The Case for buying European equities in 2013? Francis Ellison February 2013
Navigating the current environment Good news US housing market showing signs of life, consumer in better spirits Central banks committed to boosting asset prices New regime in China raises prospects of stimulus Bad news US fiscal cliff threatens to tip economy into recession Europe condemned to another year of pitiful economic performance Risk of crisis remains, likely candidates are Spain and Greece Deleveraging forces continue to hold back developed economies for the foreseeable future PT/12/01517 2
Why European equities now? The market is trading at an attractive valuation historically and relative to other assets such as bonds Cash flows are healthy and balance sheets are strong, yet cash balances are earning little M&A activity is likely to be a feature Whilst problems in some countries have caused euro weakness this benefits a number of exporting companies, particularly in northern Europe Despite tough macroeconomic conditions, it is still very possible to find companies, even in the peripheral eurozone There are great opportunities. Why smaller companies Small cap earnings tend to grow faster than large cap earnings over the long-term. This is particularly true in terms of our expectations for growth in 2013.
The housing recovery continues, held back by fiscal uncertainty Improved optimism amongst Builders suggests higher Sales and Construction ahead Source: Reuters EcoWin, September 2012. 4
Consumers feeling better about life for the first time since the crisis Source: Reuters Ecowin, October 2012. 5
Central Bank policy: Who needs growth anyway? Central bank balance sheets (rebased, Jan 08 = 100) Central bank balance sheets v S&P 500 Index (Jan 08 = 100) 450 400 350 300 250 200 150 100 50 Central Bank Assets 08 09 10 11 12 ECB Fed BoE USD bn 5000 4500 4000 3500 3000 2500 2000 1500 Index 1500 1400 1300 1200 1100 1000 09 10 11 12 Combined Central Bank balance sheet S&P 500 (RHS) lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Ben Bernanke, November 2010 900 800 700 600 Source: Threadneedle, Bloomberg, Reuters Ecowin, October 2012, Combined balance sheet = ECB + Federal Reserve + Bank of England. 6
Tentative signs of improvement in China Growth rate (% y/y) Growth of infrastructure investment (% y/y 3mma) Source: Threadneedle, UBS, October 2012 PT/12/01517 7
Growth divergence is not new, but cannot continue Eurozone Unemployment Rates % % 12 11 10 9 8 7 6 5 93 95 97 99 01 03 05 07 09 11 Germany Italy Spain (RHS) Source: Threadneedle, Reuters Ecowin, Reuters Ecowin October 2012 25 23 21 19 17 15 13 11 9 7 5 Corporate loan growth, %YoY 35 % Lending to Corporations 30 25 20 15 10 5 0 04 05 06 07 08 09 10 11 12-5 -10 Italy Spain Germany France Time for decisive action PT/12/01517 8
US bank lending vs. European bank lending US and UK banks are 3 years into shrinking their balance sheets. European banks not yet started necessary deleverage 110 G 056 110 105 105 100 100 95 95 90 90 85 Euro area domestic bank loans ( 11.2trn) + external loans and sec s ( 5.3trn) have yet to contract; but loan-to-deposit gap is a wide 126% Source: Thomson Reuters Datastream, Arbuthnot, October 2012. 2008 2009 2010 2011 2012 COMMERCIAL BANK ASSETS - LOANS & LEASES IN BANK CREDIT : United States-COMMERCIAL BANK ASSETS: CON M4 LENDING EXCLUDING SECURISATIONS, EXCLUDING INTERMEDIATE OFCS : United Kingdom MFI'S & EUROSYS: LOANS TO E-A RESIDENTS - NON GOVT. (EP) : Euro Area, Evolving Membership 85 9
Corporate balance sheets are strong excluding financials! Cash on balance sheets Ex-financials debt to equity (%) Source: MSCI, Worldscope, Morgan Stanley Research, 31 December 2012. All data above based on companies within the MSCI Europe ex-financials. PT/12/01314 10
European companies sales are increasingly global 460 European non-financial companies Extrapolation 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: Published accounts/redburn IDEAS database. Rest of World Asia ex Japan Other Americas USA and Canada Japan Europe European equities are a play on global growth PT/12/01314 11
What next? Equities are cheap 1 30 26 Volatility to continue Remain alive to macro developments Multiple (x) of trend earnings 22 18 14 Many alpha opportunities A stock picker's paradise 10 6 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 EU Ex Bubble Trend PE Median + 1 SD -1 SD 1 Source: Mirabaud Securities LLP, 30 November 2012. 12
The case for European equities Index Level 2013E PE 2014E PE PCF 2012 yield (%) US - S&P 500 1,466 14.4 13.8 8.4 1.9 Europe MSCI Europe 99 13.6 12.4 7.5 3.3 Japan TOPIX 889 17.8 13.2 5.3 3.2 Asia Pacific ex. Japan MSCI Asia Pacific ex Japan 476 13.2 12.3 8.9 2.9 Source: Threadneedle Investments, Bloomberg, 4 January 2013 13
Characteristics of companies we like Themes Portfolio strategy Examples Strong franchises / unique assets Restructuring / recovery Quality cyclicals Structural growth Emerging markets opportunities Source: Threadneedle as at 31 December 2012. Market leaders Strong finances / management Barriers to entry New management strategy Improving returns Value creation Growth potential Overseas earnings Strong finances Demographic trends Energy efficiency Global shortages Innovation Emerging markets exposure Reasonable valuations Nestlé, Ryanair, Fresenius Medical Care Allianz, Merck Sika, SGS, Lanxess Syngenta, Atlas Copco, Novo Nordisk Edenred, ABI PT/12/01314 14
Thanks! Please feel free to join the workshop session this afternoon to further discuss the European Equities opportunity: Time: 2:45pm Location: Granville Room
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