1) The document provides an outlook and review of the European equities market in 2012 from the BlackRock European Equity Team.
2) It summarizes 2011 as a negative year for most major markets except the US, with defensives outperforming cyclicals. Financials suffered due to the Euro crisis.
3) Looking ahead to 2012, the team emphasizes quality companies with strong balance sheets, free cash flow, and international earnings to navigate the turbulent environment in Europe. Stock selection will be key.
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Credit suisse mexico breakfast meeting march v22012
1. BlackRock European Equity Team
2012 Outlook for European Equities
March 2012
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2. Year 2011 in Review – Market Moves
Local Currency Index Performance 2011 (%)
NIKKEI 225
HANG SENG
SWISS MARKET
OMX STOCKHOLM 30
• US was the outperformer amongst major markets AEX INDEX
FTSE MIB £
IBEX 35
• Europe outperformed emerging markets DAX 30
FRANCE CAC 40
FTSE 100
-MSCI Europe 2011 Total Return (€) -7.5% STOXX EUROPE 600
EURO STOXX 50
MEXICO IPC
-MSCI Emerging Markets 2011 Total Return (€) -15.4% BRAZIL BOVESPA
S&P/TSX
NASDAQ
• UK and Switzerland outperformed in Europe S&P 500
DOW JONES
-25.00% -20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00%
• Italy was the worst performer in Europe MSCI Europe - Tot Return Ind
150
140
130
120
110
100
A negative year except in USA
2
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3. Year 2011 in Review – Styles & Sector Moves
MSCI Europe Sector Performance 2011 (%)
•Defensives best performing sectors
•Financials suffer from Euro crisis
•Cyclicals suffer from worries over global growth
Style/Size Index Performance 2011 (%)
•Growth outperforms Value MSCI Europe
Stoxx Small 200
Stoxx Mid 200
•Large caps outperformed small caps Stoxx 200 Large
MSCI Europe Value
MSCI Europe
Grow th
-20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0
A year of defensives, energy and non-cyclical growth
3
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4. Year 2011 in Review – Volatility and Risk
European equity market volatility 2011 Explanatory Power of the Largest Principal Component
60% of returns
80% explained by ‘Risk
on, Risk off’
70%
60%
50%
40%
30%
20%
10%
0%
A year of elevated volatility dominated by the risk on/risk off trade
Source: BlackRock RQA as at March 2012
4
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5. Europe remains under owned
Asset Allocation to Europe
20%
19%
18%
17%
16%
15%
14%
13%
12%
11%
10%
Ene-02 Jul-03 Ene-05 Jul-06 Ene-08 Jul-09 Ene-11
Global funds allocation to Cont Eur, Manager Simple (Germany, France, Spain, Italy, Greece) Average
Need investor confidence to unlock value
Source: Credit Suisse December 2011
5
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6. The two sides of Europe
Which way out of the crisis?
Source: Google images
6
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7. ECB is offering vital support
ECB Balance sheet (EUR, Billion) Growth of Balance sheets during the crisis
Crisis has been averted for now
Source: Deutsche Bank February 2012, Barclays/Bloomberg March 2012
7
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8. Ireland - the cost of fiscal austerity
Irish GNP growth turned negative in Q3 2011 Irish domestic demand continually declining since recession
10.0%
10.0%
5.0% 5.0%
0.0% 0.0%
-5.0% -5.0%
-10.0% -10.0%
-15.0% -15.0%
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
GNP Domestic demand
Nominal Irish GNP has fallen 25% since the end of 2007
Source: Goodbody, as at January 2012
8
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9. Global leading indicators - tentative signs of recovery?
Global Leading indicators showing tentative signs of recovery
Source: Barclays as at February 2012, GS as at March 2012
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10. Positive signs emerging for Europe’s global leading franchises
Purchasing Manager Indices (PMI’s) inflecting upwards MSCI Europe Geographical Revenue Exposure 2012
65
60
55
50
45
40
35
US Eurozone China
30
- 08 l-0
8 - 09 l-0
9 - 10 l-1
0 - 11 l-1
1 - 12
E ne Ju E ne Ju E ne Ju E ne Ju E ne
Weaker Euro benefits Europe’s international earners
Source: Barclays as at January 2012, GS as at December 2011
10
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11. The corporate profit cycle
Earnings revisions ratio becoming less negative Pan-Europe and US net profit margins (%)
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
US Europe
Potentially positive, but this is not March 2009
Source: Morgan Stanley March 2012 Credit Suisse, as at January 2012
11
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12. European valuation
Pan-Europe Price to Earnings ratio
30
25
20
15
10
5
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Pan Europe PE Average +1Stdev -1Stdev
Valuations cheap relative to history and USA
Source: Citigroup as at December 2011,
12
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13. Equity Yield vs. bond yield
Traditional investments yields Developed World Dividend Yields
8
7
6
%
5
4
3
2
1
0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Japan US Europe ex UK UK
Europe offers most attractive dividend yields
Source: Yield data as at 31 December 2011source Bloomberg, Societe Generale. Cash rate is UK 3M Libor. Citigroup as at December 2011
13
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14. Year 2012 Outlook – Key themes
What are we emphasising in portfolios? What are we avoiding in portfolios?
Quality Companies Highly leveraged businesses
- Strong balance sheet Companies exhibiting signs of financial distress
- Proven management Large domestic peripheral earnings exposure
- Reliable business model
Overvalued stocks
Free Cash Flows
- Dividends
- Share buyback
- Capital returns
International Earnings
- Undervalued cyclical companies
- US and Emerging market exposure
Non-cyclical growth
Stock selection essential to navigating turbulent environment
14
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16. BlackRock European Equity Team
Extensive coverage across European markets
• Team AUM U$15.6bn as at 29 February 2011
• 13 sector analysts
• Average 19 years experience of senior PMs
Vincent Devlin Alice Gaskell
Consumer / Other Financials
Commercial Services
Bottom-up fundamental investors with macro Michael Constantis
IT – Telecoms,
Stefan Gries
Energy
awareness Media
Andreas Zoellinger Brian Hall
• All Fund Managers & analysts conduct research Insurance Capital Goods/
Construction
• Team produces proprietary research, not reliant on
broker recommendations Nigel Bolton
Head of European Equity Team
• Best ideas are delivered through team debate & Real Estate
collaboration
Hampus Lundh
• Leverage BlackRock’s Global resources Materials & Amy Dey
Mining Banks
Simon Hunter
Alister Hibbert
Autos, Tobacco, Retailing,
Banks
Transport
Portfolio construction that builds portfolios Zehrid Osmani
Cons Staples &
Anne Osborne
Healthcare
around high conviction ideas Luxury Goods Utilities
Kathleen Dickson Dugal Bain Joe Williams Laurence Gallo
Product Specialist Product Specialist Product Specialist Product Specialist
Highly Experienced, Rigorous Approach, Global Reach
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17. BlackRock European Equity Team: Investment process overview
Idea In-Depth Company Analysis Portfolio
Generation Construction
Financial
Modelling
Team Sector Analysts Fundamental
Analysis Sophisticated risk
Screening
systems to control
External Research Company Recommendation
Research Pipeline risks & maximise
Macro/Thematic Meetings & Rating rewards
Challenge
Assumptions
Structured, disciplined research framework
17
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