Eurozone Renaissance?30 January 2014

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MARKET UPDATE

Market Update

EM – Secret’s Out

Risk is Back

Diminishing QE

Tech Banged Up

Macro Snapshot

US GDP and unemployment improving, but labor participation, CPI, and EM currencies are weak. Nat gas climb = Polar Vortex. Are these prices sustainable?

EUROPE RENAISSANCE?HiddenLevers

Eurozone - Overview

Eurozone = second biggest economy

Eurozone population = 330 million

Unemployed population = 20 million

France + Germany + Italy + Spain = Historically 75% of Eurozone economy

2

330m

20m

75

sources: HiddenLevers, Wikipedia

Europe – Historical Scenario Overview

Two Euro Crisis Periods: • Nov 2009 – June 2010• Oct 2011 – July 2012

The 2011/2012 cycle ended with Greek default and bailout.

Summer 2011 correction driven by other factors (US downgrade etc)

Euro Crisis I

Euro Crisis II:Greek Default

The Greek default impacted the Euro and commodities, but little S&P downside

Europe Macro Picture: Unemployment

sources: Eurostat, Deutsche Welle

Youth unemployment exceeds 50% in Spain, Greece, and Hungary, and exceeds 25% in most of the EU.

Japan

USA

EU

Euro ZoneEuro Zone unemployment is still over 12%, and significantly higher than the broader EU, United States, and Japan.

Europe Macro Picture: GDP + Currencies

• Germany recovered strongly from financial crisis, but recent growth on par with France (in dumpster)

• UK is accelerating, 2.8% Q4 2013 is almost on par with US

• Despite growth weakness, major EU currencies outperformed USD in 2013

And demand is flat.

source: HiddenLevers

Europe – Market Activity

The S&P 500 has outperformed all major European markets since 2009.

Germany’s DAX kept pace with S&P in 2013, while France (CAC 40) and UK (FTSE 100) lagged behind.

source: HiddenLevers

Europe – Focus on PIIGS

Unemployment stuck at 20% +

for years

Spain Housing still falling into

2015

2014 = turnaround year for trouble makers

PIIGS ETFs have high volatility

source: HiddenLevers, Zero Hedge, Reuters, Irish Times, CBC News, Economist, Economist Data Center

2014 expected GDP 2013 Performance

Portugal + 0.8% n/a n/a

Italy + 0.7% EWI + 26%

Ireland + 2.1% EIRL + 42%

Greece + 0.6% GREK + 26%

Spain + 1.0% EWP + 29%

Eurozone + 1.4% IEV + 22%

PIIGS GDP as % of Eurozone GDP

Europe – Comparison to USA

source: HiddenLevers, Guardian UK, Financial Times , Forbes, Country Economy, Eurostat

5y chart – Europe Markets recovery lags US

• double-dip + severity

• record level unemployment

• brutal fiscal tightening

• no decision-maker accountability

• political agendas

• poor corporate credit

Recovery Comparison

USA Eurozone

2008 - 0.3% + 0.4%

2009 - 2.8% - 4.4%

2010 + 2.5% + 2.0%

2011 + 1.8% + 1.6%

2012 + 2.8% - 0.7%

2013 + 1.9% - 0.4%

2014 (exp) + 2.8% + 1.4%

What prevents US style

bounce back in Eurozone? 114%

28%

Eurozone GDP clinging to positive EU won’t repeat US comeback

PIIGS in healthier place

Europe Renaissance? – Recap

Greek default = correct analogue

HiddenLevers

EUROPE RENAISSANCE? – SCENARIOS

Good: Bona Fide Recovery

source: HiddenLevers, Reuters, Irish Times, CBC News, Economist,

EU equities + Economy both catch up to USA

No countries in depression

No removal of stimulus by ECB

Margins rising as EUR rises

PIIGS must

participate

Monetary policy is now

supportive

Mild: Recovery amidst US Correction

PIIGS need not

participate

source: HiddenLevers

Europe Currencies + Markets rising, US not so much

USA risk back on table,

no US boost

Germany + France playing catch up

Markets RecoveryNOT

Economic Recovery

Bad: Euro Trashed

No abatementin

debt + austerity

source: HiddenLevers, Guardian UK, Wall Street Journal

Still many skeletons in EUR closet

Default inEuro Zone

still possible

EU bankscounterparty risk comes to fruition

outlier scenario

political regime changes in Germany

Merkel re-elected, Sept 2013

Scenario: Eurozone Renaissance?Good

Bona Fide Recovery

MildRecovery

Amidst US Correction

BadEuro Trashed

European growth accelerates, adding to global recovery and boosting US markets.

European equity markets play catch-up, but real growth is slow, with no carry-over benefit to US.

German politics or other black swan enables debt crisis to come back into play

HiddenLevers

WINNERS + LOSERSwinner loser

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