True Potential Keynote presentation

1. True Potential Keynote presentation Chris Bailey, Close Brothers Asset Management 18th July 2012 • DIVERSIFIED INCOME, CONSERVATIVE & BALANCED FUNDS BOND INCOME FUND

2. Don’t ignore European opportunities

3. Europe…is it soon game over? It is easy to be negative about Europe

4. Europe: ‘a multitude of problems’ .  Sovereign crisis + Bank crisis + BOP crisis All exacerbated by political fragmentation • Sovereign • Convergence of spreads • Mispriced risk • Entitlements Euphoria • Sovereigns dragged down by the need to prop up ailing banks • Bank • Cheap credit • Spurs real estate and credit boom • Massive balance sheet expansion • Banks are dragged down by their holdings of sovereign bonds Fragmented political leadership • Current Account • Differential labour rates (30-40%) • No mechanism to adjust • Huge surplus in Germany matched by deficits across Eurozone

5. The German solution: the market is ignored Forced Economic Convergence Lack of Comprehensive Solution Eurozone GDP (Q1 08 rebased to 100) Germany • Debt Deflation • No bank recapitalisation (LTRO to equity) • Wage deflation • Firewall mirage • EFSF: € 100bn (after Spain) • ESM: bailout funded by bail-outs • (4 countries have even passed) France Netherlands Periphery Source: Bloomberg Never-ending cycle of Crisis – “fixes” have less impact

6. The market solution: Germany’s two bad choices 1. ‘Fiscal Union’: Transfer of Wealth 2. Break-up: Disorderly Exit and Contagion • Sovereign: Eurobonds, Eurobills, ECB lender of last resort • Banks: Bank union, EDIC, Euro Taro (recapitalisations) • BOP: Increase German inflation plus labour reform in periphery • Target 2 likely to reach €1trn by year end (currently €700bn) • ECB capital – bond purchases plus collateral €1trillion • Net Euro liabilities E10 trillion soar to 200% of GDP Germany (27% of GDP) France Netherlands Periphery • Strict conditionality and loss of sovereignty • Yields converge to weighted average of Eurozone • German ‘leader role’ in Eurozone economic bloc • Payments and default crisis in unquantifiable proportions • Solve BOP crisis at expense of Germany • Lost opportunity for German ‘leader role’ It is easy to get worried about the future of Europe

7. ST: Central Banks call to action… To ease financial strain and provide liquidity • June 6th– PBOC cuts RRR rate by 25bp • June 14th – Central Banks stand "ready to offer a co-ordinated policy response • June 20th – Fed extends Operation Twist-and prepared to take further action • Further easing… • July 5th – ECB Further interest rate cut • July 5th – UK MPC Further QE • July 5th – PBOC cuts rates again Source: Deutsche Bank Expect further central bank action in months ahead

8. LT: hello supply side reform Growth and austerity not alternatives Supply side measures • Reduction in regulation and red tape • Reduction in corporate tax rate • Incentives for business investment • Prioritise infrastructure spending • Energy independence • Support for SME Austerity & Growth G7 countries looking to improve competitiveness, embrace innovation, achieve energy independence and reduce the welfare state will be the long term globally competitive winners.

9. Europe: valuation looking better P/E gap widening out

10. Europe: generational lows in performance Performance differentials very stretched

11. Europe: double the dividend yield vs the US Significant yield pick-up

12. Europe: and how European is Europe really? Europe is looking outwards more and more Source: Redburn Partners

13. European investment – a checklist • Europe has attractive investment opportunities • European macroeconomics is difficult but the authorities are being accommodative • Therefore the glass is half full…here is what you have to look for: • International businesses, European listing; • Strong market positions and brands; • Solid balance sheet and ideally attractive dividend yield • Dis-interested investors

14. European conviction equity ideas We continue to find many fascinating companies in Europe to invest in – all of which we have visited senior management in their offices: The number one beer company in the world Global consumer thematic, oligopoly with pricing power The biggest asset turnaround story in France Global wealth management…and the investment bank for free European Equities

15. European opportunities #1 Who would have thought the world’s number one brewer was listed in Belgium? Strong market shares in Europe, the US and Brazil; Focused management operating zero cost budgeting; Value adding deals; Continuing to generate considerable free cash

16. European opportunities #2 Sporting marketing coup of the year has to be Pirelli supplying F1 Tyres are all about replacement demand not new car sales; Regulation, safety and environmental considerations limit competition; Strong balance sheet and internationalising – now number 1 in Latam tyres by value and volume; F1 profile raising hugely successful

17. European opportunities #3 and #4 Vivendi and UBS are worth considering given the value of the franchises they own

18. Europe the reality It is easy to be cautious about the European economy However valuations are good value and… …there are many interesting companies which are overlooked The key is to not shut your eyes but to embrace volatility and uncertainty Don’t ignore European opportunities • Don’t ignore European opportunities

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