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    Renaissance  capital Renaissance capital Document Transcript

    • 11 December 2012 Charles Robertson +44 (207) 367-8235 CRobertson@rencap.com Thoughts from a Renaissance man Is the euro immoral? Is an economic policy that has produced 25% unemployment in Spain and Greece, and is forecast to make this worse, a morally acceptable policy choice? How does an electorate react to such a socially damaging man-made disaster? History is unequivocal. The electorate will reject the policy. Taking the Great Depression template for countries leaving the gold standard, we should expect Greece to leave the euro in 2013 and Spain to follow in 2014-2015. The former might see markets decline by 10-20% over one quarter. The latter is a Lehmans II event, likely to trigger a 50% fall in markets before a strong rebound. Yet we should buy equities today and sell US treasuries. History tells us that forecasting a departure from a fixed exchange rate regime is nearly impossible even weeks before it occurs, yet we (perhaps foolishly) assume Greece will not leave in the next quarter and will have only a temporary market impact, while Spain should remain stable enough throughout 2013. We share the view of many that equities today offer better value than debt, until closer to the time when the political events we fear come to fruition. Why have we turned more negative on Spain? Until now we have argued that Spain had a 50% chance of pushing through structural reforms that would allow jobs creation by 2014-2015. We always saw high risks, because Spanish households have a net savings structure closer to the devalue-and-inflate model of the UK and the US, than Germany or Italy. Greece has now joined Spain in this camp. Today we are cutting our estimate of euro survival for Spain to 40% from 50%, for the following reasons: Spain and Greece now record 25% unemployment rates. We can find no example of a country experiencing an unemployment surge to this level and remaining in a fixed exchange rate regime. Ben Bernanke’s work on the Great Depression implies they will leave. No major institution expects Spain’s unemployment to improve in 2013. The OECD and EU Commission both expect deterioration in 2014 too. The IMF expects Spain will not record GDP growth above 1.7% by 2017. Since 1981, Spain has not seen job creation with GDP growth lower than 2.4%. We tentatively assume another 1.5mn job losses in Spain in coming years based on IMF growth forecasts. Export growth has collapsed after encouraging (but inadequate for job creation) growth of 20% in early 2011. Spain’s current account improvement is due to falling domestic demand, not export growth. Exports of goods, services and income remain too low for Spain to benefit from Baltic/Irish levels of openness. Productivity gains – as seen in the Great Depression – do not offer a solution unless they are creating jobs. Rising unemployment and falling wages will hurt household consumption. Budget deficits estimated at 6% of GDP in 2014 – by both the OECD and EU Commission – suggest no scope for Spain’s government to spend more in 2013-2014 to produce jobs. ECB intervention in the bond market is no solution. It is unlikely to produce the zero (or negative) nominal bond yields that we believe are needed to encourage corporates to ramp up investment and create jobs. The welfare state may yet keep Spain in the euro. A crucial difference from the 1930s is the government provision of welfare to the unemployed. As no rich country has seen the unemployment surge now experienced by Spain and Greece, we have no way of quantifying if this will be sufficient. The Spanish people may also prove to have greater fortitude and resilience than any society previously. Surprises that may keep Spain in the eurozone would include stronger global growth, a radical change in German economic policy towards growth promotion, massive euro depreciation, and/or proof that structural labour reforms in Spain have reduced the growth rate required for job creation. Democracy is immortal in Greece and Spain, and Germany’s export model would survive a much stronger euro. We strongly disagree with those arguing the opposite. We will not use this piece in our global economic forecasts. No-one else will. From Russia to Nigeria and Turkey to South Africa, the public and private sector are preparing for this scenario. We continue to favour them in the short and long term. © 2011 Renaissance Securities (Cyprus) Limited. All rights reserved. Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04). Hyperlinks to important information accessible at www.rencap.com: Disclosures and Privacy Policy, Terms & Conditions, Disclaimer
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 The most important question for investors over the next few years is whether Spain Spain’s euro departure would be another will leave the eurozone. If it does, we should assume a Lehmans-style market Lehmans-style event reaction, with equities plunging 50%, before rebounding strongly some three-to-nine months later. Many banks across Europe may need to be nationalised. The world will experience another global macro-shock. Africa and Asia will still grow, but emerging Europe and Mexico will be hit hard. Investors will flee to US treasuries and bid yields down to around 0%. Of course none of these investment strategies are correct today. Rather the But we believe buying global equities is a opposite. We don’t believe for a second that Spain will leave the eurozone in the good strategy today next few months. So investors today should be gearing up for a somewhat better global outlook going into 2013 – selling US treasuries in favour of EM/frontier equities – and indeed, perhaps buying Spanish bonds too, as 2013 will likely see the ECB step into the bond market. Where we increasingly differ from the market is regarding the outlook for 2014-2015. It is 2014 where we differ from the market Today, we read that some expect US treasuries to sell off aggressively that year, ahead of a Fed rate hike in 2015, because US growth will be picking up strongly towards 3.0-3.5%. If that is correct, then EM hard and local currency bonds will become significantly less attractive. Instead of debt investors hunting yield – a hunt that today has already created a global ‘hard’ currency bond bubble – the US treasury market will itself begin to offer yield. Would the markets still over-subscribe a debut Zambian eurobond more than 10x, at around 5.5% yield, if US treasuries were offering 3-4% for 10 years? Would South African or Turkish or Russian local currency bonds look so attractive at their low real yields? A more bullish outlook for the US and world economy in 2014-2015 – while positive for EM growth – would also have some negative impact on EM and frontier markets. But it is 2014-2015 that we believe carries maximum deflation risk. The work we have done below tells us to be increasingly worried about Spain’s ability to remain in the euro over those years. We will not make Spain’s departure from the euro our base-case forecast for any We will not make Spain’s euro departure economy or stock. No other bank will. If we forecast the start of a sharp western the base case for our forecasts, even recession in 2014-2015, then our earning numbers for shares, and our assumptions though we think it is likely for currencies, would become radically different from the market’s, require a very different ‘fair value’ for a share, and make us entirely useless for investors trying to trade in 2013. In addition, there is still a good chance (albeit less than 50% as we see it today) that something happens to surprise us positively. So we will stick close to consensus for our US and European GDP forecasts, but will strongly doubt them. But most importantly, our pessimism about Spain is rooted in assumptions about the The Spanish people may have more level of pain that a population can take, and we may be wrong. The Spanish may fortitude and resilience than any other prove to have more fortitude and resilience than any other society in history. society in history Why have we shifted from 50/50 to 60/40? This economist’s concerns about Spain are not new. A Spanish financial newspaper We have shifted from seeing a 50% cited them back in September 2010, just months before moving to Renaissance chance of Spain staying in the euro to Capital. Indeed, it was these concerns that were a push factor for the move to this 40% emerging market investment bank. But until now, we’ve argued that Spain had a 50/50 chance of pushing through the tough reforms that Germany recommends, and that the Spanish people endorsed with a landslide victory for the centre-right Popular Party and Prime Minister Mariano Rajoy himself in November 2011. The trigger for our change of view was the IMF’s World Economic Outlook forecasts Because no major forecaster sees jobs of October 2012. The fund forecast that the maximum growth Spain could expect as growth in 2013-2014 late as 2017 is just 1.7%. That looked to us to be too low to create jobs in Spain, and indeed, since at least 1981, Spain has not created jobs with growth of less than 2
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 2.4%. We would have to assume that the structural labour market reforms enacted already in 2012 have lowered that growth threshold to 1.5-1.7% to believe that Spain will see jobs created in 2015-2017. That is pretty heroic, so the implication is Spain’s unemployment rate will keep rising. Figure 1: GDP and employment data in Spain 1980-2017E Employment % ch GDP % ch Since 1981, Spain has 8 not created jobs 6 when GDP growth was less than 2.4% 4 2 0 -2 -4 -6 -8 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IMF World Economic Outlook Very oddly, in our view, the IMF believes unemployment will fall, from 25% in 2012- 2013 to 24% in 2014 to as low as 20.5% by 2017. We strongly disagree that the IMF’s forecasts for growth and unemployment will prove to be consistent. If it is right on growth, we tentatively assume another 1.5mn jobs will be lost from 2012-2017 and unemployment will rise above 30%. Figure 2: GDP % ch (rhs) and net job creation (000s, lhs) with Renaissance Capital forecasts for 2012E-2017E GDP real pc change Net job creation (000s, Rencap forecasts 2012+, lhs) 1500 5.0 These growth rates dont create jobs in Spain 4.0 1000 3.0 500 2.0 1.0 0 0.0 -1.0 -500 -2.0 -1000 -3.0 -4.0 -1500 -5.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: IMF World Economic Outlook, Renaissance Capital estimates Indeed, the EU Commission and OECD have both now produced forecasts that differ from this rosy IMF view. The EU Commission sees 26% unemployment in 2013 and the OECD sees 27% in 2014. These are more credible but may prove too low. 3
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Figure 3: Unemployment rate forecasts (EU Commission, autumn 2012), OECD (2012, Volume 2), IMF (October 2012) Spain unemployment rate (%) OECD IMF EU Commission 29 27 25 23 21 19 17 15 2009 2010 2011 2012 2013 2014 2015 Source: IMF World Economic Outlook, EU Commission, OECD Economic Outlook Volume 2 What this means is that Spain will have to endure an unemployment rate of 25% or Spain has managed one year of 25% more for 2012-2015. So far, it has managed just one year. Even if you are as unemployment; it probably has to optimistic as the IMF, Spain will need to manage an unemployment rate of 20% or manage three more years more for eight years. So far Spain has managed just three, and voter anger was so high in 2011 that the (then) ruling Socialist party suffered its worst-ever election defeat in three decades at the local elections, before getting hammered in the parliamentary elections. Most damaging of all is the lack of hope that we believe will have engulfed Spain by Growth well above 2% is required to 2014. It is not just that unemployment will have risen to 27% if the OECD is correct, create a feel-good factor or 30% if we are correct, but that there will be no feeling of hope of improvement. Note that even if growth surprises on the upside before then, electorates do not feel positive about growth of up to 2%. Former US President Bill Clinton famously beat former President George H Bush in the 1992 election with the tag-line, “It’s the economy, stupid”. Yet the economy was in a strong recovery mode in 1992 and high-yield bonds were rallying hard. The electorate did not feel it. Only 3-4% growth feels good to a developed market electorate. Spain will not have that in the IMF forecast period even in 2017. So having got worried about the unemployment outlook, we hunted around for data to judge whether Spain can cope with this unemployment rate. The answer is very discouraging. What country can bear unemployment this high? And for how long? No economy (as far as we are aware) has ever sustained this unemployment rate Spain has had high unemployment and maintained a peg to a fixed exchange rate. Since the Second World War, we before, but always with good reasons to can find no example of a European country that has seen sustained unemployment hope it would decline above 20% except Spain itself, with three years above 20% in the 1980s and five years in the 1990s. But in neither episode did unemployment top 25%. In addition, Spain then had a currency that the market could (and did) force weaker to help produce jobs. Moreover, and we believe this was of huge psychological importance, the 1985-1987 unemployment peak coincided with Spain’s entry into the EU which gave many hope that life would improve. The 1993-1997 period coincided with Spain being given approval to adopt the euro, which again provided hope of growth and jobs. Indeed, private sector debt trebled from 70% of GDP to nearly 210% of GDP. Both times, the population was right to be hopeful. 4
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Figure 4: EU entry in 1986 and euro adoption (and a massive rise in debt) helped cut unemployment previously – neither can help now Spain Private debt (% of GDP, lhs) Govt debt (% of GDP, lhs) Unemployment (% rate, rhs) Spanish unemployment plunged as 300 private sector debt doubled. 30 How high will it rise in a 250 deleveraging scenario? 25 200 20 150 15 100 10 50 5 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: IMF Today, we see nothing to provide hope to sustain those unfortunate enough to be There is no hope provided by any major unemployed. For households, wages are still likely to fall to boost competitiveness. forecast today Households are deleveraging and defaulting, not borrowing more to fuel consumption. We cannot see how the government can dramatically increase spending, when the budget deficit in 2014 may still be 6% of GDP, double the 3% deficit limit aimed for by eurozone member states. We do not expect companies will decide Spain (over Poland, for example) is the best place to invest in for future production. Meanwhile exports are too small to give Spain the chance to echo Ireland’s recovery. Figure 5: Spain: Key forecasts by OECD, IMF, EU Commission 2010 2011 2012 2013 2014 OECD Economics Outlook, Volume 2012 Issue 2 GDP (real % ch) -0.3 0.4 -1.3 -1.4 0.5 Unemployment (%) 20.1 21.6 25 26.9 26.8 Gen Govt budget balance (% of GDP) -9.7 -9.4 -8.1 -6.3 -5.9 C/A balance (% of GDP) -4.5 -3.5 -2 0.5 1.8 IMF, World Economic Outlook, October 2012 GDP (real % ch) -0.3 0.4 -1.5 -1.3 1.0 Unemployment (%) 20.1 21.7 24.9 25.1 24.1 Gen Govt budget balance (% of GDP) -9.4 -8.9 -7.0 -5.7 -4.6 C/A balance (% of GDP) -4.5 -3.5 -2.0 -0.1 0.7 EU Commission, Autumn 2012 forecasts GDP (real % ch) -0.3 0.4 -1.4 -1.4 0.8 Unemployment (%) 20.1 21.7 25.1 26.6 26.1 Gen Govt budget balance (% of GDP) -9.7 -9.4 -8.0 -6.0 -6.4 C/A balance (% of GDP) -4.4 -3.7 -2.4 -0.5 0.4 Source: OECD, IMF, EU Commission If we go back to the Great Depression that began in 1929, we find plenty of The Great Depression saw examples of high unemployment in the mid-teens and ranging up to 33%, and in unemployment reach 33% in the every case, the country involved dropped its adherence to the gold standard, Netherlands; one of the last to leave gold devalued and/or imposed capital controls. Fed Chairman Ben Bernanke wrote a very good paper on this, and we can all see that he has learnt a lesson from history1. The benefits of leaving gold were not just the export boost (US exports were a very small share of GDP) but also the freedom given to governments and central banks who no longer had to maintain a costly peg via inappropriately high interest rates. 1 http://www.nber.org/chapters/c11482.pdf 5
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Figure 6: The Great Depression: Policy changes on gold, capital controls and devaluation Abandoned gold standard 1929-35 Suspension of Foreign exchange with date, or abandoned full gold Devaluation gold standard control standard in 1931 Austria Apr-33 Yes Sep-31 Belgium Yes (1935) Mar-35 Denmark Sep-31 Estonia Jun-33 Yes Jun-33 Finland Oct-31 Yes Oct-31 France Yes (1936) Oct-36 (Jul 31 according to other Germany Yes Jul-31 sources) Greece Apr-32 Yes Sep-31 Apr-32 Italy Yes (1934) May-34 Oct-36 Netherlands Yes (1936) Oct-36 Norway Sep-31 Spain (not on gold) May-31 Hungary Yes Jul-31 Latvia Yes Oct-31 Poland Yes (1936) Apr-36 Oct-36 Romania Yes (1932) May-32 Sweden Sep-31 Yes Sep-31 UK Sep-31 Yes Sep-31 Australia Dec-29 Yes (1929) Mar-30 Canada Oct-31 Yes Sep-31 Japan Dec-31 Yes Dec-31 New Zealand Sep-31 Yes (1930) Apr-30 US Mar-33 Yes (1933) May-33 Apr-33 Notes: League of Nations, Yearboo, various dates; and miscellaneous supplementary sources Source: http://www.nber.org/chapters/c11482.pdf What is surprising is how long some countries lasted. Lightweights such as the UK This is roughly equivalent to 2014 for managed two years of the Great Depression before coming off gold in 1931. The Spain Netherlands held onto gold until 1936, by which time its unemployment rate had reached 32.7%. This date – 1936 – will be roughly equivalent to 2014 for Spain2. 2 Note there are an absurdly large range of estimates for unemployment rates in the 1930s. To take Sweden as one example, we have seen 30% cited in http://www.ekonomifakta.se/en/Swedish-economic-history/From-War-to-the-Swedish-Model/ and 7% cited in http://www.tcd.ie/iiis/assets/pdf/Workshop25-26Feb2011- Lindvahl_Responding_to_the_Crisis[1].pdf . The data source we have cited is perceived to be reliable, but we should be aware of the variation. 6
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Figure 7: Unemployment rates, yellow to show departure from gold standard Unemployment rates 1930 1931 1932 1933 1934 1935 1936 1937 1938 Belgium 5.4 14.5 23.5 20.4 23.4 22.9 16.8 13.8 18.4 Germany 15.3 23.3 30.1 26.3 14.9 11.6 8.3 4.6 2.1 Netherlands 7.8 14.8 25.3 26.9 28 31.7 32.7 26.9 25 Poland 12.7 14 15.6 16.7 16.3 11.9 11.8 12.8 8.8 UK 11.2 15.1 15.6 14.1 11.9 11 9.4 7.8 9.3 Sweden 12.2 17.2 22.8 23.7 18.9 16.1 13.6 10.8 10.9 Denmark 13.7 17.9 31.7 28.8 22.1 19.7 19.3 21.9 21.3 Norway 16.6 22.3 30.8 33.4 30.7 25.3 18.8 20 22 Switzerland 3.4 5.9 9.1 10.8 9.8 11.8 13.2 10 8.6 US (Lebergott) 8.7 15.9 23.6 24.9 21.7 20.1 16.9 14.3 19 US (Derby) 8.7 15.3 22.9 20.6 16 14.2 9.9 9.1 12.5 2008 2009 2010 2011 2012 2013 2014 Ireland 6.3 11.9 13.7 14.7 14.8 14.7 14.2 Greece 7.7 9.5 12.6 17.7 23.6 24 22.2 Spain 11.3 18 20.1 21.7 25.1 26.6 26.1 Portugal 8.5 10.6 12 12.9 15.5 16.4 15.9 Italy 6.8 7.8 8.4 8.4 10.6 11.5 11.8 Source: International Historical Statistics, Europe 1750-2000 by Brian Mitchell for 1930-38; EU Commission forecasts 2009-14, IMF estimate for 2008 Today we are in the equivalent of 1934, a year after 1933 when the US came off Countries that left gold last, suffered the gold (unemployment was 21-25% depending on which measure you use) and three most years after the UK had led a number of European countries off gold with it. These countries, from Sweden to the UK, were the ones that suffered least from the Great Depression. Those that devalued last, France, the Netherlands and Poland, suffered for longer. Figure 8: GDP % ch, 1929-1938, yellow for suspension of gold standard, blue for devaluation 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 Australia -1.0 -4.9 -4.5 3.8 5.7 3.8 4.1 4.8 5.7 0.8 Austria 1.4 -2.8 -8.0 -10.3 -3.3 0.9 1.9 3.0 5.3 12.8 Belgium -0.9 -1.0 -1.8 -4.5 2.1 -0.8 6.2 0.7 1.3 -2.3 Canada -0.1 -3.3 -15.4 -7.1 -7.1 10.6 8.1 5.4 9.4 2.6 Denmark 6.7 5.9 1.1 -2.6 3.2 3.0 2.2 2.5 2.4 2.4 Finland 1.2 -1.2 -2.4 -0.4 6.7 11.3 4.3 6.8 5.7 5.2 France 6.8 -2.9 -6.0 -6.5 7.1 -1.0 -2.5 3.8 5.8 -0.4 Germany 1.2 -6.1 -10.2 -9.3 10.5 7.7 9.1 10.5 6.0 7.7 Italy 3.3 2.7 -7.9 3.2 -0.6 0.4 9.6 0.1 6.9 0.7 Japan 3.1 -7.3 0.8 8.4 9.8 0.2 2.8 7.3 4.8 6.7 Netherlands 0.8 -0.2 -6.1 -1.4 -0.2 -1.8 3.7 6.3 5.7 -2.4 New Zealand 3.6 -4.3 -8.5 -2.5 6.6 5.0 4.7 18.6 5.4 7.0 Norway 9.3 7.4 -7.8 6.7 2.4 3.2 4.3 6.1 3.6 2.5 Sweden 6.1 2.1 -3.6 -2.7 1.9 7.6 6.4 5.8 4.7 1.7 Switzerland 3.5 -0.6 -4.2 -3.4 5.0 0.2 -0.7 0.6 4.8 3.8 UK 2.9 -0.7 -5.1 0.8 2.9 6.6 3.9 4.5 3.5 1.2 US 6.1 -8.9 -7.7 -13.2 -2.1 7.7 7.6 14.2 4.3 -4.0 Note: US Source: International Historical Statistics, Europe 1750-2000, Brian Mitchell The Great Depression tells us not to worry too much about Ireland or Portugal, and Unemployment in Ireland, Portugal and that we should relax about Italy. Their 2012 IMF estimated unemployment rates of Italy have not reached unprecedented 14.8%, 15.5% and 10.6% are just not high enough to warrant the same concern that levels we have about Spain and Greece. 7
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Figure 9: Unemployment rates: EU Commission data, average for 1992-2008 and then annual from 2009-2014 Ireland (unemployment) Greece (unemployment) Spain (unemployment) Portugal (unemployment) Italy (unemployment) 30 25 20 15 10 5 1992-2008 2009 2010 2011 2012 2013 2014 Source: EU Commission Departure from the gold standard or euro will be hard to forecast six months ahead One key lesson to take from leaving a fixed exchange rate is that they are very The departure from a fixed currency unpredictable even three months ahead of time. Former US President Franklin D regime is hard to forecast even months Roosevelt did not campaign in the 1932 election on the promise of leaving gold. But ahead of time he enacted the policy quickly after coming to office, when the dire economic situation forced a policy response. The UK in August 1931 had just formed a new national coalition cabinet with the Public sector wage cuts forced the UK off strength to push through harsh budget cuts required by the gold standard and the gold in 1931 markets. Yet it was cuts in public wages, leading to a naval mutiny (exaggerated by the media) in September 1931, which forced the UK government to abandon gold. It was a humiliating retreat for a country that had seen its return to gold in 1925 as indicative of its global strength and imperial longevity. We should not for a moment assume that officials found it easier to leave the gold standard than Spanish leaders may find it to leave the euro. The most recent example we are all more aware of is of course Argentina in 20013. Argentina was considering dollarisation The country was still seriously considering full dollarisation in 2000. Harsh austerity in 2000, and did a big debt swap in 2001, measures were still being advanced in 3Q01 supported with new IMF money. While just weeks before abandoning the dollar the opposition won mid-term elections in October, the government was still peg functioning and in November 2001 was able to enact significant debt swaps to reduce the debt burden. Yet a bank run that began on 30 November, amidst 18% unemployment, led to riots and chaos. In December 2001, Argentina was ruled by four successive presidents4. What timeline could we expect from Spain? Having just argued that the end of the euro will be quick and unpredictable in its Spanish politics meant eurozone precise timing, we are still foolish enough to make a stab at forecasting the date. We departure was not a threat in 2011-2012, have not been worried for the past year, because in 2011, the Spanish had a chance and probably not in 2013 to vent their rage at the incumbent Socialist government and elected PM Rajoy with a large majority, despite his promise that the road ahead would be painful and filled with tough reforms. Few would cope well with the cognitive dissonance of taking to 3 http://www.guardian.co.uk/world/2001/dec/20/argentina1 4 http://fpc.state.gov/documents/organization/8040.pdf 8
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 the streets to protest against a man who has delivered harsh tough reforms which you have just voted for. Figure 10: Support for the main establishment parties has fallen from 84% in 2008 to 54% in the latest November 2012 poll Socialists Peoples Party Plural Left 50 45 40 35 30 25 20 15 10 5 0 2007 - local 2008 - 2011 - local Nov-11 Aug-12 Sep-12 Oct-12 Nov-12 general general Source: Wikipedia Even taking to the streets in Rajoy’s second year (2013) will prove a little difficult to reconcile with having voted for him in 2011. Yet already there are murmurs of discontent, that Rajoy has been unable to keep his promises. We assume that by 2014, the Spanish will be able to justify to themselves that Rajoy We believe 2014 could be the crunch year has failed them, and that his reforms have failed to deliver prosperity. People may then take to the streets and demand change. There is a chance that the Rajoy government survives until a heavy defeat in It is hard to believe in an unchanged parliamentary elections in December 2015, but it seems hard to believe the policy stance until elections in December electorate will be that patient. And today no large party exists which offers the 2015 Spanish a choice. That will change. No-one outside Greece had heard of Alexis Tsipras before May 2012, yet by June he was seen as a plausible prime minister. For both Greece and Spain, we tentatively assume that summer is more likely for political unrest than winter, given the example set by Argentina (summer is in December), and many other countries. Democracy is immortal in Greece and Spain While we believe the 1930s is a valid template when considering economic policy 7,000 data points tell us democracy is options, it is totally invalid to suggest that democracy is under threat. As we showed immortal in southern Europe in the Revolutionary Nature of Growth (click here), no country has lost democracy with a per capita GDP above $9,800 in 2005 PPP dollars, and it is very rare to lose it above $6,000. Spain ($27,600 in 2009) and Greece ($27,300 in 2009) are hugely above this figure. As PPP dollars do not collapse like nominal dollar comparisons do, we can see no way in which democracy would be threatened in either Spain, or indeed Greece. In the 1930s, those countries with a per capita GDP of $5,000-6,000 (in 1990 Spain and Greece in 2009 were 8x richer international Geary-Khamis dollars, so not quite the same) such as the UK, the per capita than Germany in 1933 Netherlands and Switzerland maintained democracy; Germany lost democracy with a per capita GDP of $3,500 in 1933. 9
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 What about Greece? Greece is in a very similar situation to Spain, but is further advanced on the road to Less than half of Greeks supported pro- euro exit. A coalition government even before elections meant the electorate did not euro bailout parties in the June 2012 want to vote for either of the major status quo parties in 2012. The two dominant election parties, New Democracy (ND) and PASOK, failed to get even 50% of the electorate’s votes in either the first May election, or more worryingly, in the second election of June 2012. Ahead of the second vote, the Greek population was effectively told by the EU that EU loans would cease unless they voted for pro-EU bailout parties. Only 42% voted for ND or PASOK. Fortunately, the Greek electoral system gives bonus seats to the largest single party (the ND), but Greece’s population is no longer a country committed to the euro. And little wonder. Unemployment is also above 20%. The EU sees it rising from Greece’s GDP decline is frighteningly 23.6% in 2012 to 24% in 2013. The IMF sees it rising from 23.8% this year to 25.4% similar to Great Depression declines in 2013. GDP is already down 17% from the 2007 level and will be 20% down from the 2007 level in 2013. Of 17 countries during the Great Depression, only four experienced a bigger decline than Greece has already experienced, and all major forecasters assume the situation will get worse in 2013. Our assumption is that the Greek government will fall in 2013, quite possibly also It will surprise us if the Greek involving a further splintering of PASOK and ND too. Opposition leader Alexis government survives 2013 Tsipras will be very well placed to take power, having correctly told the electorate in 2012 that a vote for PASOK and ND would produce more pain. We assume his premiership would take Greece out of the euro. This might delay (or even prevent) similar happening in Spain. The experience of Greece’s euro departure might (initially) many countries when they first devalue and default is one of financial and economic deter the Spanish from following chaos – see Russia in late 1998 or Argentina in 2001-2002. Greece will look very messy from the outside and feel worse from the inside. Assuming Greece leaves the euro in 2013, many Spaniards may be deterred from following in late 2013 or early 2014. However, by late 2014, Greece’s export recovery should have begun and the strong growth and job creation in 2015 may prove to be as tempting to Spain, as the UK or German boom of the mid-1930s was to the Netherlands and France in 1936. We do not believe the market will react for too long to a Greek euro exit. Investors Global stock markets may fall 10-20% have largely divested their exposure to Greece. French banks have taken large upon Greece leaving losses to shut down their operations. Companies are moving their stock market listing out of Greece. A 10-20% fall in markets over one-to-three months is as much as we expect from this. We assume a fall, because Greek departure is not yet priced in. Interestingly 80% of 56 fund managers in a recent Reuters’ poll expect Greece to still have the euro by the end of 2013. The Spanish and Greeks want to keep the euro We have no doubt that those with jobs and savings would like to keep the euro. Spanish and Greek household saving However, this no longer reflects the economic interests of many Greeks or structures are now very different from Spaniards5. Our estimates suggest that most Spanish households now have more Germany’s debt than cash or bond savings. Since the Greek bond default on the private sector, and capital flight, we assume the same for Greece. It is ironic that by adopting the euro, and greatly increasing personal debt levels, it is likely that Spain has moved from being a country with a net savings structure that was well aligned with Germany’s preference for low inflation and a strong currency, to becoming a debtor 5 for more detail on this – click here for Thoughts from a Renaissance Man, Who supports inflation/deflation, 20 June 2012 10
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 country like the UK where society is more likely to favour a weaker currency, and inflation to erode away that debt. Italy by contrast, remains a country where most households should favour deflationary policies. Figure 11: Household cash and bond savings minus household debt, as a % of GDP (2007-12 data) 140 120 US savings structure shifting 100 Deflation should be politically away from inflation preference popular in these countries while Greece shifts towards inflation 80 60 40 Inflation should be politically 20 popular in these countries 0 -20 -40 Greece (2007) Greece (2012) US (2006) US (1Q12) Japan China Austria Germany Spain UK Indonesia Russia Hungary Romania Turkey France Italy Czech Rep Poland Ukraine Portugal Source: IMF, various national sources The Germans won’t allow the euro break-up – we disagree We think the market makes two fundamental errors when it analyses Germany’s attitude to the euro. These errors are rooted in market beliefs about Germany’s self- interest in having a weak euro and its commitment to a political project. First, the market assumes the Germans can’t afford a euro break-up because the residue euro, or Deutschemark if it comes to that, would strengthen to excessive levels and destroy German competitiveness. We could not disagree more. Germany is a saving nation. Like Japan or Switzerland, and more recently China or The Germans can cope with an the Czech Republic, this means its currency will appreciate over time because a appreciating euro/Deutschemark saving nation will run current account surpluses. Those savings provide a cheap source of funding for the banking system, and therefore the corporate sector, which invests to become more efficient over time. In the 10 years after former US President Richard Nixon took the US off gold, the Deutschemark appreciated from DEM3.6/$ to DEM1.8/$. This did not destroy the German export base. In the 1980s, the Deutschemark appreciated from DEM3.2/$ to DEM1.5/$ and Germany survived that too. Today, were it not for the euro, Germany might well have a currency at DEM1/$ instead of DEM1.5/$, but we see no reason to believe that German industry could not cope with it. 11
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Figure 12: Deutschemark has appreciated for 40 years against the US dollar – and still we buy German goods DEM/$ 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 1-Jul-74 1-Jul-79 1-Jul-84 1-Jul-89 1-Jul-94 1-Jul-99 1-Jul-04 1-Jul-09 1-Mar-71 1-Nov-72 1-Mar-76 1-Nov-77 1-Mar-81 1-Nov-82 1-Mar-86 1-Nov-87 1-Mar-91 1-Nov-92 1-Mar-96 1-Nov-97 1-Mar-01 1-Nov-02 1-Mar-06 1-Nov-07 1-Mar-11 1-Nov-12 Source: Bloomberg Since 1971, both Switzerland and Japan have coped with a similar appreciation. Yet Switzerland and Japan both run C/A both record current account surpluses and have massive FX reserves. Germany will surpluses despite massive FX be in a similar position if it ever left the euro. Yes, Germany would suffer a little, but appreciation since 1970 in the long run, the deflationary bias of an ever stronger currency, is something which German industry has always been able to cope with, and which German households’ saving structure says the population should support. Figure 13: Swiss franc has appreciated for 40 years and still the world’s 20th Figure 14: Japanese yen appreciates for 40 years and still their FX reserves biggest economy runs the 9th biggest C/A surplus are among the largest in the world CHF/$ JPY/$ 4.5 400 4.0 350 3.5 300 3.0 250 2.5 200 2.0 1.5 150 1.0 100 0.5 50 1-Mar-71 1-Jun-73 1-Sep-75 1-Dec-77 1-Mar-80 1-Jun-82 1-Sep-84 1-Dec-86 1-Mar-89 1-Jun-91 1-Sep-93 1-Dec-95 1-Mar-98 1-Jun-00 1-Sep-02 1-Dec-04 1-Mar-07 1-Jun-09 1-Sep-11 1-Mar-71 1-Jun-73 1-Sep-75 1-Dec-77 1-Mar-80 1-Jun-82 1-Sep-84 1-Dec-86 1-Mar-89 1-Jun-91 1-Sep-93 1-Dec-95 1-Mar-98 1-Jun-00 1-Sep-02 1-Dec-04 1-Mar-07 1-Jun-09 1-Sep-11 Source: Bloomberg Source: Bloomberg Second, the market assumes an open-ended German commitment to a political project, but forgets the deal that Germany made. Germany agreed to sacrifice the euro only if other countries were prepared to do the structural reforms required to make the single currency work without massive federal transfers between countries. Governments from Spain to Portugal, Italy and Greece said they would do these reforms when necessary. Their elites believed that only the euro strait-jacket could deliver the long-term prosperity that Germany enjoyed, and keep their populations from following the devalue-and-inflate model they had adopted previously. They did not do these reforms when times were good. Germany did, enacting the Harz IV reforms of the mid-2000s. 12
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Figure 15: Germany did harsh reforms when the world was growing – unemployment rates % Germany Greece Ireland Italy Portugal Spain Germany cannot afford large transfers to 30 Spain Germany did Harz IV reforms when times were good 25 20 15 10 5 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: IMF Today Germany is prepared to support governments on the reform path support, via the ECB, but it cannot keep doubling down on the bets it is making. If pessimists about Target-2 contingent liabilities are right, Germany’s public debt could rise from 80% of GDP to around 110% of GDP. Even if they are not right, Germany’s long- term pension obligations and poor demographics mean it cannot endorse significantly more fiscal transfers to Spain. We do not expect Germany’s late 2013 election to change this. Spain is largely on its own. The ECB can step in and help out Up to a point. Let’s optimistically assume the ECB piles into the Spanish bond ECB intervention is unlikely to create market in January, and cuts yields on 10-year debt to 3%. If you are a Spanish jobs in 2013-2014 corporate, able to borrow at, let’s say 4%, and the economy will not grow faster than 1.7% by 2017, would you 1) invest your cash in the bond or 2) invest in a slow growth economy. Or if you have a job in Spain, will you 1) borrow money or 2) save money, when your wages are falling, house prices are falling, the economy is shrinking and private sector (household and corporate) debt levels above 190% of GDP are among the highest in the world. If Spanish bond yields were cut to zero, then we would get a little more optimistic. What Spain really needs, and what any country needs when its economy is weak, is interest rates in negative territory in real terms. This is not likely. ECB support is closer to an aspirin, than a cure. Spanish productivity has improved sharply – it has become much more competitive What all economists are looking for is a sharp improvement in Spanish and Greek productivity and this is under way. However, the improvement in unit labour costs partly reflects a fall in wages, but also the surge of unemployment to 25%. If unemployment rose to 50%, the figures would probably get better still, but this is not politically sustainable. Spain needs job creation and urgently. That is not in the ECB’s mandate, although the maintenance of the euro may require it. Note also that productivity booms were very obvious during the Great Depression too. To cite one example we found last week, Belgium’s iron and steel sector saw huge productivity improvements from 1930 until 1935, when Belgium finally left the gold standard, and began to create jobs again. 13
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Figure 16: Belgian productivity rose until it left the gold standard in 1935, (tonnes per man per year) Smelting Crude and semi-finished steel 800 700 600 500 400 300 200 100 0 1930 1931 1932 1933 1934 1935 1936 Source: The Unbound Promotheus (1969), David Landes Spanish exports have risen and the C/A deficit has disappeared Among the reasons we have turned more pessimistic is that Europe’s double-dip The good news of Spanish export growth recession has wiped out what was a potentially better story for Spain. Exports of has disappeared goods (in euros) were up 20% in early 2011, but the latest data show this has collapsed to nothing. Figure 17: Spanish export growth (% ch in euros) - not exceptional in 2010-2011 has disappeared Exports Imports 50 40 30 20 10 0 -10 -20 -30 -40 Jan-96 Jan-01 Jan-06 Jan-11 Sep-92 May-94 Nov-96 Sep-97 May-99 Nov-01 Sep-02 May-04 Nov-06 Sep-07 May-09 Nov-11 Sep-12 Jul-93 Mar-95 Jul-98 Mar-00 Jul-03 Mar-05 Jul-08 Mar-10 Source: Bloomberg Exports of goods, services and income are now 35% of GDP, barely up from 34% of Total exports are a small share of GDP; GDP in 2011 or 32% in 2001. And GDP is down 15% since 2007. This is a broader unlike Ireland or the Baltic states measure than we would ever normally look at, purely to emphasise how unlikely it is that Spain is to emulate the Irish or Baltic economic recoveries. Do click here to see Thoughts from a Renaissance Man – why the Latvian model is not valid for Greece (26 October 2011) – which highlights trade comparisons and that Latvia in 2011 was 3x richer than in 2000, even after its 2008-2011 austerity. 14
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Figure 18: Exports of goods, services, and income do not look high enough as a % of GDP Exports (Goods, Services, Income) as % of GDP Imports (Goods, Services, Income) as % of GDP 45 40 35 30 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Bloomberg The improvement in Spain’s current account to around 2% of GDP from deficits of The C/A improvement is due to no 10% of GDP looks good, but is due to a collapse of internal demand. Admittedly this domestic demand means Spain is no longer seeing cash flow out of the country, but no export growth means we are not seeing inflows either. On the FDI side, 2012 has seen more inflow than any year since 20036, but we are sceptical this will be sustained. Figure 19: The improved C/A and net FDI balances do not look good enough to warrant optimism Outward net FDI Inbound net FDI C/A % of GDP Net FDI as % of GDP 8 6 4 2 0 -2 -4 -6 -8 -10 -12 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Bloomberg A massive depreciation of the euro to the $0.65/EUR levels seen in the mid-1980s could save the day. It does not look likely, although the last year has seen some belated Asian currency appreciation against the euro which will help Germany. 6 Among deals cited earlier this year, French energy management company Schneider Electric is moving to buy Spain’s Telvent for EUR1.4bn; the IT sector and Barcelona geographically have attracted investment in 2012 http://www.fdiintelligence.com/Trend-Tracker/Spain-takes- larger-share-of-global-FDI-in-2012?ct=true 15
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Figure 20: $/EUR rate since 1975 -- Spain would benefit it we saw 1985 levels 1.8 Inflationary German 1.6 1970s re-unification 1.4 1.2 37-year average is 1.19/EUR 1.0 Volckers high interest rates Tech bubble 0.8 deflates Plaza accord 0.6 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: Bloomberg The Spanish unemployment data are misleading – the black market will save Spain We totally agree Spanish unemployment rates may be misleadingly high. Even at Spanish unemployment numbers may be the peak of the Spanish boom, there was still an 8% unemployment rate, which is far overstated – but are still far too high higher than in other over-heating economies. But even assuming the real rate was 4 ppts lower, this still implies that Spanish unemployment today is around 21%. And the unemployment rate is higher than it’s ever been and it is likely to rise further. We also have no doubt that there is increasingly reliance on the black market in Growth of the black market is a negative Spain – but this means less taxes for the government and therefore more austerity for government finances from the public sector. In addition, wages are likely to be lower, which will make servicing mortgages more difficult. Not paying taxes may help some manage for a year or two, but it is not a sustainable long-term strategy. The Spanish can emigrate We hear many anecdotes about people leaving periphery Europe for jobs Spanish unemployment figures suggest elsewhere, and are aware that many Spanish worked in France during the 1980s. less emigration is happening than in However, we are more convinced by the anecdotes that the Portuguese, Irish and Italy, Portugal or Ireland Italians are leaving – the boom in Angola is making it easy for the Portuguese to move and the Irish are famous for their willingness to move (is there a capital city without an Irish bar?). When we read that the Spanish Chamber of Commerce in Brazil, the world’s sixth-largest economy, receives 100 CVs a month from Spaniards looking to find work7, it does not take long to work out that if every one of them gets a job, it will only be another 5,000 years before there is no Spanish unemployment. More obvious still are the unemployment rates in those countries, which are 40-60% lower than in Spain or Greece, suggesting emigration is helping Ireland and Portugal, but it is not solving Spain’s unemployment problem. The welfare state and being richer than our grandparents In our view, the most important differences between the 1930s and now are 1) the The welfare state may be the single most development of the welfare state and 2) the vast increase in wealth in Western important factor that could keep Spain in Europe relative to the 1930s. Some would argue that the welfare state is partly the the eurozone cause of Europe’s budgetary problems. But more important today is that the welfare state means that unemployment is probably sustainable at far higher levels than ever before, and for far longer than ever before. 7 The Future of Spanish Business, Financial Times, 30 November 2012 16
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 In addition, the personal stored wealth of an individual and their family, is far greater than in the 1930s. Virtually all in the West have more savings and/or more possessions than their grandparents had at the same age, again potentially giving more resilience in the face of an income collapse. There is an offset to this of course. Many of us also have far more debt, and also higher expectations regarding their standard of living, meaning they may in fact struggle to cope with a sustained loss of income. The West may actually be less resilient. We will find out in which is true through Spain’s experience in the coming years. So where’s the upside? Spain’s euro departure would of course be messy, as in Greece, but the upside Export profits could treble if Spain leaves would come swiftly. In the past 12 months, exports of goods, services and income the euro, on the currency effect alone were worth 35% of GDP. Let us assume that profits are 10% of this, and are worth 3.5% of GDP or roughly EUR35bn. If the peseta devalued from ESP1/EUR to ESP3/EUR, then exactly the same volume of exports would now deliver ESP105bn of profits, giving more corporate tax revenues to the government and more cash for companies to invest in Spain. Yes, peseta GDP would inflate too, but not as quickly, and at first the benefits would be very significant. Exporters would boom once the global macro shock began to fade. Moreover volumes would rise too. Germany’s Volkswagen Spanish subsidiary, SEAT, would see exports soar, perhaps at the expense of French and Italian models. Domestic sales would benefit due to import substitution. Spain, already one of the world’s most popular tourist markets, would gain a competitiveness boost relative to France, Italy and Turkey. Spanish companies in the Ibex 35 now make 61% of their revenues outside Spain8. Overseas profits would also help greatly In pesetas, this would grow hugely, giving Spanish companies liquidity, and producing corporate taxes that would again help close the Spanish fiscal gap. Santander alone gets an estimated EUR5bn of its total EUR7bn profits from overseas – though its adverts suggest its exposure to Spain is even less than this. We would expect Spanish companies and Spanish corporates to bring money home after devaluation. This Spanish boom would lead to job creation, leading to more government budget revenues, investment as well as higher domestic demand. For some years, the boom could be self-sustaining even without a well-functioning banking sector. Continuing rows with the rest of Europe over the Spanish default would last years, but each year would give Spain more growth, and budget revenues and therefore scope to reach a deal that satisfied its most important partners. And Portugal, Italy, France? It is hard to see how Portugal could remain inside the euro if Spain left. The far more important question is could France and Italy remain inside? On that we have no strong view. Conclusion We believe Greece is likely to leave the euro in 2013 and believe Spain may leave by the end of 2014. The timing of each will be determined by domestic political unrest and unlike for example, the chances of democracy surviving (100%), we find this impossible to quantify. We cannot know how much pain the Spanish and Greek people will be prepared to take. However history suggests staying in the euro with unemployment at these levels would be an unprecedented achievement. 8 The Future of Spanish Business, Financial Times, 30 November 2012 17
    • Renaissance Capital Thoughts from a Renaissance man 11 December 2011 Positive surprises that would make us re-evaluate our views would include 1) any We need to see growth to turn more sign that structural labour reforms already enacted have lowered the growth rate positive on Spain remaining inside the needed to create jobs, 2) a significant euro collapse to well below parity to the dollar, Euro which would boost European growth, 3) a huge shift in northern European thinking in favour of GDP growth, 4) any sign of global growth accelerating hard which may lift Europe’s prospects and 5) a massive Spanish default on private and public debt, cutting the total debt load by perhaps 150% of GDP or EUR1.5trn, paving the way for renewed borrowing by both. Given the poor prospects for the eurozone in coming years, we continue to believe that emerging and frontier markets are the better place for investors who hope to see capital appreciation in the short and long term, and an income stream too. The domestic demand we see in Russia, parts of emerging Europe (especially Turkey), and Africa, fed by the likely rise in bank lending from systems that are less inter- twined with the European banking system, means these markets can grow. In addition, we see evidence across from Russia to Turkey and Nigeria to South Our key markets are preparing well for Africa, that the public and private sectors are preparing well for Spain’s euro Spain’s euro departure departure. Nigeria is targeting a 20-25% lift in FX reserves to over $50bn, Russia’s budgetary plans aim to reduce the dependence on energy so that a commodity price fall will be less damaging, South Africa is maintaining low interest rates and a competitive currency so that growth might be sustained even in this scenario, while Turkey is re-orientating trade towards the Middle East. Many governments and companies are pushing out the duration of their debt, to avoid refinancing problems in 2013-2015. We assume a commodity price shock would be short-lived, as growth in Asia would continue and a global shock would limit new investments in supply. All recognise that markets will be severely disrupted by departures from the eurozone, but their levels of preparation for this are improving every month. Nonetheless, we’d expect their markets to be hit hard in 2014 if Spain does leave the euro, before bouncing back strongly in 2015 18
    • Renaissance Capital Renaissance Capital Ltd. Renaissance Capital Renaissance Securities (Cyprus) Moscow London Johannesburg Ltd. T + 7 (495) 258 7777 T + 44 (20) 7367 7777 T +27 (11) 750 1400 Nicosia T + 357 (22) 505 800 Renaissance Securities (Nigeria) Renaissance Capital Renaissance Capital Renaissance Capital Ltd. Nairobi Ukraine Almaty Lagos T +254 (20) 368 2000 Kyiv T + 7 (727) 244 1544 T +234 (1) 448 5300 T +38 (044) 492-7383 Renaissance Capital Renaissance Capital Istanbul Harare T +90 (212) 362 3500 T +263 (4) 788336This Communication is for information purposes only. The Communication does not form a fiduciary relationship or constitute advice and is not and should not be construed as arecommendation or an offer or a solicitation of an offer of securities or related financial instruments, or an invitation or inducement to engage in investment activity, and cannot be relied upon asa representation that any particular transaction necessarily could have been or can be effected at the stated price. The Communication is not an advertisement of securities nor independentinvestment research, and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition ondealing ahead of the dissemination of investment research. Opinions expressed therein may differ or be contrary to opinions expressed by other business areas or groups of RenaissanceCapital as a result of using different assumptions and criteria. All such information is subject to change without notice, and neither Renaissance Capital nor any of its subsidiaries or affiliates isunder any obligation to update or keep current the information contained in the Communication or in any other medium.Descriptions of any company or issuer or their securities or the markets or developments mentioned in the Communication are not intended to be complete. The Communication should not beregarded by recipients as a substitute for the exercise of their own judgment as the Communication has no regard to the specific investment objectives, financial situation or particular needs ofany specific recipient. The material (whether or not it states any opinions) is for general information purposes only and does not take into account your personal circumstances or objectives andnothing in this material is or should be considered to be financial, investment or other advice on which reliance should be placed. Any reliance you place on such information is therefore strictlyat your own risk. The application of taxation laws depends on an investor’s individual circumstances and, accordingly, each investor should seek independent professional advice on taxationimplications before making any investment decision. The Communication has been compiled or arrived at based on information obtained from sources believed to be reliable and in good faith.Such information has not been independently verified, is provided on an ‘as is’ basis and no representation or warranty, either expressed or implied, is provided in relation to the accuracy,completeness, reliability, merchantability or fitness for a particular purpose of such information, except with respect to information concerning Renaissance Capital, its subsidiaries and affiliates.All statements of opinion and all projections, forecasts, or statements relating to expectations regarding future events or the possible future performance of investments represent RenaissanceCapital’s own assessment and interpretation of information available to them currently. Any information relating to past performance of an investment does not necessarily guarantee futureperformance.The Communication is not intended for distribution to the public and may be confidential. It may not be reproduced, redistributed or published, in whole or in part, for any purpose without thewritten permission of Renaissance Capital, and neither Renaissance Capital nor any of its affiliates accepts any liability whatsoever for the actions of third parties in this respect. The informationmay not be used to create any financial instruments or products or any indices. Neither Renaissance Capital and its affiliates, nor their directors, representatives, or employees accept anyliability for any direct or consequential loss or damage arising out of the use of all or any part of the Communication.© 2012 Renaissance Securities (Cyprus) Limited. All rights reserved. Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).