Europe on the Ropes. 29 th September,

Transcription

1 Europe on the Ropes 29 th September, 2009

2 2 Introduction Introduction to Absolute Return Partners ARP was established in 2002; We are a London based independent partnership controlled by 8 partners; We have established a powerful global network of corporate partners and advisers providing us with substantial resources; We focus on non-correlated alternative investment strategies with high barriers to entry in niche markets; We serve a diverse client base which includes institutional investors, wealth managers, family offices and private investors; We are authorised and regulated by the Financial Services Authority.

3 3 Introduction The People Behind Absolute Return Partners The Investment Committee Niels C. Jensen founded ARP in 2002, following a career in the City, most recently as Head of Private Wealth Management at Lehman Brothers Int l. Niels is Senior Partner and CIO with overall responsibility for investments. Jan Vilhelmsen joined ARP in 2004 from Lehman Brothers, having extensive experience from research and fund management. Jan is a Partner in charge of our single manager programme. Nick Rees joined ARP in Nick spent his early years at Goldman Sachs, involved with the management of financial and operational risk. Nick is a Partner in charge of our wealth management programme. Chief Operating Officer The Advisory Board Jan Froeshaug chairs a range of listed and privately held companies within finance, media and IT. Jan has previously served as CEO of Egmont International Holding. Jan has been the Chairman of our Advisory Board since ARP was established back in John Mauldin is the CEO and founder of Millennium Wave Investments and a recognised expert and leader on investment issues. John is a prolific author and editor of the popular E-letter Thoughts from the Frontline. He acts as a sub-advisor to ARP and is a director of the ARP funds. Gerhard Weisschädel is a partner of Invision AG, a Swiss private equity firm. Gerhard has previously served as CEO of Deutsche Telekom Media and has in recent years built up a formidable reputation in private equity. Prof. Dr. Cuno Pümpin is Professor em. at the University of St. Gallen. As well as a respected academic, Prof. Pümpin is a lecturer at international seminars and a consultant to governments. Steven Bartel joined ARP in 2007 from GSA Capital where he held the position as Finance Officer. Steven became a partner in 2009 and holds the position as Chief Operating Officer. Global Economic Adviser Woody Brock is president and founder of Strategic Economic Decisions, Inc. and acts as an economic adviser to ARP and its clients. Other Key People Rob Dawson joined ARP in 2007 as a research analyst with responsibility for asset based lending, options and volatility strategies. Rob holds an MBA from Wits Business School in South Africa. Tricia Ward joined ARP in 2008 as a research analyst with responsibility for credit and insurance strategies. She has over 8 years hedge fund experience, having previously worked at Goldman Sachs and KBC.

4 4 Introduction We offer products and services in three different areas Multi Manager Products Private Wealth Management Single Manager Products The ARP funds are all managed by ARP, focus on uncorrelated strategies and have a strict focus on absolute returns. We offer discretionary management services designed to meet your particular needs, and with a focus on absolute returns. In the next few days we will be launching our first single manager fund in association with a leading Danish energy company.

5 5 Should Denmark join the euro? No-Voters are usually against joining the euro for one of the following reasons Politically driven Emotionally driven Financially driven DISCLAIMER - I belong in this category! Should Denmark join the euro? Yes Maybe Yes Maybe No The latest opinion poll No Don't Know 0% 10% 20% 30% 40% 50% 60% 6546 votes Source: Børsen, 28 September, 2009

6 6 Should Denmark join the euro? We haven t t been told the whole story! Europe in general, and the monetary union in particular, faces large and potentially insurmountable problems over the next several years; Importantly, some of these problems were on the horizon even before the onset of the financial crisis; The financial crisis has made an already difficult situation extremely challenging; Today s presentation will focus on 3 particular challenges facing Europe: 1. Eastern Europe and the effect it may have on an already fragile Western European banking system; 2. Poor fiscal discipline and lax cost control in many member countries; 3. An ageing population and the dire consequences thereof.

7 7 A fragile banking system

8 8 Challenge # 1: A fragile banking system Eastern European countries are very vulnerable to external shocks Source: Credit Suisse Global Equity Strategy

9 9 Challenge # 1: A fragile banking system Eastern European problems cannot easily be contained Source: Financial Times

10 10 Challenge # 1: A fragile banking system Western Europe is heavily exposed to Eastern Europe 90% Loans to emerging countries as a % of GDP 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Financial Times Austria Switzerland Sweden United Kingdom European Average Japan USA

11 11 Challenge # 1: A fragile banking system The EU s s largest banks have almost doubled their gearing over the last decade 50.0 Leverage of the Largest EU and US Banks, Source: R&S Mediobanca EU US

12 12 Challenge # 1: A fragile banking system Further losses amongst European banks can do considerable damage Source: BCA Research

13 13 Challenge # 1: A fragile banking system European banks may need 16.3 trillion bail out, EC document warns * Earlier this year Bruno Waterfield, the Brussels correspondent for The Daily Telegraph, revealed that he had had access to a secret document produced by the EU Commission in order to brief the Union s finance ministers on the true extent of the financial crisis: European Commission officials have estimated that impaired assets may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the trading book total 12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets. In addition, so-called available for sale instruments worth 4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of 16.3 trillion. Within a few hours, the header of the article was changed and the two paragraphs above had disappeared! * Telegraph.co.uk, 11 th February, 2009

14 14 Poor fiscal discipline

15 15 Challenge # 2: Poor fiscal discipline The Stability and Growth Pact is there for a reason! An annual budget deficit no higher than 3% of GDP; A national debt lower than 60% of GDP or approaching that value. Government Debt (% of GDP) E 2010E Euro Area Germany France Italy Spain Denmark Debt impacts bond yields in periods of high inflation Source: Eurostat, Deutsche Bank.

16 16 Challenge # 2: Poor fiscal discipline Club Med countries have lost competitiveness at a frightening pace 130 Unit Labour Costs (2008) % gap to Club Med!!! If Europe s monetary and economic union were to be designed all over again, it might make sense to have a stability pact for unit labour costs. Source: Eurostat. Germany EU25 France Portugal Italy Spain Greece 1998 = 100 Jean-Claude Trichet, ECB President

17 17 Challenge # 2: Poor fiscal discipline Club Med countries are poorly equipped to weather a storm Source: BCA Research

18 18 Deteriorating demographics

19 19 Challenge # 3: Deteriorating Demographics The populations of Club Med countries are aging rapidly 70 Old-Age Dependency Ratio Germany France Italy Spain Netherlands Belgium Austria Greece Ireland Finland Source: Note: The elderly dependency ratio is the ratio of the population aged 65 years or over to the population aged All ratios are presented as number of dependants per 100 persons of working age (15-64). Assuming constant fertility. Portugal Denmark

20 20 Challenge # 3: Deteriorating Demographics The consequences are dire Net Present Value of Impact on Fiscal Deficit Current Crisis versus Age-Related Spending (% of GDP) Source:

21 21 onclusions

22 22 Conclusions Welcome to the real basket case Spain! Spain has over 1.6 million unsold homes (~7 years supply); The total amount of loans outstanding to Spanish developers and construction companies is about 470 billion, almost 50% of Spanish GDP; The Spanish economy continues to be in freefall showing none of the signs of recovery we have seen in other EUR member countries; The ECB are quietly pumping billions into the Spanish banking system in a desperate attempt to keep it afloat; Next year, when the ECB will be forced to begin a normalisation of interest rates, Spain will suffer even more; Deflation is already rampant with CPI down 0.8% in August vs. same month last year; The big Q: What will happen when the rest of Europe has fully recovered but Spain continues to go downhill? Spanish GDP

23 23 Conclusions Governments regularly fail to meet their debt obligations and Spain has defaulted more times than any other country on this planet!

24 24 Conclusions Solutions? 1. Loss of fiscal sovereignty with bonds issued centrally Challenge: To convince the public that more powers should be granted to the EU 2. Exit of weakest members Challenge: Risk of negative chain reaction 3. Exit of strongest member(s) 4. Two-tiered euro 5. Bailout Challenge: Echos of the 1930s Challenge: Not much better than (2) above - where does it stop? Challenge: A bailout would depend on Germany and France funding the bailout; how do they convince their voters that it is the right thing to do?

25 25 Conclusions Long term implications The problems facing the euro will almost certainly not lead to a collapse of the European monetary system far too much political capital has been invested in the euro for that to happen; More likely, the powers will be centralised (solution 1), and the e weaker members bailed out (solution 5) at a huge cost to the stronger members; This will only happen when the weaker members cannot cope any longer, which may take several more years!

26 26 Conclusions My reservations about the euro are based purely and simply on financial logic Why join the euro? until these problems have been resolved I I don't care to belong to a club that accepts people like me as members. Groucho Marx

27 27 Risk Warnings This material has been prepared by Absolute Return Partners LLP ("ARP"). ARP is authorised and regulated by the Financial Services Authority. It is provided for information purposes, is intended for your use only and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. The information provided is not intended to provide a sufficient basis on which to make an investment decision. Any investment in ARP will be made pursuant to written subscription materials. The information provided in this material will be subject to, and expressly qualified by, any information contained in the subscription material. The Securities and Exchange Commission of the United States does not pass upon the accuracy or completeness of any of the information contained herein. Information and opinions presented in this material have been obtained or derived from sources believed by ARP to be reliable, but ARP makes no representation as to their accuracy or completeness. ARP accepts no liability for any loss arising from the use of this material. The results referred to in this document are not a guide to the future performance of ARP. The value of investments can go down as well as up and the implementation of the approach described does not guarantee positive performance. Any reference to potential asset allocation and potential returns do not represent and should not be interpreted as projections. All opinions and estimates included in this report are subject to change without notice. This report is intended for qualified customers of ARP. 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. Investors should be aware that the market price of the securities discussed in this report may be volatile. 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 investor s base currency, movements in exchange rates will have an effect on the value, either favourable or unfavourable. An investor may not get back the original amount invested and in the case of an illiquid stock the investor may be unable to sell at any price. Any tax relief mentioned are those currently available and are subject to change. Their value depends on the personal circumstances of the investor Absolute Return Partners LLP. All rights reserved. Contact: 16 Water Lane Richmond, TW9 1TJ Tel: +44 (0) Fax: +44 (0) info@arpllp.com Web Site: