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BCI Global Investment Conference
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copied or given, in whole or in part, to any other person.
Continental Europe in turmoil –Where to from here?Wednesday, 7th June 2017
2
European equities are cheap on normalised earnings metrics
European macro is very supportive of domestic earnings growth
Earnings growth is accelerating quickly and is world leading
Positioned in pro-cyclical sectors that will benefit from the pick up in economic growth and earnings
Long term value creation accrues to those with the best compounding of returns
Excellent compound value stocks across luxury, technology, capital goods and consumer
Banks as a group are much more fully valued than realised but some are interesting
Summary – reasons to be (very) bullish
Stock selection is key
Source: GAMThe views are those of the manager at the time of publication and are subject to change.
European equities relative to global equities
Source: GAM, Bloomberg, 1987=100
Past performance is not indicative of future performance.
3
European equities have dramatically underperformed the rest of the world
4
Valuation and earnings
Europe Shiller P/E
Real price divided by 10-year average real EPS
Return on Equity of US and European markets
Source: : Datastream, Goldman Sachs Global Investment Research 15 Nov 83 to 5 May 17 Source: Morgan Stanley, MSCI Jan 75 to 5 May 17
Past performance is not indicative of future performance.
X
5
10
15
20
25
30
35
40
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Average
+ 1 stdev
- 1 stdev
4
6
8
10
12
14
16
18
20
22
75 80 85 90 95 00 05 10 15
%
Europe ROE (%)USA ROE (%)
5
1. Current accounts have moved from deficit to surplus
2. Austerity is coming to an end and a positive ‘fiscal impulse’ will support economic growth
3. Southern Europe has become more competitive
4. The European banking sector has been substantially re-capitalised
– A positive ‘credit impulse’ has been set off
– There is deep misunderstanding of deleveraging and debt dynamics
Four key structural points
Source: GAMThe views are those of the manager at the time of publication and are subject to change.
6
Structural improvements are real
Current account balances
As a % of GDP
Primary Budget balance
As a % of GDP
Germany France Italy Portugal Greece Ireland Spain Finland
Unit labour costs
Q1 2000 = 100
Capital strengthening
European banks ‘leverage’ ratio
Source: Haver, Goldman Sachs, Citi European Strategy Team, Autonomous Research
Past performance is not indicative of future performance.
0%
2%
4%
6%
8%
2007 2009 2011 2013 2015 2017E
Tangible equity to tangible assets
-20
-15
-10
-5
0
5
10
15
2000 2002 2004 2006 2008 2010 2012 2014-40
-30
-20
-10
0
10
2000 2002 2004 2006 2008 2010 2012 2014
80
100
120
140
160
180
2000 2002 2004 2006 2008 2010 2012 2014
The views are those of the manager at the time of publication and are subject to change.
Short-term macro - very positiveEuro area PMI v GDP - 31 Mar 2000 to 30 June 2017 est.
Source: GAM 7
Past performance is not indicative of future performance.
The views are those of the manager at the time of publication and are subject to change.
-3,0
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
20
25
30
35
40
45
50
55
60
65
2001 2003 2005 2007 2009 2011 2013 2015 2017
PMI GDP
% q
oq
Ind
ex le
ve
l
Credit conditions suggest positive impulse
Euro area credit impulse and growth
Euro area credit numbers – A solid story
Source: Haver Analytics as at 5 Apr 2017.
The views are those of the manager at the time of publication and are subject to change.
New borrowing as a % of GDP
Supply of credit
-5
0
5
10
15
1996 1999 2002 2005 2008 2011 2014 2017New borrowing as a % of GDP
Euro area% GDP
-10
-5
0
5
10
-10
-5
0
5
1996 1999 2002 2005 2008 2011 2014 2017Credit impulse Private demand (rhs)
Euro area% yoy % yoy
-30
-10
10
30
50
-10
-5
0
5
2004 2006 2008 2010 2012 2014 2016
Credit impulse Credit supply
Euro area
Index level % qoq -40
-20
0
20
40
60-10
-5
0
5
2003 2005 2007 2009 2011 2013 2015 2017
Credit impulse Credit conditions
Euro area
Index level % qoq
8
(lhs)
(lhs) (rhs)(lhs) (rhs)
The performance of past values and returns is no indicator of their current or future development.
9
Medium-term:
Eurozone domestic demand recovery to drive domestic consumer and industrial cyclical stocks
Most positive on Spain and Ireland but France and Italy also improving
Long-term:
Long-term value creation accrues to those with the best compounding of returns
Structural growth from emerging market middle class to drive growth
Transfer of consumer spending from physical to on-line world to cause serious disruption
Disrupters and growth technology stocks offer excellent growth and returns
Reflation vs. deflation:
A red herring, as real GDP is what matters
Strong reason to believe inflation is overstated and real GDP under recorded
Short-term inflation in energy and commodities pass through only
Banks are more highly valued than realised, are not so geared to a recovery
Key investment themes
Source: GAMThe views are those of the manager at the time of publication and are subject to change.
How we are positioned for ‘the earnings recovery’
10
Key sectors:
Building and construction materials
Consumer spending beneficiaries
Employment
Importance of “levels”: many areas of activity saw declines of 40-80% from peak.
Don’t underestimate the upside
Multi-year recovery
Importance of “operational gearing”
Survivors have reduced costs and become much leaner
Operational gearing from high drop through of revenues to profits will super-
charge earnings
Eurozone domestic demand recovery
Source: GAMThe views are those of the manager at the time of publication and are subject to change. Reference to a security is not a recommendation to buy or sell that security.
Examples
Kingspan
Grafton Group
CRH
Cairn Homes
DIA
Ryanair
Caixabank
Mediaset Espana
AdeccoExposure to cyclical stocks in consumer and industrial
sectors with exposure to domestic Europe
Kingspan Group PLC
Past performance is not indicative of future performance. Reference to a security is not a recommendation to buy or sell that security.
Source: Bloomberg
World leader in rigid board insulation with
significant R&D and investment maintaining
technological leadership
Strong cyclical growth drivers from recoveries in
property and construction in the OECD
Strong structural growth drivers from need to
reduce buildings’ energy usage and carbon
footprint backed by strengthening legislation
Strong growth at high Return on
Capital
The views are those of the manager at the time of publication and are subject to change.11
Kingspan growth vs construction macro
90
100
110
120
130
140
150
160
2009 2010 2011 2012 2013 2014 2015 2016
Kingspan Macro
UK US
60
80
100
120
140
160
180
200
2009 2010 2011 2012 2013 2014 2015 2016
Kingspan MacroGermany The Netherlands
90
110
130
150
170
2009 2010 2011 2012 2013 2014 2015 2016
Kingspan Macro
70
90
110
130
150
2009 2010 2011 2012 2013 2014 2015 2016
Kingspan Macro
12Source: Non-Residential Construction Stats Euroconstruct & Reed Data, Kingspan, 2016 Full Year results presentation
Past performance is not indicative of future performance. Reference to a security is not a recommendation to buy or sell that security.
0%
20%
40%
60%
80%
100%
2005 2016 2020P
13
Kingspan penetration growth
Source: Kingspan 2016 Full Year results presentation, Penetration as a % of the respective addressable markets
Past performance is not indicative of future performance. Reference to a security is not a recommendation to buy or sell that security.
0%
20%
40%
60%
80%
100%
2005 2016 2020P
Insulated Panels
UK Germany
0%
5%
10%
15%
20%
2005 2016 2020P
North America
0%
10%
20%
30%
40%
50%
2005 2016 2020P
UK
0%
2%
4%
6%
8%
10%
12%
14%
2005 2016 2020P
Western Europe
0%
2%
4%
6%
8%
10%
12%
14%
2005 2016 2020P
Australia
Insulated Boards
14
A. Exposure to emerging market middle class consumption growth
Luxury
Beverages
Healthcare
Elevators
B. Disruptive technology and ‘growth’ technology
Autonomous vehicles
Measurement technology
Low cost carriers
C. Transition of consumer spending from physical to on-line
On-line retailers
Physical retailers with right business model
Long term value creation
Source: GAMThe views are those of the manager at the time of publication and are subject to change. Reference to a security is not a recommendation to buy or sell that security.
Examples
LVMH
Richemont
Pernod Ricard
AB InBev
Fresenius
Schindler
Continental
Hexagon
Ryanair
Zalando
Inditex
Paddy Power
Long term value creation accrues to those with the best
compounding of returns
15
Regional breakdown of European Equity revenues
Source: Redburn, forecast data from 5 Dec 2016
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15f
20
16f
20
17f
Rest of World Asia ex Japan Other Americas USA and Canada Japan Europe
Zalando SELargest European online apparel retailer
Past performance is not indicative of future performance.Reference to a security is not a recommendation to buy or sell that security.
Source: Bloomberg
Largest purely online European retailer serving 18m
active customers and generating Eur 3bn in sales in
a European fashion market worth c.Eur 420bn
Strong barriers to entry driven by investment in
technology now reinforced by high proportion of
repeat customers as well as platform of choice for
brands seeking growth and pricing discipline
Attractive capital light model – potential to double
sales on existing warehousing and IT infrastructure
suggests strong operational leverage to growth
Turning retail on its head by putting technology and
big data at the heart of the customer proposition
The views are those of the manager at the time of publication and are subject to change.16
APPENDIX
GAM Continental European Equity Composite - GrossPerformance from 30 Nov 2009 to 30 Apr 2017
Source: GAM, MSCIPresented as supplemental information only. Please refer to the relevant GIPS compliant report and the GIPS supplemental text.
Past performance is not indicative of future performance. Performance is provided gross of fees.
18
Niall GallagherInvestment Director,
European Equities
Joined GAM in 2009, now with 21 years’ industry experience
Manages a number of Europe-focused equity funds with an emphasis on capital growth
Stocks selected on a fundamental, bottom-up approach
Runs a combined USD 1.8bn in assets
Source: GAM, unless otherwise stated. (Where applicable and, unless otherwise noted, performance is shown net of fees, on a NAV to NAV basis).GAM has not independently verified the
information from other sources and no assurance can be given as to whether such information is accurate, true or complete and GAM makes no warranty, expressed or implied, regarding such
information. Every effort has been made to ensure the accuracy of the information provided, but GAM cannot be held responsible for any errors or omissions. While every effort has been made
to ensure the accuracy of the financial information herein, you should note that some of the information may be based on unaudited or otherwise unverified information.
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Nothing contained herein constitutes investment, legal, tax or other advice, nor is it to be solely relied on in making an investment or other decision. This document qualifies as marketing
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Disclaimer
20