Europe between Debt Crisis and Liquidity Glut

Transcription

1 Europe between Debt Crisis and Liquidity Glut Europa zwischen Schuldenkrise und Liquiditätsschwemme Ben Funnell Man Wien, 8. Mai 2012 Firmenlogo

2 Europe - The Problem

3 A Growth / Competitiveness Imbalance Core vs Periphery Periphery EMU: real GDP Index 100=Q EMU (GIPSI countries): real GDP index 100=Q Germany France Italy Spain Ireland Portugal Greece 92 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: Oddo Securities.

4 Widening Current Account Imbalances TARGET 2 Trans-European Automated Real-Time Gross settlement Express Transfer System EMU: net foreign position of national central banks (TARGET2) When deposits move between Eurozone countries, they create liabilities in the gross settlement system of the ECB, called TARGET2. bn EUR Bundesbank claims on the ECB GIPSI central banks liabilities at the ECB Balance of payments deficits are thus settled in this way within the Eurozone, since the normal outlet valve (a depreciating currency) is not available within the system. Thus we can see that TARGET2 is effectively a way of making the books balance when you can t devalue your currency, when foreigners are not buying your bonds. The key thing to note is the size of these balances. Total claims have risen by a factor of 7 since 2004 and more than doubled in the last year. And Germany alone is on the hook via this channel for a total of 465bn, which is of course more than the EFSF in total! 4 Source: Oddo Securities. Data as at 15 March 2012.

5 Credit Conditions Have Tightened European Central Bank Surveys of Loan Demand and Lending Conditions Diffusion index where 0 = no net change Lending Conditions (%, inverted) -70 Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Expected Loan Demand (left) Net % Tightening Lending Conditions (right, inverted) 5 Source: European Central Bank, Bloomberg.

6 The Global Cycle Has Not Helped,but is it Turning UP? Société Générale Proprietary Newsflow Indicators Net balance of economic newsflow (0-100 scale) Jan-10 May-10 Aug-10 Nov-10 Mar-11 Jun-11 Sep-11 Dec-11 Apr-12 World United States Europe United Kingdom Japan Pacific Rim France Germany 6 Source: Société Générale. Data as at 23 April 2012.

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8 Europe - The Policy Response

9 Massive Balance Sheet Expansion Fed and ECB Balance Sheet - Total Assets bn Jan-00 Oct-00 Jul-01 Apr-02 Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Fed ECB 9 Source: Federal Reserve, ECB, Bloomberg.

10 The ECB s Balance Sheet (Pre-Crisis and Current) Eurosystem Financial Statement (simplified) bn 29/06/ /04/ /06/ /04/2012 Assets pre-crisis latest Liabilities pre-crisis latest Gold/FX Reserves Banknotes Claims on MFIs Liabilities to MFIs o/w MRO o/w current accounts o/w LTRO o/w deposit facility lending facility o/w term deposits Securities Other liabilities o/w SMP o/w CBPP 0 68 Revaluation accounts Other assets Capital & reserves TOTAL TOTAL MFI = Monetary and Financial Institution; SMP = Securities Market Programme; MRO/LTRO = Main/Long term refinancing operation; CBPP = Covered Bonds Purchase Programme. Source: Oddo Securities. Data as at 27 April 2012.

11 Policy may not Work Structurally, but can Work Cyclically Nikkei - Four Rallies in a Bear Market, 3 out of 4 Policy-Driven 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, % BoJ cuts rates: M2 growth recovers +55% Yen weakens on concerted intervention +59% Post Asian crisis rally, TMT boom +119% PM Koizumi gives hope on reform 0 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan Source: GLG Partners LP, Bloomberg. Data as at 18 November 2011.

12 And It s Been Working on Risk Markets Recently S&P500 and US Quantitative Easing QE2 Ends QE1 Ends QE2 Starts QE1 Starts QE2 Announced Jan-2009 May-2009 Sep-2009 Jan-2010 May-2010 Sep-2010 Jan-2011 May-2011 Sep Source: GLG Partners LP, Bloomberg.

13 ... Even in Europe Sovereign Space Not All PIIGS Are Flying... because Someone is Buying their Bonds LTRO1 first announced (8 December 2011) 5 Year Government Bond Yield (%) Year Government Bond Yield (%) Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Italy Spain France Germany Greece Portugal Italy Spain France Germany 13 Source: GLG Partners LP.

14 Glimmers of Hope

15 Terrible Trailing Returns Nominal and Real 10 Year Rolling Total Return to US Equity 25% 20% Rolling 10 Year Annualised Return 15% 10% 5% 0% -5% -10% Rolling 10 Year Real TR Rolling 10 Year Nominal TR 15 Source: Data from Shiller, Robert (Yale University), see Subsidiary calculations by GLG.

16 European Valuation has Improved Europe Shiller Price to Earnings (Latest Eur = 12.4, UK = 13.5) MSCI Europe FTSE All-Share UK Avg 16 Note: Shiller PE defined as inflation adjusted price to 10Y average EPS Source: FTSE, MSCI, Various National Sources, Global Financial Data, Morgan Stanley Research, 27 January 2012.

17 Europe is Very Cheap vs US Equity European Performance Relative to USA % European Valuation Premium / Discount Relative to USA % Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan Premium / Discount % Sector Neutral Premium / Discount % 17 Note: Performance in local currency (chart on LHS). Average relative valuation across PB, PD, PCE. Sector neutral valuation assumes that sector weights are in-line with MSCI World Index (chart on RHS). Source: MSCI, Morgan Stanley Research, 27 January 2012.

18 Europe Macro No Longer Surprising Negatively Citigroup Economic Surprise Index 150 Standard deviations "surprise", 3 month moving average Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 Citi Econ Surprises - Eurozone 18 Note: Performance in local currency (chart on LHS). Average relative valuation across PB, PD, PCE. Sector neutral valuation assumes that sector weights are in-line with MSCI World Index (chart on RHS). Source: MSCI, Morgan Stanley Research, 27 January 2012.

19 Global Macro Momentum is Improving Some Great Coincident Activity Indicators Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 CRB RIND (left) Weekly Claims (inverted, right) 19 Note: "CRB RIND" is the Commodities Research Bureau's Raw Industrials index, which comprises the prices of non-exchange traded commodities, including scrap copper, lead, steel and rubber, print cloth, rosin, tallow, tin, wool tops and zinc. It is an indicator of real industrial demand rather than of financial market demand. "Weekly claims" refers to the US initial unemployment claims series. Source: CRB, US Department of Labour, Bloomberg

20 Value has Underperformed Value relative to Market Index (31 Dec 2007 = 100) Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Value rel Market Value (ex Financials) rel Market 20 Source: Credit Suisse, Nomura, GLG Partners LP (chart RHS).

21 Value is Truly Cheap Europe, P/Book of High RoE Quintile (Median, Ex-Fin) Europe, P/Book of Low RoE Quintile (Median, Ex-Fin, rhs) Europe P/Book of High RoE vs Low RoE Stocks 21 Source: GLG Partners LP.

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