campus for finance 2015 summary

8/21/2019 Campus for Finance 2015 Summary

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Alexander Yalygin, Financial Analyst, KIT Finance Ltd.

Campus for Finance New Years Conference 2015

Topic: Cheap money, easy borrowing, tough investment

Jaime Caruana, General Manager, Bank for International Settlements (BIS).

The world is still recovering from the consequences of the 2007-2009 financial crisis. Thesituation remains complex, and those who say that they clearly understand what is going on, eitherlying or just dont have enough information at hand.

BIS invests in high-quality assets. Therefore, the appetite for risk is low because of the influence ofworld Central Banks decisions. As a result, return on investment is low as well.

Trends in the EU market:

1. Performance dispersion

Commodities prices decline. Winners: Sri Lanka, Philippines, Romania, Thailand, India,Ukraine, Pakistan, Bulgaria, Cambodia. Losers: Venezuela, Norway, Ecuador, Columbia,New Zealand, Australia, Chile, Iceland, Canada, South Africa, Denmark, Mexico.

EU and Japan are barely moving

Most Emerging markets (EM) are slowing down

2. High debt overhang: banks are deleveraged, but economies are not. Globally debt ofhouseholds, non-financial corporations and government combined has increased from 210% ofGDP at the end of 2007 to around 235% of GDP (it is more than 20%).

US dollar denominated credit to borrowers outside US

SourceL McCauley, McGuire and Sushko (BIS 2014); data as of Dec 2014

Public debts grew by 40% globally, while the private sectors debt has seen a decline of 5%.

The public debt remains high; however, companies and households are deleveraging. That

means that they are paying off their previous debts instead of spending more. In case of EMpublic debt was kept under control but the debt of firms and households exploded.

Non-bank

borrowers

Banks

Bond

investors

US borderBanks

Bond

investors

1.0 trillion

1.3 trillion

2.7

3.8


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No deleveraging in aggregate. In aggregate, funds are available as well as cheap.

The Federal Reserves flow of funds data show that nonfinancial corporate business inthe US held $1.9 trillion in bank deposits, money market funds, bonds and mutualfunds at end-September 2014.

The same source shows that internal funds (mostly after-tax profit and depreciationexpenses) at $1.8 trillion exceed capital spending at $1.7 trillion.

In the euro area, nonfinancial corporations showed a profit share of gross value addedover 24% but an investment share of less than 22%.

In the US and Europe, junk bonds and leveraged banks debt have never been moreavailable and cheaper.

All this suggests structural rather than financial impediment investment.

3. Eurozone economy is stuck with easy money and fairly weak investment. This means that itis getting harder for investors to allocate assets in their portfolio to maximize return on Investment.

Long and global view

What has to be done and taken into consideration?

1. Better integrate finance into global economy:

Financial cycles are the key focal point to real economy. Currently the debt piles up and itresults in financial system deterioration. The role of finance and financial cycles is oftentimesunderestimated. The same goes to long-term costs of the short-term expedients.

Monetary policy sets leverage price in currency and influences risk-taking. That is caused bythe following boom of misallocated resources and obscured weakness in productivity. Therefore,there is a gap between financial and real risk-taking.

2. Invest in real economy:

Financial boom obscured a general decline in productivity growth in advanced economies.

Booms are financed by banks headquartered in countries not experienced in that (e.g.Germany, CH)

Slow productivity growth forms basis for the raise of pay and living standard)

Advanced economies: nominal investment in equipment is below the trend. Newtechnologies are not being installed.

Investment is not so weak.

There are two approaches to risk (leverage): bank-driven and asset management-driven.

Within asset management-driven approach the move to capital markets implied it is positivedevelopment. However it has the following issues: first, asset managers are influenced by ranking;second, liquidity. Liquidity is a key component for real global economic growth support. But it is notclear if liquidity will be there. However, interest rates hike is projected in the medium-run,concluded top executive.

Summary and Conclusions:

Recognize benefits of easy money decline.

Costs and risks taking lead to the rise of debt and distortions although they are country-

specific. Symmetrical monetary policy needed. Counter boom in a real sector needed against that in

financial sector.


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Investing in the low Interest Rate Environment, Panel Discussion

1. Tamaz Georgadze (TG), Weltsporen2. Thomas Groffmann(TGr), COO of BlackRock3. Prof. Markus Leippold (ML), Zurich University

4.

Prof. Hans-Peter Burghof (HB), Hohenheim University

TG: Interest rates will remain low for a considerable time. Approximately 10 years.

ML: there is no indication of interest rates hike because of savings overhang and low productivity.Large amount of money goes to the stock market to support dividend-paying companies.

Nowadays it is very hard to diversify globally due to the assets interconnection. The demand forETFs goes up which, thereby, increases correlation between various asset classes. In essence, ETFschanged the market.

TGr: Investment horizon and expected return are becoming the most primary factors. 69% savings

in savings account are held in cash (in Germany) => no opportunities for the capital markets.

Inflation in UK remains around 0.5%. There will be no change in Bank of England monetary policy.

ML: The maturity term for US bonds is 5 years. Fed will not make any haste in interest rates hike.Unemployment rate for unskilled and young people remains high.

TGr:EUR/USD is forecast to go down which is good for European exporters. The problem of lowinterest rates in Europe is complicated by diversified policies and growth rates among Europeanmember states. That is contrary to the US, where the policy is uniform nation-wide.

It will take a long while till the rates will improve. We are expecting that the US economy will growfurther. Hence, there is a high probability that dollar will rise further this year.

HB: What is good for the US might be unhealthy for Europe. That is, shall low interest rates remain

at all-time low, the classic banking model will be destroyed.

The capital is currently exported from Germany. Deposit banks have to set negative interest rate

which will cause bank runs and system destabilization => systemic risk. In particular, Central Bank

of Switzerland has negative interest rate.

If banks dont make any changes to their business models German banks in particular then

bank runs across Europe will be inevitable in the upcoming decade.

ML: There is not enough production capacity among European companies. This makes no space for

the money inflow, so new economic and business models need to be introduced.

TGr: ETFs are cost effectiveand cheap instruments in such environment. Individuals and investors

now need to get advice from professionals on how to invest the money. One of the ways to diversify

is to select the ETFs to buy. Derivatives and swap-based ETFs could be considered as an option.

TG: There is a problem of failing oil prices. It is good for real economy. However, it creates hurdles

for monetary policy which is not working properly the key interest rates are well below target

levels => investment is subdued. E.g., the Netherlands have high interest rates due to high taxes.

HB: It is currently hard to believe in ratings. Market is fundamentally inefficient. Europe is exposed

to political risks (as such, election in Greece and geopolitical tensions between Ukraine and


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Russia). ECB believes that interest rates have to be the same everywhere in EU. However, it is not

the way for Eurozone economy recovery given the difference of economic model among EU

members.

Why should not ECB lock into large-scale asset purchases program?

HB: deflation is wrong term in the context of Euro area. Inflation of 2% all over Europe does not

mean the price stability.

ML:inflation is not healthy way out for Southern Europe. There is no discipline among EU Central

Banks, so they will not be able to run unprecedented bond-buying program.

TG:Due to subdued inflation and absence of growth the debt burden will become unbearable for

the borrowers. Quantitative Easing (QE) alone is not enough to spur growth in Europe due to

structural problems in Eurozone economy and low productivity growth.

David Blumer, Head of EMEA, BlackRock

Investor poll takeaways

1. Europeans remain downbeat about their financial futures. The Club Med countries arefeeling least positive.

2. Efforts to encourage financial advice are needed.3. With over half of all household assets held in cash, Europeans need to take greater strides

towards investment.4. Funding Europes ageing society is an important need. 50% of Europeansare not saving for

retirement. Less than half know what they need to save.5. Key message how to take greater financial control. Europeans believe this would involve

putting something aside managing their debts and having cash safety net. But this willrequire governments and industry to better educate servers.

Smart investorshabits

1. Save and invest more.2. Make retirement as priority.3. Actively invest for income.4. Recognize the need to spread assets => diversification. As such, if 60% of savings held in

cash, it is not a diversification at all.5. Take advice from professionals.

Economic growth and monetary policy across the globe are diverging.

The year 2015 will be return of volatility. This requires investors to recognize, mitigate and

hedge risks.

Tightening of financial conditions is expected in UK and US. Risk-free rates in EU will stay

low for longer. The cost of mistakes will increase. Thus, investment strategy needed.

This year US, EU and Japan are recommended to be considered as investment

opportunities.

US. We expect Fed tightening in 2015 but in a gentle way. Cyclical and low beta stocks will

be key beneficiaries of that. USD will keep on strengtheningand the US economy will enjoy

sustainable recovery.

EUis low-flying plane. This year EU might a subject to occasional near-death experience as

well as large potential for upside surprise through potential QE.


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Japan. Key theme Abenomics. The reasons for Japan to be a good story for 2015 are the

following: Bank of Japan (BoJ) buys equities and large pension fund will double investment

allocations into equity stocks. Additionally, Japanese equities have cheap valuations.

However, watch out for air pockets (turbulence, high volatility)

Investors are searching for yield. It becomes more difficult to be fixed income investor.

More and more investors take private debt and go into more illiquid instruments. One has

to make sure to be able to stomach illiquidity.

Few bargains today in the global markets. Russia is a bargain due to cheap valuations. But

due to uncertain environment it is very risky investment. US valuation is quite expensive,

but it is still somehow below the average. China also looks attractive and, no doubt, is good

long term investment. Nevertheless, one has to be patient and be ready for numerous

storms on the way of their structural reforms implementation.

Lower commodities prices beneficiaries are also recommended to be tracked from the

buying prospective.

Investment ideas for the 2015

Equities

Japanese and EU equities

US cyclical stocks (if Fed tightens)

Fixed Income

Hard-currency Emerging Market debt

US Treasuries

Contrarian

Natural resources equities as a hedge if US dollar strength fad.

Alternative investments

Income paying real real-assets (e.g., property, infrastructure), but make sure to get

compensated for illiquidity

Trends in Cross-Border M&A

Alexander Doll, CoHead of Barclays, Germany

There are three types of M&A: hostile, friendly and reluctant.

EMEA accounts for 28% of global volume ($304 bln). In terms of the deals size and transactions

amount industrial sector in Germany took the lead.

EMEA into Americas 19%

Americas into EMEA 16% with largest cross-border volume flows.

M&A was assumed as Foreign Direct Investment (FDI)

Overall M&A activity is well below historical levels in relation to FDI

Germany $900 bln (15%)


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USA - $4500 bln (15%)

China - $900 bln (15%)

M&A Financing

Globally:

83% was paid by cash. Cash is King in a global basis, 8% by stocks, 9% by debt.

Germany:

95% was paid by cash, 5% by stock, 0% by debt.

Acquisition premia in 2014

Global 29%

Germany 26.4%

77% of M&A volume was provided by financial investors.

Low interest rate policy triggers leveraged buyouts (LBOs). We will see more deals like these closed

in 2015.

The Americas is responsible for 50%+ of M&A volumes, while Europe has seen a decline. In EMEA,

only 1-2 out of 10 M&A deals are closed. Why does this happen? I dont know.

Cross-border deals with German involvement

Historically US inbound M&A flows exceeded those from the States by roughly 40%. 2014 markeda new high and raised the game with the Sigma-Aldrich being one of the largest US acquisition out

of Germany.

The largest deals: German acquirer/US Target

* 55|25 63|25 74|16 74|30 75|29 42|14 49|21 78|21 92|25 50|13 78|27

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Acquirer DeutscheTelekom

Adidas BASF Siemens Fresenius K+S SAP SAP DeutscheTelekom

Bayer Merck

Target CingularWireless

Reebok Engelhard

DadeBehring

Holdings

APPPharmac

euticals

Morton Sybase Success-factors

MetroPCSCommuni

cations

Conceplus

Sigma-Aldrich

Value($m) 2,480 4,311 5,400 6,814 5,623 1,675 7,111 3,739 6,806 1,136 16,989

*Total # of transactions|# of transactions that reported transaction value

0

10

20

30

40

50

60

70

80

90

0

500

1000

1500

2000

2500

3000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Transaction volume, $bn (right axis)

Average Transaction value in $m

Source: Dealogic, Barclays presentation

The largest M&A deals volume. German Acquirer/US Target


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The largest deals: US acquirer/German Target

* 130|61 116|48 113|43 170|56 112|39 86|27 108|30 143|32 104|28 85|33 118|33

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Acquirer Rockwo

od

Specialists

Providenc

e Equity

Partners

Goldman

Sachs

Goldman

Sachs

JC flowers Liberty

Global

BlackR

ock

Liberty

Global

General

Motors

McKess

on

ADM

Target Dynami

t Nobel

Kabel

Deutschland

Property

Portfolio(Karstadt

Quele)

Property

Portfolio(Allianz)

Hypo

RealEstate

Holding

Unitym

edia

Allianz

(5%)

Kabel

Baden-Wurtem

berg

GMAC-

SAICAutomoti

veFinance

Celesio WILD

Flavors

Value($m) 2,703 2,533 5,416 3,329 1,782 5,247 2,930 4,481 4,200 7,062 3,126

*

Total # of transactions|# of transactions that reported transaction value

US companies make more M&A deals but in a smaller scale rather than Germany. US companies

acquire mostly medium-size firms.

Why M&A is important?

Strategic / M&A dialogue serves many business areas of IBD

Access to key decision makers on highest board level

1. DCM/Leveraged Finance

Bonds

Syn. Loan

Bridge Financing

2.

ECM

IPO

Capital inc.

Convertibles

3. RSG

FX hedging Interest hedging

Commodity

0

5

10

15

20

25

30

35

0

100

200

300

400

500

600

700

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Transaction volume, $bn (right axis)

Average Transaction value in $m

Source: Dealogic, Barclays presentation

The largest M&A deals volume. US Acquirer/German Target


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4. Corporate Bank

Transaction services

Trade Finance

Credit cards

M&A Revenue Contribution

M&A as % of total bank revenues

US banks 1-4%;

EU Banks 0.25-2.5%

Adv. Specialists 39-52%

Banking is in the heart of strategic decision.

Strategic Importance

M&A importance cannot easily be pinned down to pure P&L contribution

Strategic dialogue serves as door opener and angle for other investment banking products

A whole package of event-driven products can be offered to support M&A transaction

(financing, risk solutions, etc.)

Verizon Case Study

Source: Barclays presentation

M&A activity is expected to rise in the year 2015. Availability (more targets and different

dimensions) and cross-dealing(deals between industries) are projected to be among major trends

in M&A activity.

Bridge

financingM&A

Bond

financing

RiskSolutions

ECM

Verizon has agreed to

acquire the remaining

45% stake in Verizon

Wireless Stake for

Vodafone

$120 billion Financial

Advisor to Verizon

Barclays

Verizon

$61 billion Bridge

Facility

Joint Lead Arranger and

Bookrunner

Barclays


9/12


Cheap Money A Take on Current M&A Activity

Dr. Wolfgang Fink, Co-CEO Goldman Sachs, Germany & Austria

The GS Economic View

Overall positive growth outlook despite persisting macto concerns over Eurozone, US Tapering

and Emerging Markets Growth cooling.

Top 10 Themes for 2015 (herein more details)

1. A Broadening Recovery:

- US recovery remains strongest anchor of global growth

2. Developed Market Divergence Lives on

- Europe and Japan fail to march US growth

3. The New Oil Order

- Sharp decline in oil prices and its consequences

4.

Low Inflation and no fight against it

- Slack remains large and wage pressure slows to return, and commodity disinflation flows

5. The Dollar Bull Market

- Broad-based USD Strength

6. Central Bank Interest Rate Policies

- Divergence in Rate Policy

7. Chinas umpy Downshift Continues

- Further decrease in potential and actual growth

8. EM: More Relief, More Polarization

- Fight between disinflation leading to growth and commodities causes crisis

9.

The Low Volatility World and its Challenges- Lower Market Volatility may persist but low liquidity means ongoing temporary spikes

10.Living in a Low Return World

- Entry point matter more with flatter yield

Source: Bloomberg, GS Research as of 02 Jan 2015

Equity market valuationsremain favorable. P/E is trading around historical average. Risk

premiais still very high. It is a strong case for equity as an asset class.

M&A volumes are close to pre-crisis period, but not in EU, where one may observe large gaps.

>85% of M&A deals involve corporates.

Organic growth perspectives are subdued. Particularly in Europe, GS earnings growth forecastcomparatively flat.

Earnings Growth (%)

GS Research Consensus

2014E 3.2 4.0

2015E 6.2 12.3

2016E 6.0 11.0

2017E 8.0 11.1

2018E 6.0 8.1
http://www.gsalumninetwork.com/s/1366/images/editor_documents/research/2014/top_ten_market_themes_for_2015.pdfhttp://www.gsalumninetwork.com/s/1366/images/editor_documents/research/2014/top_ten_market_themes_for_2015.pdfhttp://www.gsalumninetwork.com/s/1366/images/editor_documents/research/2014/top_ten_market_themes_for_2015.pdfhttp://www.gsalumninetwork.com/s/1366/images/editor_documents/research/2014/top_ten_market_themes_for_2015.pdf


10/12


94,7102,7

113,5

162,3

219,8

0

50

100

150

200

250

2010 2011 2012 2013 Current

ActivistCapita

l($bn)

44

59 63

82

191

2010 2011 2012 2013 Current

to deploy on an increasing number of campaigns

Main driver for the difference between GS Research and Consensus are GS earnings estimates

below consensus for Oil & Gas Companies(following the sharp decline in energy prices) as well

as Financials.

CEO Confidence remains positive and markets rewarded those who have acted. One day

indexed stock price reaction to buyers 1% (in the year 2014).

Activists is here to stay running an increasing number of campaigns

Recent Examples for Break-up/Spin-off campaigns

Company Activist Proposed Transaction Status/Outcome

DOW Third Point Spin-off petrochemical business Nov-14: Dow agreed to add fourindependent directors to its board. Two ofthem Third point nominates

Cliffs CasablancaCapital

Spin-off Bloom Lake mine Jul-14: Casablanca gained majority onboardNov-14: Ceased Bloom Lake operationsas no buyer was found

Ebay Carl Icahn Spin-off PayPal Sep-14: Ebay announced plan to spin-offPayPal in 2015

DARDEN Starboard Value Break-up into several operating

companies and REIT

Jul-14: Darden Restaurant sold to Red

Lobster ChainOct-14: Starboard value took over entire

12-member boardSource: Goldman Sachs presentation

Summary of Key Trends Driving M&A Activity

1. Deal composition has shifted towards corporate activity (e.g. AActavis; TAllergan, V

$66.4bn, DNov14)

2. CEOs focusing on strategic M&A (e.g. AMerck; T- Sigma-Aldrich; V$16,4bn; DSep14)

3. Cross-border M&A US companies targeted by European firms (e.g. AGE; TAlstrom; V

$17,1 bn; D- May14).

4.

Active shareholder engagement (e.g. AVolkswagen; T- Scania; V$9,1bn; DFeb14)

Notations: A Acquirer; TTarget Company; VTransaction Value; DTransaction Date.

Activists have access to increasing amounts of capital


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Outlook for the year 2015

1. Supporting macroeconomic conditions(positive trigger):

Cheap money, low cost of financing, limited perspective of organic growth, attractive equity

valuation levels.

2.

Regulation(questionable issue):Large regulatory hurdles and Fed rate hikes.

3. Geopolitical uncertainty(negative factor)

Middle-East unrest, Russia & Ukraine conflict

Eurozone uncertainty: upcoming elections in Greece and UK.

4. Increasing volatilityis expected.

The Future of Monetary Policy. Panel Discussion.

Takeshi Shirakami(TS), Bank of Japan

Prof. Christoph Kaserer(CK), TUM

Joahim von Schorlemer(JvS), Royal Bank of Scotland

Peter Muller(PM), Bayer AG

What is the current state of monetary policy in EU?

TS: Eurozone economy is losing momentum. Deposit rate is (-0.2%). Headline deflation does not

vary considerably.

Low inflation and low interest rates trigger M&A activity and support consumption.For the next few months we might see interest rates decline because of oil price slid.

CK: Interest rates are close to zero level. This undermines investment activities. The cost of money

is very low, which stands for decreasing price of risk. Government and corporate bonds buying will

pose risk for EBC balance sheet.

JvS: Government spending is limited right now. ECB has the one mandate handling inflation. The

monetary policy of ECB may result in investors squeeze: poor will become poorer and rich people

richer.

PM:Back in 2013 when Cyprus crisis occurred, the head of ECB supported euro by phrase ECB will

save single currency whatever it takes. Strengthening euro was beneficial for exporters in the short

term. Now it is not anymore. At the same time Eurozone experiences structural problems:

1. In many companies capacities are not utilized or the money is invested in non-competitive

environment.

2. Financial regulation is very complex and unclear.

Is it deflation or natural process in EU?

TS: ECB should take into consideration the whole Eurozone economy to decide on monetary policy.

Banking sector, in particular, is much safer in low interest rates environment.


12/12


CK: Eurozone is in sclerotic situation right now. There is no belief in free market. The major

problems are economic and fiscal policy as well as inefficient government spending in

infrastructure. Interesting that in Japan one cannot turn around monetary policy instruments.

Recommendations for ECB:

1.

Go for QE: buy debt assets

2. Benefit from other economic policies support.

Japan has identical situation to EU low interest rates. In case of Japan there is uncertainty about

Abenomics. But Japan is doing better because they have a framework coordination and complex of

measures in monetary policy.

JvS: The yields are low. We pay a lot to have euro.

PM: Interest rates should stay low for a long time. Such countries as Italy, Spain, Portugal and

Greece need that. They are not ready for inflation and rate hikes.

Is ECB well-prepared for the future in the medium- and long-run?

TS: Independently ECB is not ready for that. Unfortunately, other economic policies do not work for

ECB. Its weighing on ECB plans to reach target level of inflation of 2%.

CK: Now it is not the time for ECB to unveil QE program. It will relieve government intensions for

structural reforms.

What about Exit strategy? What time will be needed for that?

CK: around 25 years.

Will the Euro survive?

CK: Politically it is impossible. In particular, there is a massive movement against Euro in Italy.

Some countries will exit EU.

TS: Euro has so-called Teenager issue. It needs to grow up.

JvS: There is unrest situation and were some mistakes made:

Some success, but no progress in Greece;

Underutilization of capacity. It accounts for 60% of GDP growth (compounded measure)

PM: Technically there is no way out. Monetary union does not provide the money for exit. All EU

countries are in the same boat and they have to agree on something to resolve existing problems.

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