Iron Harbor Capital Management

Eurozone Podcast Summer 2013

Iron Harbor Open Market Eurozone Podcast

The Eurozone and the Business Cycle

Dashboard Eurozone (2 July, 2013)
Constructive PMI/economic sentiment Sharp improvement in leading indicators

Eurozone in the early stages of the Initial Recovery

Broader economy still faces stiff headwinds: unemployment, credit availability, external demand

Late Upswing
Real Assets Bond Prices Equities

Slowdown
Real Assets

Early Upswing

Equities

Bond Prices

Bond Prices

Recession

Initial Recovery
Equities

Cyclical trend in Europe has turned

Composite PMI at 2-year highabove the neutral 50 mark for the first time since January 2012
Decline in new orders moderatingsecond-slowest pace in past 2 years Pace of job losses weakest in 16 months

EZ IP higher for 3 consecutive months with the 6mma again moving higher
OECD leading indicator trending strongly higherimproving for 6th consecutive month

Index Value 65 60 55 50 45 40 35 30 Jan-07

PMI survey data points to steady gains in sentiment.

Leading indicators and IP gain traction.

Index Value 103 102 Percent 15 10

101
100 99

5
0 -5

98
97 96 Ger IP % YoY (RHS) Fra IP % YoY (RHS) Ita IP % YoY (RHS) OECD LEI (LHS)

-10
-15 -20

EZ PMI Mftr EZ PMI Svcs Jan-09 Jan-11 Jan-13

95

-25

and is pointing to a second half recovery.

CapGoods production is a key statistic to monitor
Consistent fixed capital investment is necessary to sustain growth momentum Components of GDP
Private Consumption 22% Fixed Cap Investment Net Exports 3% 57% 18% Gov't Spend

EC economic sentiment showing signs of life

ESP and ITA seeing best gains over past 6 months

Percent 30 20 10 0 -10

Fixed capital investment is critical to the recovery.

Economic sentiment slowly improving

Index Value 120

100

80 -20 -30 -40 Jan-05 EZ IP (Cap Goods) % YoY GER IP (Cap Goods) % YoY FRA IP (Cap Goods) % YoY ITA IP (Cap Goods) % YoY Jan-07 Jan-09 EZ Econ Sent GER Econ Sent FRA Econ Sent ITA Econ Sent 60 Jan-11 Jan-13 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

But the recovery will be slow...

Unemployment rates will not reverse quickly
Unemployment in FRA/ITA/ESP not expected to show meaningful improvement for 3-5 years Domestic consumption to make limited contribution to top-line growth

Strong euro and weaker external demand weighing on ex-Europe exports

Percent 28 24 20 16

Unemployment across Europe will be slow to reverse.

Eurozone GER FRA ITA ESP

Percent 40 30 20

Export growth faces headwinds of euro strength and questionable global demand
Ex-EU GER Exports % YoY Ex-EU FRA Exports % YoY Ex-EU ITA Exports % YoY Ex-EU Exports Total % YoY

10
0 12 8 4 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 -10 -20 -30 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

ECB counting on strong rebound in exports

Attractive portfolio opportunities exist even during a slow rebound

Euro Stoxx 600 trading at record discount to SPX Low expectations and underweight allocations provide margin of safety

Relative value of European index is at 20 year lows! Normalized Index Value

450 400 350 Euro Stoxx 600 (LHS) SPX 500 (LHS) Euro 600 - SPX (RHS) 80

Leading indicators and IP gain traction.

Dividend Yield / 10Y Real

Index
60 40 20

Fwd P/E

End 2013 P/B

S&P 500 Stoxx 600

15.47 13.85 12.44

12.98 13.92 13.42 12.62

2.04 / 0.33 3.51 / 0.09* 3.26 / 0.05

3.48 / 0.45 4.71 / 2.69* 3.39 / 2.87 3.67 / -0.55

2.24 1.32 1.01

1.15 1.65 0.95 1.21

300
250 200 150 100 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09 Jan-13

0 -20 -40

DAX (GER)
CAC40 (FRA) IBEX 35 (ESP) FTSE MIB (ITA) FTSE 100 (UK)

-60
-80 -100

Improved outlook should see gap close

* Nominal CPI YoY

Attractive portfolio opportunities exist even during a slow rebound (cont)

Sovereign debt spreads will benefit from favorable growth revisions and decreased break-up risk ECBs euro discomfort zone starts between 1.35-1.38

Percent 14.0 12.0 10.0 8.0 6.0

We expect better growth expectations to precede moderate rate convergence

GER 10yr Real FRA 10yr Real ITA 10yr Real POR 10yr Real ESP 10yr Real

The euro remains reasonably overvalued.

$/EUR 1.70 1.60 1.50 1.40 1.30 USD/EUR $/EUR PPP Expect more verbal intervention between 1.37-1.40

4.0 2.0 0.0 -2.0 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 1.20 1.10 1.00 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

Summary
Eurozone recession is endingbut the recovery will be slow Expected returns for equities are highest in the early phases of the business cycle Overweight Europe vs. US equities Long ITA vs FRA/US sovereign debt Euro upside limited at 1.40 over the next 6 months

The views expressed herein are for information purposes only and ARE NOT intended as trading or investment recommendations. Iron Harbor Capital Management IS NOT a Commodities Trading Advisor and IS NOT offering these views as investment advice or as a solicitation for investment.