be regarded by many as a sleeping giant, but it is clear that the group has a solid share price base above
1,200p and consistent revenues despite the doomsters pointing to public sector spending cuts and Avandia issues. This international cash
generator should be more than capable of heading to where the money is, a view underlined by the recent Chinese acquisition move.
GlaxoSmithkline is therefore a Prime Sleeping Beauty and a buy for 2011.

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Man Group: Financial Services Target 340p

Bull Points:
– A big swing in sentiment toward hedge funds by
investors
– Recent GLG Partners acquisition
– Better than expected funds under management

Technicals:
Following multiple support points put in between
200p and 220p between May and September this
year, shares of Man Group broke above their 200‐
day moving average then at 240p and have
remained above the 50‐day moving average now at
274p ever since. With strong support also down to
260p and a September price channel target of 340p
for Q1 2011, Man Group shares appear to be
gathering decent charting momentum.

Recent News flow:
November 4th: Funds under management (FuM) at the end of the third quarter were $1bn ahead of Man Group’s expectations, helped by
strong investment performance and favourable currency movements at the end of September.

October 14th: The $1.6bn acquisition of investment management firm GLG Partners by Man Group, first announced back in May, has been
completed as Man says it intends to make a fast start to fully integrating the new business.

th
September 28 : Hedge fund manager Man Group’s first half profits will fall by a fifth to $215m as performance fees dwindled after a tough
half for its flagship AHL fund. Funds under management have stabilised recently and the end of September was up over the previous three
months to $39.5bn from $38.5bn.

In the view of Prime Markets, the market has remained way too obsessed by the performance of the flagship AHL Fund at Man Group and
issues of funds under management. While these issues are important, it is important to remember that at 0.5 percent base rates, investors are
virtually gagging for any place they can get a decent return on their money. The acquisition of GLG Partners adds to the Man Group offering
and the autumn turnaround in FuM can be expected to gather momentum as the new business is integrated. What also helps Man’s cause is a
Bank of America survey, which found that almost two‐thirds of investors intended to increase allocations to alternative assets in the next 12 to
24 months. This is a significant fundamental plus from any standpoint.

Man Group represents Prime’s big financial play for 2011, as insurers, banks and other plays exposed to fiscal risk are sidelined. Indeed, it
could very well be that the problems of sovereign debt and competitive currency devaluation means that hedge funds like Man are ideally
positioned to deliver historical best‐ever returns.

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Vedanta (VED) : Mining Target 2,950p

Bull Points:
– Shares significantly off year highs
– Cairn deal has disproportionately dampened
sentiment towards Vedanta
– A great emerging markets mining play with takeover
possibilities

Technicals:
Shares in Vedanta have delivered no less than 6
successful probes for support below 2,100p since May,
with the assumption now that the longer the stock
remains above the key 200‐day moving average
support at 2,330p, the greater the prospect of a retest
of the best levels of the year through 2,950p in Q1
2011.

Recent News flow:
th
November 19 : Vedanta has finalized a $6bn financing agreement with a consortium of banks to cover part of the $8.5bn‐9.6bn needed to
acquire 51‐60 percent of Cairn India. The company is buying 31‐40 percent and subsidiary Sesa Goa Ltd the remaining 20 percent.

th
November 11 : Vedanta posted a sharp rise in profits in the six months to September 30 as it tapped into the recovery in commodity prices
with record production of a number of metals. Pre‐tax profits were up to $1.11bn (£690m) from $605m over the same period the previous
year on revenues that soared to $4.58bn from $2.98bn.

October 7th: Vedanta produced record amounts of zinc, lead and aluminium during the second quarter. In the three months to 30 September
it grew refined zinc output by 25 percent to 176,000 tonnes to make it 341,000 tonnes for the half‐year, an increase of almost 22 percent.

Vedanta remains one of the few stocks in its sector not trading well above levels of H1 2010, with the main reason for this clearly the
uncertainty associated with the mega deal proposed for Cairn Energy’s (CNE) India business. The Prime view is that the markets have now had
months to factor the ramifications of such a deal into the mix, and have already sold the rumour. It is likely that if there had been no such
M&A activity proposed, Vedanta shares would already be well clear of £30. From current levels under £25, with commodities prices still
soaring, it would appear that Vedanta will rally into 2011 under most foreseeable scenarios.

With the Cairn India deal already in the price, we view Vedanta as an attractive emerging markets mining play still around 25 percent off its
year highs, and trading at a significant discount to the equivalent share prices of its peers. Buy.

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Unilever (ULVR): Food Producers & Processors Target
2,300p

Bull Points:
– Unilever is in a non‐cyclical sector when economic fears
are still rife.
– Emerging markets growth potential
– Underlying sales growth approaching 4 percent

Technicals:
The start of December has seen Unilever gap higher
through its 200‐day moving average currently at 1,853p.
While this feature remains in place as support, it is
expected that Unilever will progress off the back of this
strong buy signal to reach the top of a rising trend channel
from the beginning of 2009 at 2,300p.

Recent News flow:
th
November 5 : Unilever’s underlying sales growth eased off in the third quarter, despite a strong performance in emerging markets. Turnover
in the third quarter was up 13.2 percent at €11.55bn from €10.20bn a year earlier, ahead of some market forecasts of €11.35bn. Underlying
sales growth in the third quarter was 3.6 percent, while the growth rate for the first nine months of 2010 was 3.8 percent. Underlying price
growth was negative at ‐1.2 percent, though this represented an improvement on previous quarters. For the first nine months of 2010 price
growth was negative at ‐2.1 percent.

th
September 27 : Unilever paid $3.7bn (£2.3bn) in cash for Alberto Culver, adding the TRESemmé, Nexxus, VO5, St Ives and Simple brands to
the household goods conglomerate’s portfolio. The company is paying $37.50 a share for the American firm, a 19 percent premium to the
pre‐bid price.

August 5th: Unilever saw volume growth slow in the second quarter and expects the trading environment to remain difficult for the rest of the
year. The company announced second quarter turnover of €11.75bn, up 12.4 percent (3.4 percent using constant exchange rates) from
€10.46m in the corresponding quarter of 2009. Underlying year on year volume growth in the second quarter was 5.7 percent, below the
growth rate for the half‐year, which was 6.6 percent.

The market views Unilever as something of a sleeping giant, especially when compared to the stellar rewards (and risks) offered by resource
and commodity stocks. But it may very well be that buying into the group now represents a magic mix of low risk growth. In the view of Prime
the slight variations between quarters of volume growth / sales and revenues, as well as “difficult” trading conditions are only of marginal
concern. This is especially the case given the earnings‐driving purchase of Alberto Culver with all the brands expanding opportunities it
provides for the coming year.

Prime recommends Unilever as a buy for 2011 off the back of a rare ultra bullish charting set‐up, a significant acquisition and progressively
greater emerging markets growth prospects.

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BP (BP.): Oil & Gas Producers Target 550p

Bull Points:
– Gulf of Mexico leak less bad than feared
– Disposal program to raise $30bn
– Oil & Gas sector apart from BP is buoyant

Technicals:
Shares in BP more than halved between late April
and late June, falling from 658p the day after the
Gulf of Mexico accident to under 300p at worst
intraday. Since June there has been a steep recovery
for the stock with the floor of a rising 6‐month price
channel currently running through 439p and level
with the 50‐day moving average. While above this
combination of support, the upside for the oil & gas
giant should be towards the 550p price channel top
as soon as the end of Q1 2011.

Recent News flow:
December 16th: The U.S. government filed a civil lawsuit seeking unlimited damages against BP and eight other companies over the Deepwater
Horizon oil rig explosion and the subsequent oil spill in the Gulf of Mexico.

November 29th: BP has sold its stake in Argentina‐based oil and gas company Pan American Energy to Bridas Corporation for $7.06bn in cash.

th
November 24 : BP announced its Egyptian subsidiary has made a “significant” gas discovery in the Nile Delta area.

On December 16th the US Government announced it would sue BP for “unlimited” damages and the shares fell just 3p. Prime Markets believes
BP shares were massively oversold during the crisis, falling from over 600p to under 300p during 2010. This is particularly so once the “real”
damages of no more than $20bn ‐ $30bn is taken into consideration. In addition, the legal process is likely to take so long that the UK group
will have years and possibly decades to adjust its business, a process already underway.

With the telling share price reaction following the US legal action, a significant chunk of the $30bn in asset sales completed and a steady
share price recovery, Prime believes that BP will continue to be the stock to bottom fish over the next year. Buy on any weakness towards
450p.

Summary
The team at Prime Markets are constantly scrutinising the markets, the economy and current affairs in order to identify the best trading
opportunities for our clients. For some readers this report may raise a number of further questions. Should you have any questions in regard
to your personal trading strategy after reading this report, please contact a Prime Markets Sales Trader.

Contact us:
info@primemarkets.co.uk
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Investment Research ‐ DISCLAIMER

This note is investment research which has been prepared on an independent and objective basis in accordance with the legal requirements for preparation of
investment research. This note has been issued by Prime Markets Ltd in order to promote its investment services and Approved by Fairfax I.S plc. who is Authorised and
Regulated by the Financial Services Authority and is a Member of the London Stock Exchange. Neither the information nor the opinions expressed herein constitutes, or is
to be construed as, an offer or invitation or other solicitation or recommendation to buy or sell investments. The information contained herein is based on sources which
we believe to be reliable, but we do not represent that it is wholly accurate or complete. Prime Markets Ltd is not responsible for any errors or omissions or for the
results obtained from the use of such information. No reliance may be placed for any purpose whatsoever on the information, representations, estimates or opinions
contained in this note, and no liability is accepted for any such information, representation, estimate or opinion. All opinions and estimates included in this report are
subject to change without notice. This note is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on,
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Prime Markets Ltd, and if so, the contents may have been altered from the original, or comments may have been added, which may not be the opinions of Prime Markets
Ltd. In these cases Prime Markets Ltd is not responsible for this amended research. The investments discussed in this report may not be suitable for all investors.
Investors should make their own investment decisions based upon their own financial objectives and financial resources and it should be noted that investment involves
risk. Past performance is not necessarily a guide to future performance and an investor may not get back the amount originally invested. Where investment is made in
currencies other than the currency of the investments, movements in exchange rates will have an effect on the value, either favourable or unfavourable. You are advised
that Prime Markets Ltd and/or Fairfax I.S plc and/or its directors and employees may have already acted upon the recommendations contained herein or made use of all
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therefore higher risk. It may not be suitable for everyone, so please make sure that you fully understand the risks involved. Past performance is not necessarily a guide to
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