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Zadig Quarterly Letter #27
September 28, 2012



The Manager’s Comment

Over the last quarter Zadig was up 4.8% whereas                          currency with all 27 countries reshaped into regions?
European markets, measured by the BE500 Index, were                      The answer is not financial: Europe Ltd is sound
up 7.1%.                                                                 financially. But the vested interest of local politicians and
                                                                         the rigidity of the cost of the welfare state make Zadig
Is debt expensive or equity cheap? 10 year Euro generic                  cautious about the future of the Euro currency. Our
government bonds currently yield 1.4%, whereas most                      portfolio is constructed to be resilient if the Euro were to
equities in our portfolio offer a Cash Flow Yield of 8% at               collapse. Let's hope for all of us that the scary
current share prices. Pernod-Ricard for instance, with                   consequences of the Euro break-up will bring about
great international brands (Chivas, Absolut, Martell,                    courage, not austerity, that German idea for preserving
etc.) has 10 year debt yielding 3.5% whereas its Equity                  their investment in the Euro. Zadig has gone short in
Cash Flow Yield is 7.0%, 2x higher. This quarter, we                     several industrial companies which compete globally but
added Bic to the portfolio in order to increase our                      suffer structural cost disadvantage in sectors ranging
exposure to the Americas. Bic is typical of what we like                 from auto, capital goods and chemicals. Those will be
today: low valuation, defensive, growing thanks to                       tackled by Europe’s structural issues and should keep
geographical reach (less than 7% sales in France), pricing               under performing until Europe reforms.
power to hedge inflation and conservative family
ownership. In the early 80s, investors bought equities for               Zadig went to Greece three times in the last year on the
capital appreciation and they purchased government                       lookout for distressed investment opportunities. We
paper bonds for yield. Today it is the opposite.                         only found Folli-Follie, a retailer with stores mainly in
                                                                         Asia, with high enough Risk Adjusted upside. In Greece
Zadig has sold its luxury stocks, mainly PPR and Swatch.                 the working population in public administration and
The Chinese real estate affordability ratio is today in                  defense is the same as it was in 2004 when none of us
excess of 10x (30x in Hong Kong, world capital for                       knew about the country's faults, and stands at 1 million.
luxury consumption). Paris, capital of luxury creation, is               For comparison, Austria has a population of 9 million
at 12x. This compares to 3x in the USA and 5x in                         compared to 11 million in Greece, but only 300,000
Europe. Chinese banks have 10% of their assets as Equity                 public workers for a GDP 40% higher than Greece. The
capital. With 20% of their books in property, Chinese                    number of Greek public sector workers is up 4x from its
real estate could turn into a bubble. If it were to burst,               1981 level, when Greece joined the European Union.
the luxury industry (like contemporary arts and fine                     European money went into boosting the politicians'
wines), as second derivatives of real estate prices, would               troops of public servants. With a working population of
collapse.                                                                5 million, of which 25% are unemployed, the number of
                                                                         people in private jobs is less than 3 million, only 25% of
At Zadig we have experience with property bubbles. Our                   the total population; this is similar to France where
journey took us through a Spanish housing frenzy. We                     Zadig is short some government related businesses. The
are still short Sacyr in Spain. Spanish construction and                 "47 percent on the tape" debate started by Mr. Romney
real estate loans grew from 10% of GDP in 1992 to 43%                    in the USA should go live in Europe.
in 2008, when Sacyr's share price reached 40 EUR, today
it trades at 2 EUR. The guilty party was politically                     In the words of the Austrian economist Ludwig Von
accountable, i.e. non-accountable: the Cajas. Those                      Mises: "The supporters of the welfare state are utterly
quasi-public sector banks went from 10% in 1962 to                       anti-social and intolerant zealots. For their ideology
nearly half of the Spanish loan book. Those banks are to                 tacitly implies that the government will exactly execute
blame for the credit bubble which led to Spanish                         what they themselves deem right and beneficial" and
unemployment rate jumping from 8% to 25%, and a                          instead advocate free market economy where the captain
dramatic 50% for those under 25 years old. A lost                        is the consumer. He wrote in 1929, long before the Euro
generation due to the non-accountability of the 20th                     existed: "There is no means of avoiding the final collapse
century's monster: the welfare state.                                    of a boom brought about by credit expansion. The
                                                                         alternative is only whether the crisis should come
The Euro crisis continues whilst new "E" names keep                      sooner, as the result of a voluntary abandonment of
popping up: EFSF, ESM, etc. As if these new infants                      further credit expansion, or later as a final and total
could help the ECB, the Euro currency and the European                   catastrophe of the currency system involved". His Liberal
construction. The answer to the problem remains                          views could move the economic debate into the 21th
political: do we want to build one Europe around one                     century over those of Keynes from the past 20th.

                 “This document is purely for informative purposes, and does not represent an offer or an invitation to
                    invest. All subscriptions must be made on the basis of the Funds issue Offering Memorandum or
                     Prospectus in effect at the time of the subscription. Past performance cannot guarantee future
                 performance in any way. Despite the fact that great care has gone into creating this document, errors
                 or omissions cannot be ruled out. Zadig Gestion (Luxembourg) S.A. accepts no responsibility in terms
                             of the full and accurate nature of the information contained in this document.”

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Zadig. quarterly letter september 2012

  • 1. Zadig Quarterly Letter #27 September 28, 2012 The Manager’s Comment Over the last quarter Zadig was up 4.8% whereas currency with all 27 countries reshaped into regions? European markets, measured by the BE500 Index, were The answer is not financial: Europe Ltd is sound up 7.1%. financially. But the vested interest of local politicians and the rigidity of the cost of the welfare state make Zadig Is debt expensive or equity cheap? 10 year Euro generic cautious about the future of the Euro currency. Our government bonds currently yield 1.4%, whereas most portfolio is constructed to be resilient if the Euro were to equities in our portfolio offer a Cash Flow Yield of 8% at collapse. Let's hope for all of us that the scary current share prices. Pernod-Ricard for instance, with consequences of the Euro break-up will bring about great international brands (Chivas, Absolut, Martell, courage, not austerity, that German idea for preserving etc.) has 10 year debt yielding 3.5% whereas its Equity their investment in the Euro. Zadig has gone short in Cash Flow Yield is 7.0%, 2x higher. This quarter, we several industrial companies which compete globally but added Bic to the portfolio in order to increase our suffer structural cost disadvantage in sectors ranging exposure to the Americas. Bic is typical of what we like from auto, capital goods and chemicals. Those will be today: low valuation, defensive, growing thanks to tackled by Europe’s structural issues and should keep geographical reach (less than 7% sales in France), pricing under performing until Europe reforms. power to hedge inflation and conservative family ownership. In the early 80s, investors bought equities for Zadig went to Greece three times in the last year on the capital appreciation and they purchased government lookout for distressed investment opportunities. We paper bonds for yield. Today it is the opposite. only found Folli-Follie, a retailer with stores mainly in Asia, with high enough Risk Adjusted upside. In Greece Zadig has sold its luxury stocks, mainly PPR and Swatch. the working population in public administration and The Chinese real estate affordability ratio is today in defense is the same as it was in 2004 when none of us excess of 10x (30x in Hong Kong, world capital for knew about the country's faults, and stands at 1 million. luxury consumption). Paris, capital of luxury creation, is For comparison, Austria has a population of 9 million at 12x. This compares to 3x in the USA and 5x in compared to 11 million in Greece, but only 300,000 Europe. Chinese banks have 10% of their assets as Equity public workers for a GDP 40% higher than Greece. The capital. With 20% of their books in property, Chinese number of Greek public sector workers is up 4x from its real estate could turn into a bubble. If it were to burst, 1981 level, when Greece joined the European Union. the luxury industry (like contemporary arts and fine European money went into boosting the politicians' wines), as second derivatives of real estate prices, would troops of public servants. With a working population of collapse. 5 million, of which 25% are unemployed, the number of people in private jobs is less than 3 million, only 25% of At Zadig we have experience with property bubbles. Our the total population; this is similar to France where journey took us through a Spanish housing frenzy. We Zadig is short some government related businesses. The are still short Sacyr in Spain. Spanish construction and "47 percent on the tape" debate started by Mr. Romney real estate loans grew from 10% of GDP in 1992 to 43% in the USA should go live in Europe. in 2008, when Sacyr's share price reached 40 EUR, today it trades at 2 EUR. The guilty party was politically In the words of the Austrian economist Ludwig Von accountable, i.e. non-accountable: the Cajas. Those Mises: "The supporters of the welfare state are utterly quasi-public sector banks went from 10% in 1962 to anti-social and intolerant zealots. For their ideology nearly half of the Spanish loan book. Those banks are to tacitly implies that the government will exactly execute blame for the credit bubble which led to Spanish what they themselves deem right and beneficial" and unemployment rate jumping from 8% to 25%, and a instead advocate free market economy where the captain dramatic 50% for those under 25 years old. A lost is the consumer. He wrote in 1929, long before the Euro generation due to the non-accountability of the 20th existed: "There is no means of avoiding the final collapse century's monster: the welfare state. of a boom brought about by credit expansion. The alternative is only whether the crisis should come The Euro crisis continues whilst new "E" names keep sooner, as the result of a voluntary abandonment of popping up: EFSF, ESM, etc. As if these new infants further credit expansion, or later as a final and total could help the ECB, the Euro currency and the European catastrophe of the currency system involved". His Liberal construction. The answer to the problem remains views could move the economic debate into the 21th political: do we want to build one Europe around one century over those of Keynes from the past 20th. “This document is purely for informative purposes, and does not represent an offer or an invitation to invest. All subscriptions must be made on the basis of the Funds issue Offering Memorandum or Prospectus in effect at the time of the subscription. Past performance cannot guarantee future performance in any way. Despite the fact that great care has gone into creating this document, errors or omissions cannot be ruled out. Zadig Gestion (Luxembourg) S.A. accepts no responsibility in terms of the full and accurate nature of the information contained in this document.”