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European EquitiesOutdated Model or Innovation Center?
Joachim Schallmayer, Senior Portfolio Manager
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Agenda
1
2
3
4
Corporate backdrop
World Market Leaders
Valuation backdrop
Sovereign backdrop
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Agenda
1
2
3
4
Corporate backdrop
World Market Leaders
Valuation backdrop
Sovereign backdrop
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Cyclically Gross GeneralAdjusted Budget Government DebtDeficit (% GDP)** (% of GDP)***
Germany* -1.8 73.2France -6.2 77.6Italy -3.3 115.8Spain -9.6 53.2Netherlands -3.6 60.9Belgium -4.5 96.7Austria -2.4 66.5Greece -14.1 115.1Finland 0.3 44Ireland -11.4 64Portugal -8.3 76.8Slovakia -6.4 35.7EMU-Average(PPP Weighted) -4.9 78.9UK -8.4 68.1USA -8.0 83.9Japan -5.5 218
‡ Sovereign funding is an issue globally
‡ Other developed economies starting from a similar or worse level
‡ Reduction of deficits and austerity measures needed in most parts of the developed world
‡ Several European countries announced and implemented a first set of measures
Global Competitiveness Index
Europe: Sovereign backdrop
Crisis put into perspective
Budget Deficits and gross financial liabilities as % of GDP
Source: Goldman Sachs*Countries listed according to their share of Euroland GDP** Sources: European Commission, CBO, OECD, HM Treasuries*** Sources: Eurostat, Goldman Sachs Estimates
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Europe: Sovereign backdrop
Crisis put into perspective
0
200
400
600
800
1,000
1,200
09/09 01/10 05/10 09/10 01/11
Greece Portugal SpainEgypt Indonesia Philippines
‡ Intensive market speculation
‡ Extreme risk perception
‡ Positive: market speculation put pressure on governments to react immediately and in a comprehensive manner
Global Competitiveness IndexCDS Spreads
Source: Bloomberg
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Agenda
1
2
3
4
Corporate backdrop
World Market Leaders
Valuation backdrop
Sovereign backdrop
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8 Source: Barclays Capital and own calculations
‡ Significant debt reduction during the last years with trends set to continue
‡ Strong cash generation
‡ Flexibility to increase the payback to shareholders through dividend increase or buyback
‡ Provides european companies with strategic flexibility
Europe: Corporate backdrop
Excellent balance sheet quality
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2000 2002 2004 2006 2008 2010e2012e
0,0
0,2
0,4
0,6
0,8
1,0
Net Debt / Ebitda Net Debt / Equity (rhs)
Corporate deleveraging trend expected to continue
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9 Source: Barclays Capital and own calculations
‡ Companies operate on a high level of capital efficiency and profitability
‡ Efforts of past restructurings now become very visible
‡ Strong signal of managerial capabilities of european management teams
Europe: Corporate backdrop
Excellent efficiency
1998 2000 2002 2004 2006 2008 2010
Asset Turnover (rhs) EBIT Mgn.
4%
6%
8%
10%
12%
14%
16%
1,0
1,1
1,2
1,3
1,4
1,5
Profitability safeguarded during the crisis
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10 Source: Barclays Capital and own calculations
‡ Wages remain restrained in the european environment while producer prices are on the rise
‡ European companies continue to gain competitiveness
Europe: Corporate backdrop
Continous productivity enhancement
0%
1%
2%
3%
4%
5%
6%
7%
1997 1999 2001 2003 2005 2007 200985
90
95
100
105
110
115
Europe hourly earnings % y/yEurope PPI index (rhs)
Hourly earnings and Producer Prices
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Significant part of European company revenues generated in EM
Europe: Corporate backdrop
European Products in strong demand
Source: Barclays Capital
0%
10%
20%
30%
40%
50%
60%
70%
Met
als
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Ser
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Average % of total EPS from China for Daimler & BMWEstimated EM exposure for European Sectors (%)
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Agenda
1
2
3
4
Corporate backdrop
World Market Leaders
Valuation backdrop
Sovereign backdrop
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World market leaders out of Europe
Typical Stocks
‡ LVMH
‡ Pinault Printemps Redoute
‡ Luxottica
‡ Richemont
‡ Swatch
Luxury
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World market leaders out of Europe
Typical Stocks
‡ Daimler
‡ BMW
‡ VW
‡ Porsche
‡ MAN
Autos
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World market leaders out of Europe
Typical Stocks
‡ Siemens
‡ ABB
‡ Philips
‡ ASML
Industry
Source: Photo ABB, Philips, Tognum AG
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World market leaders out of Europe
Typical Stocks
‡ Danone
‡ Henkel
‡ Nestlé
‡ Lindt & Sprüngli
Consumer
Sources: Danone, Nestlé, Henkel, Lindt & Sprüngli
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Agenda
1
2
3
4
Corporate backdrop
World Market Leaders
Valuation backdrop
Sovereign backdrop
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European Equities – Valuation backdrop
Attractively valued on multiples
P/E-Ratio* Price / Book*
* MSCI EuropeSources: Factset
12M-Forward PE 12M-Trailing PE
0
5
10
15
20
25
30
35
40
19701976198219881994200020060
1
2
3
4
5
6
1970 1976 1982 1988 1994 2000 2006
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MSCI Europe: Historic EPS Growth with Future Estimates
Sources: IBES
European Equities – Valuation backdrop
Attractive earnings growth outlook
-23%-20%
-21%
26%
36%
13%4%
18%
-9%
6%4%
-19%
-4%
44%53%
25%
6%
-24%-17%
13%15,3%
39%
24%
-40%
-20%
0%
20%
40%
60%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
bottom-up estimates
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Wrap up
Stable political environment
Gearing to world economic growthespecially to strong growing BRIC economies
Corporates that are in excellent shape
Very supporting valuation background
No listed alternatives to a lot of these world market leaders
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Thank youfor your attention!