The EU – Without growth how can we prosper?

Without continual growth and progress, such words as improvement, achievement, and success have no meaning.” Benjamin Franklin

There has been much debate about whether the EU should be classified as a success or failure – no prizes for guessing in which camp the majority lie! We’ve heard calls for the dissolution of the euro and a public outcry from the German people [see their newspaper headline “we are once again the schmucks of Europe” (Bild, May 11th 2010) in reply to their hefty contribution to the fiscal package which gave support to the fledging Greek community and the subsequent hammering Chancellor Merkel then received in the regional election.] In terms of growth, the EU has an envisaged growth rate of 1% this year (World Economic Forum 2010). So lets look at what the data is telling us by the same criteria we judged the UK in the previous post…

  1. Stimulus? Are we seeing money growth feeding through to the wider economy?  NO

    Source: Bloomberg – although ticking up, still posting only a 4+ decade low annual growth rate

  2. Spending? NO – Domestic demand is suffering

Source: Capital Economics. EC Consumer Sentiment – low / falling (most hurt unsurprisingly in the periphery) - not the environment of encouraged and motivated spending.

3. Job creation and self sustaining recovery? NO! Structural issues remain

Youth unemployment rates EU.PNG. Source: European Commission – Eurostat. Euro-Zone Unemployment – remains a key structural issue

 

Note – most worrying is that this chart refers to youth unemployment! Who will drive the economy going forward?

Source: Capital Economics. EC Consumer Sentiment – low / falling (most hurt unsurprisingly in the periphery) - not the environment of encouraged and motivated spending.

INVESTMENT INSIGHT – the conditions for a self-sustaining recovery in the EU are also not in place. But in every “crisis” one can find “opportunities” and as requested by Shira at Seeking Alpha – I enclose a stock tip to implement my insights…

In Chinese the word for crisis is composed of two characters, one representing danger, the other opportunity – which is quite apt since my stock pick focuses on the opportunity the growing Chinese top-end consumer will offer to a certain European company whilst I continue to recommend caution with respect to the amount of beta exposure you take – protect from market pullbacks!

The type of stock to pick would be similar to a Rolls-Royce, (now owned by BMW and hence the vehicle to play this theme through – excuse the pun! BMW GR Equity). Please note – this is a theme to be expolited, not an intense bottom-up fundamentals- and valuation-based pick. The theme is exposure to the growing Chinese market, in particular the super-rich – price-insensitive and focused on the prestige purchase. With Rolls-Royce cars positioned as the world’s most expensive, they are “a symbol of wealth and personal success that simply has no real competitor”. (Matthew Alabaster, an automotive expert at PricewaterhouseCoopers)

A good article to explain the other virtues of the company is Sarah Arnott’s report in the Independent, Rolls Royce: The flying lady looks to the east

Chinese Demand: “this year the market for the Phantom in China alone will outstrip total sales in the first year of production in 2003”

Sales versus history: In June of this year, production topped 300 cars for the first time in Rolls’s history, the waiting list was backed up until October at the earliest and the company expects to more than double its sales for the year as a whole.

Sales versus competitors: Well insulated: Demand dropped by 17 per cent in 2009 “versus 50% for some others” (chief exec Torsten Muller-Otvos) and in comparison to the “Detroit giants General Motors and Chrysler file for bankruptcy protection, and a rash of takeovers and job cuts as demand dropped through the floor”. Every car is made to order, as demand drops, so does production – providing some insulation.

Outlook going forward : “Baby Rolls”, the Ghost, aims to take the producer into a broader market – smaller, lighter and cheaper than the traditional Phantom (although still early to determine its success, 30 orders for the car within days of the Chinese launch at the Beijing Motor Show in April is a good sign)


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