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Zadig. quarterly letter september 2012

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

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