Tiburon 2014 Panorama PDF

Tiburon Capital Management
A GrayCo Alternatives Company
1345 Avenue of the Americas 3rd floor New York, NY 10105

www.tiburonholdings.net ____________________________________________________________________________________________________
January, 2014 The 2014 Tiburon Panorama - Climate, Themes, Opportunities and Risks
Panorama An unbroken view of the whole region surrounding an observer Websters In this December letter, as done in prior years, we will pull the camera back a bit to look at the coming year. Better put, this letter, which serves a bit like a roadmap for us, is a panorama an unbroken view of the totality (as we can simply offer) of the opportunities and risks we see in the 2014 landscape. This Tiburon 2014 Panorama is made up of many specific observations, framed as Big Picture, Tighter Focus, Snap Shots, etc. Some of our 2014 themes echo 2013 and therefore some of the text and graphs are a synthesis of commentary about markets opportunities and risks which weve discussed in previous writings.
Executive Summary
The storm and thunder of the immediate post-crisis environment has gradually been replaced by something calmer, quieter, and yet lacking in vitality outside the financial markets. We are now in the long-tail rather than the fat-tail phase of the systemic crisis that moved around the globe from 2007 into 2013. The balm of central bank liquidity has offered material comfort first to bonds and now to equities, but the key to medium-term prosperity, we think, comes from sustained strength in corporate investment, which so far has been anemic. We favor Development Markets over Emerging Markets in 2014.We expect a rebound in Developed Markets to be led by the US and Europe. With risks at bay in the latter, we could begin to see policy addressing the region's stock problems, including the lack of confidence in the banking sector and the high level of unemployment. The absence of a new demand shock in the euro area could help support a stabilization in Emerging Markets. While we expect the cyclical outlook for Emerging Markets growth to improve, the structural weakness is likely to persist (exerting a negative influence on commodities). Hence, the focus on the impact of China's reform package will be on how quickly China might allow productivity to rebound as well as how it alters the orientation of growth. We still see room for markets to price a better cyclical story or, perhaps more accurately, increased confidence that cyclical risk is diminishing. On balance, that should make 2014 another year in which equities and bond yields move higher together, though we prefer equities to debt, all things being equal. We continue to favor Cyclicals, particularly in the US. With the ISM above 50 for the longest span since 2007 and interest rates prone to a gentle, eventual rise, Cyclicals will likely benefit. Banks will enjoy increased net interest margins. Further, there is a foreseeable, potential virtuous circle of banks driven to lend in 2014 just as companies seek to borrow for three uses of cash: the necessary financing of aged fixed assets, M&A activity, and shareholderfriendly behaviors. This business symbiosis - lenders lending/borrowers borrowing - is perhaps the raging bulls upside scenario. We are a bit more careful in this regard but recognize this upside case and also project those three uses of cash/borrowing as a driver of returns in 2014, perhaps beyond. A reacceleration in corporate capital expenditures should push the Real Profits (versus engineered profits) of some carefully chosen companies securities, particularly companies firmly remaining in a growth cycle. For others, return of capital to shareholders and other enlightened shareholder friendly behaviors (spinoffs, asset sales) can produce outperformance in the securities of other carefully chosen companies securities, particularly those firmly in maturity or saturation cycles of company life. Despite the improvement in growth, we expect G4 central banks to continue to signal that rates are set to remain on hold near the zero bound for a prolonged period, faced with low inflation and high unemployment. The combination of still-easy policy and improving growth should, on balance, be a friendly one for equities and other risky assets, while preventing sharp increases in long-term yields. In Fixed Income, we prefer High Yield to Investment Grade for a few reasons. Companies have improved their balance sheets and operations and have sufficient access to capital markets that projected defaults are miniscule. The spread inherent in High Yield versus Investment Grade is significant. Further, Investment Grade companies will likely seize upon the perceived closing window on cheap financing to re-leverage, making Investment Grade bonds a short, but leading to potential shareholder-friendly events at the same companies as well. The perceived closing window on cheap financing (which will remain historically low) will hasten corporate actions events. We believe 2014, and 1H14 in particular, will be a robust period for M&A and other shareholder value-centric behaviors.


Equity Commentary
Big Picture - DM over EM It remains our view going into 2014, that Developed Markets (DM) are preferable to Emerging Markets (EM). Additionally, we believe that there is the prospect of continued growth in DM and from this we derive additional themes (below). EM is challenging and there is a clear bifurcation based upon sovereign current account deficits. Relative PMIs continue to suggest that DM growth may be set to surprise on the upside, while EM is set to disappoint. We continue to think that EM currencies are still vulnerable. EM exporters into DM may benefit both from stronger end-market demand and from the boost to competitiveness from a weaker currency. Our 2013 outlook was dominated by the notion that underlying private sector healing in the US was being masked by significant fiscal drag. As we move into 2014 and that drag eases, we expect the long-awaited shift towards above-trend growth in the US finally to occur, spurred by acceleration in private consumption and business investment. This improving DM impulse should also help EMs growth. But with less slack, more inflation, and ongoing imbalances, there is less scope for acceleration and the improvement in growth is more externally driven. Above Trend Growth in the DM, Particularly in the US
Source: Goldman Sachs Global Investment Research
An improving global (particularly US) growth picture is widely forecast but, in our view, also still doubted in the investor community because of the stop-start nature of the recovery hitherto and the possibility of a renewed US fiscal logjam in early 2014. We therefore still see room for markets to price a better cyclical story or, perhaps more accurately, increased confidence that cyclical risk is diminishing. On balance, that should make 2014 another year in which equities and bond yields move higher together. Tighter Focus - Cyclicals and Consumer Discretionary Preferable to Defensives We continue to favor Cyclicals, particularly in the US. With the ISM above 50 for the longest span since 2007 and interest rates prone to a gentle, eventual rise, Cyclicals will likely benefit. Industrials and Information Technology sectors should be the beneficiaries of expanding capital expenditures (capex). Historically there has been a strong relationship between the level of the ISM Manufacturing index and the relative performance of Industrials vs the S&P 500. The ISM has been in expansion (>50) for 49 of the past 51 months and our outlook for three years of above-trend US economic growth from 2014-2016 means this could be the longest ISM expansion cycle since at least 1950. ISM was above 50 for 54 months from July 2003 to January 2008 and 48 months from August 1975 to July 1979 with Industrials outperforming the S&P 500 by about 300 bp per year in each case.1 Strong Relationship of ISM to Cyclicals Performance
Source: ISM
Institute for Supply Management


Additionally, with a likely more consistent savings rate and reduced perceived market risk and volatility from exogenous events (assuming no Black Swans), savings-adjusted Consumer Discretionary cash flow should expand in 2014, making it a favored sector as well. Cyclical performance lagged in 2013. Some would argue that Cyclicals should have outperformed by 12% or more, given the improvement in ISM new orders. We would also agree that Cyclicals should outperform, given our view of rising rates, and the strong relationship between Cyclicals performance and bond yields - 80% of the time when bond yield rises, Cyclicals outperform (see below). We prefer US to European cyclicality. Cyclicals tend to Outperform when Bond Yields Rise
Source: Thomson Reuters
Close Up - Where to Focus among Cyclicals Below we show the sector sensitivity to both a change in ISM new orders and a steepening yield curve. Typically semis, tech hardware, diversified financials and autos are the most cyclical sectors with the highest correlation to bond yields and ISM new orders. Our preference is to play cyclicality through those areas which are heavily focused on short-cycle corporate discretionary spend (i.e. where the payback is relatively quick). Sector Correlation to Increasing Bond Yields Most Attractive
Least Attractive
Banks and the Self-Fulfilling Prophecy While profitability for US banks has rebounded strongly between 2009 and 2011, it has only improved very slightly since 2011, with the 12-month forward consensus return on equity for the sector going from 4% to 10% between 2009 and 2011 and only moving up to 11% since then. The first strong rebound in profitability was driven by the fall in provisions, from 3.5% of loans in 2009, to 0.5% now.2 This reduction has accounted for nearly all of the increase in pre-tax profits for US banks over the past four years. Thus, we think the second important driver of US bank earnings upside is emerging, namely an expansion of net interest margins. At 3.26% for FDIC-insured institutions in 3Q13, they were close to 25-year trough levels. However, the main determinant of net interest margin, the US 5- year/3-month yield curve has steepened sharply this year, and looks set to steepen further, in our view, given the Feds commencement of reducing its monthly asset purchases. Even at current levels, the yield curve is consistent with an increase in net interest margins to 3.7%. This could mean a 25% rise in US bank net income.
Credit Suisse research


US banks loan growth to the private sector has slowed notably over the past 18 months, with 3-month annualized loan growth falling from 7% in early 2012 to close to zero now. However, this has happened against the backdrop of an economy facing significant fiscal headwinds (with fiscal tightening of 2.5% of GDP in 2013), which are likely to turn into tailwinds in 2014. The outlook for accelerating GDP growth suggests potential upside for loan growth, while US leading indicators are already consistent with 3-month annualized loan growth accelerating to around 10%.3 Partly because of the link between GDP and loan growth, banks tend to be among the US sectors that perform the best when economic momentum accelerates. Economic Momentum and US Loan Growth One begets the Other
Source: Credit Suisse research
There is a foreseeable, potential virtuous circle of banks driven to lend in 2014 just as companies seek to borrow for three uses of cash: the necessary financing of aged fixed assets, M&A activity, and shareholder-friendly behaviors. This business symbiosis - lenders lending/borrowers borrowing - is perhaps the raging bulls upside scenario. We are a bit more careful in this regard but recognize this upside case and also project those three uses of cash/borrowing as a driver of returns in 2014, perhaps beyond. Shareholder-Friendly Behaviors (Social Contract) versus Significant Capital Expenditures An argument can be made that one cannibalizes the other. We would contend that they are more two sides of the same coin. Suffice it to say that companies sit on historically large cash positions. Further, that cheap financing driven by historically low interest rates remains there for the taking. Companies, whether enlightened or not, well managed or not, have ample ways to either finance growth via capital expenditures or acquisitions, and to return capital to shareholders via dividends and/or share buybacks, or do some of each. All of these prospective behaviors can suggest events. We dont have to be right in choosing positions in the portf olio where the bet is that adept company management chooses optimally among uses of cash, utilizing internal return on invested capital (ROIC) models. We have to be right more often than not about the prospects of accretive events. Shareholder-Friendly behaviors (dividends, share buybacks, spinoffs) and expansion-oriented/margin-oriented capex and/or acquisitions, if identified, properly handicapped will drive idiosyncratic performance relative to market. Social Contract A Snapshot Companies continue to sit on large amounts of cash. Increasingly, those embracing a heightened Social Contract (see our white paper)4 are choosing, when return on investment capital suggests, to return cash to shareholders via shareholder friendly activities, such as initiation or increased or special dividends, share buybacks and/or spinoffs of non-core assets. We see this movement hastening and intensifying. Even with an increased cost of borrowing, balance sheets are swollen with cash reserves, and rates remain at historically low levels. With the secular change of an aging investor seeking income, and increased like-minded corporate directors and managers, the persistence of more normalized (and likely increased) investor friendly behaviors, we believe, will continue. Social Contract screened equities, in our view, will outperform in up and down markets. Tiburon utilizes a proprietary quantitatively-derived algorithm to filter for Social Contract equities. Big Picture Growth over Value/Real Profits over Denominator-Driven Profits Wed argue that valuations are toppy but the economy is generally moving in the right direction. Given that companies sit on significant cash and have access to cheap financing, here is the nuance: companies playing either side of our two-sided Social Contract/Capital Expenditures coin can outperform. Outright, a reacceleration in corporate capital expenditures should push the Real Profits of some carefully chosen companies securities, particularly companies firmly remaining in a growth cycle. For others, return of capital to shareholders and other enlightened shareholder friendly behaviors (spinoffs, asset sales) can produce outperformance in the securities
3 4
Thomson Reuters The Seismic Shift towards a New Corporate Social Contract - Implications for Shareholder Friendly Events and Harnessing Social Contract for Returns, Peter M. Lupoff, September 3, 2013


of other carefully chosen companies securities, particularly those firmly in maturity or saturation cycles of company life. Capital Expenditure Cycles Suggest Possible Outperformance
Stocks with minimal recent investment but high ROIC tend to outperform when capex growth accelerates. The performance of S&P 500 firms with the lowest capex/sales and highest ROIC have tracked the cycle of S&P 500 capex growth during the past 20 years, albeit by a lag of 6-18 months in some cycles.5 Tighter Focus Share Buybacks for Multiple Immunization in a Fair to Rich Market The current fair valuation of the equity market leads us towards investment strategies that are not dependent on further P/E multiple expansion. Fortunately, we may see as much as 45% of S&P 500 cash spending in 2014 will be returned to shareholders via dividends and buybacks,6 so many stocks may not require much earnings growth to drive share prices higher. Empirical evidence shows that S&P 500 companies returning the most cash to shareholders have significantly outperformed. Those firms with the largest buyback programs have led the S&P 500 by 970 bp in 2013 while those with the highest total shareholder yield have beaten the market by 1,040 bp YTD, each on a sector-neutral and equal-weight basis.7 Those returns continue a trend over the past 20 years that makes returning cash to shareholders a compelling investment case and fosters a community of interest for both managements and investors. S&P 500 Sector Buyback and Dividend Yields
Source: Compustat
Tighter Focus Dividends with a Plausible Catalyst In 2014, it is feasible that S&P 500 dividends will increase faster than earnings as firms return more cash to shareholders. Some expect that dividend will grow by 12%, 12% and 9% during the next three years respectively, and that the dividend payout ratio will rise from 32% in 2012 and 2013 to 34% by 2014. Goldman Sachs expects the payout ratio will equal 34% through 2017.8 We have liked, and continue to like trades where a company is cheap to fairly priced on an intrinsic basis, and pays a dividend while we await a plausible catalyst that can move price in a step-function change. Technicals A Recent Drought in Corporate Spending/Capital Expenditures There is a credible, foreseeable rebound in corporate spending: a) there clearly has been corporate under-investment: the business investment share of GDP (net of depreciation) is still below previous recession lows in the US, at one-third of normal levels in Europe and actually negative in Japan, while the average age of the capital stock at all-time highs; b) free cash flow, even after dividends, is abnormally high and net debt to EBITDA is 40% below normal levels; c) corporate spending indicators, such as Philly Fed spending intentions, FOMC loan officer survey, or IFO business spending intentions, are consistent with a 10% pick-up in capex (the main constraint on corporate spending on survey data has been, in our view, red tape and tax uncertainty and this should diminish); d) capex has a beta of 2x with GDP growth once US GDP growth is above 1.8% (which it should be in 2014). 9 We continue to focus on areas where the pay-back is relatively quick and where a high percentage of demand comes from corporates: IT services, software,
5 6 7
Impending Spending: S&P 500 Capital Expenditures, Goldman Sachs, December 3, 2013. 2014 US Equity Outlook: Momentum vs. Fundamentals, Goldman Sachs, November 20, 2013 IBID 8 IBID 9 IBID


employment agencies, larger airlines, high-end hotels and select names within the semis and capital goods sectors (note only 14% of the capital goods revenues come from industrial end-markets). US Net Business Investment at Trough Level of Past Two Recessions
Goldman Sachs anticipates that 2013 corporate capital expenditures and research & development totaled nearly $900 billion and that corporate capex will grow another 9% in 2014 as sales accelerate. 10 Corporate capex should begin to improve in 2014 for a number of reasons: Stronger revenues. Capex has a strong lagged relationship with sales growth companies tend to spend only after they see increased demand we anticipate sales growth in 2014. Falling policy uncertainty. Fed taper and fiscal debate fade from headlines and Washington dysfunction should not likely add the same distraction and volatility as it did in recent years. Easy lending conditions. Surveys and new issue data suggest a continuing access to capital markets. Narrowing output gap. This is the consequence of falling unemployment and improving economic growth. High Return on Equity (ROE). There is continued ROE health despite a modest decline from cyclical peaks. Macro and Micro11 Indicators Point to a Pickup in Capex Growth
Source: Compustat, Goldman Sachs Global Investment Research
We have written in the past that it seemed likely that there is embedded pent-up demand for durable goods given the age and condition of corporate assets, significant cash on balance sheets, and access to capital markets. Further, with all marginal bloat wrung out of companies in the last few years, theres little else that can be done to improve financial appearances absent growing the top line. These elements should also stoke increased corporate capital expenditures, providing a real economic boost in 2014. Corporate Fixed Assets Age Highest Since 1970
Our view is that there will be a reacceleration in corporate capital expenditures which can be expressed in two themes:
10 11
IBID Goldman Sachs economists Capex Tracker aggregates 15 high frequency investment-related data series, such as the Architectural Billings Index, the Philly Fed survey of capex expectations, and the Dodge Commercial Construction index.


1. Firms that will gain the most from a pickup in their own capex. These historically are companies with minimal recent investments but high returns on the capital they have invested. Stock performance has tracked S&P 500 capex growth in most cycles since 1995. 2. Firms that will gain as beneficiaries of others capex spending. Key beneficiaries are the enablers and supply chain vendors associated with non-residential spending and capex. Big Picture - Interest Rates Rise but Remain Historically Low Despite the improvement in growth, we expect G4 central banks to continue to signal that rates are set to remain on hold near the zero bound for a prolonged period, faced with low inflation and high unemployment. The combination of still-easy policy and improving growth should, on balance, be a friendly one for equities and other risky assets, while preventing sharp increases in long-term yields. We therefore expect to see periods of pressure on rates markets, followed by reassurance from policymakers. As a result, the dance between improving growth and rising rates is likely to remain a key axis in 2014. But even with anchored policy rates, the improving growth profile is likely to put moderate but steady upward pressure on longer-dated US and European yields at a pace that is somewhat faster than the forwards. So, while we would look for assets with exposure to the growth recovery, our bias is to avoid areas with significant vulnerability to higher rates. The beneficiaries of rising bond yields are likely to be cyclicals, retail banks, select life insurance companies, and companies with large unfunded pension liabilities. The losers from higher bond yields are likely to be stocks with high financial leverage and low operational leverage. US Cyclicals Correlation to US Treasury Yields
Tighter Focus - Equities over Fixed Income We believe we will see the risk premium narrowing in both Equities and Fixed Income. We continue to like strategies that involve earning the DM equity risk premium through long equity positions, while trying to protect against the risk that US yields increase more rapidly than we or the markets expect, or that the market worries again about Fed exit. Large Gap between Earnings and Bond Yields Favor DM Equities
Source: Compustat
This gapping chasm between Bond and Equity yields suggests replacement of equity with debt and such Shareholder-Friendly behaviors previously and continuously discussed herein. Further, the replacement of equity with debt has negative ramifications for Investment Grade Fixed Income (discussed below). But Equities are Rich, No? A Snapshot The relationship between equity valuation and interest rates sits at the core of the debate regarding the fair value of the stock market. The Fed Model is a framework that relates the earnings yield of equities with bond yields. Investors use the model to track the historical relative valuation between the two asset classes. As typically applied, the spread between the earnings yield of the stock market and the fixed income yield is assumed to revert to its trailing ten-year average one-half from each direction. However, what if the yield gap narrowed more dramatically? It could compress from the current ten-year average to the 35-year average (200 bp). Assuming a 3.25%


bond yield, the year-end 2014 earnings yield would equal 5.25% and the associated P/E multiple would be 19.0x. The implied S&P 500 index level would be 2380 or 31% above the current level. S&P 500 Index Sensitivity to 2014 Yield Gap12
Multiple-Compression is Likely Following a year in which US equity returns were driven primarily by rising valuations, we expect the S&P 500 P/E and Enterprise Value/EBITDA multiples to diminish. Valuation will act as a headwind to return. This risk can be mitigated in a few ways. We believe that the relative value premium awarded to US Cyclicals will ease, and that Cyclical laggards will begin to make up ground on peers. With the ISM above 50 for the longest span since 2007 and interest rates continuing to rise, we see upside to cyclical sectors broadly. As the economy improves and revenues grow, the incremental benefit should be greater for high operating leverage stocks than for firms with low operating leverage. Companies with high fixed costs tend to experience margin expansion as the economy grows. When revenues grow, fixed costs become a smaller portion of total costs. Firms with the ability to increase margins should be particularly attractive in a stable margin environment. These firms should expand margins and grow earnings faster than those with more stable margins from higher variable costs. A foolish consistency is the hobgoblin of little minds Ralph Waldo Emerson Despite this exercise, we would contend that equity valuations are toppy. Securities selection and a refined methodology should differentiate in 2014. Further, agnosticism among securities, direction long or short, and choice among myriad catalysts helps wring out biases. Finally, while this Tiburon 2014 Panorama affords us something of a roadmap to follow, as we often say, we dont aim to be consistent, we aim to be right. We reserve the right to change points of view 180 degrees if it means better risk -adjusted returns.
Fixed Income Commentary

Some of the commentary in this section will reinforce points of view above, particularly with regard to shareholder friendly corporate behaviors and M&A. When you are agnostic among securities, as we are, you can identify drivers of these foreseeable risks and opportunities and choose among a broad array of ways/securities to express an investment point of view. Being able to recognize that there are drivers emanating from Fixed Income with implications for Equity markets and securities (or vice versa) is a distinguishing comparative advance of Tiburons. Big Picture - High Yield Fixed Income over Investment Grade We anticipate divergent central bank behaviors US versus Europe. These divergent behaviors can also mean different behaviors by companies across the globe. In the US, we believe that rising rates will drive an increase in Investment Grade (IG) corporate leverage. We think companies will likely exploit the apparent end of very cheap funding conditions by raising debt to finance shareholder-friendly behaviors, such as we saw as the rationale for some very big telecom M&A this year (Verizon). But in Europe, corporate behavior looks different at this stage given the modest outlook for Eurozone growth. In general, European companies appear to us, to continue to hoard cash with an aim of building fortress balance sheets. Escalating cash levels for European companies could continue to grow in 2014, meaning that corporate net leverage could soon reach a new low.
12
Year-end 2014 earnings yields based on Goldman Sachs 2015 top down EPS estimate of $125. Consensus bottom-up currently equals $133. Average negative revision equals 8%, implying 2015 estimated consensus earnings will be $122 one year from now.


European Companies Hording Cash
Source: BofA Merrill Lynch Global Research
As the tables below show, there are more divergences in corporate behavior across the globe. In the US, share buybacks are gaining quickly in popularity. Yet in Europe, even with very low rates, corporates are choosing to buy back their bonds instead. Divergent Cash Uses Share Buy Backs in the US Bond Buy Backs in Europe
Looking outside the US A Snapshot While the outlook for Fixed Income total returns may be a bit meager in 2014, we may cast a net globally for the better yield opportunities. If 2013 was a dry run of what tapering has in store, then dislocations will abound across global Fixed Income, as sentiment, technicals, supply and investor positioning interact differently. The table below shows the array of yields for HY in the US, Europe, Asia and the UK according to BofA Merrill Lynch, and is broadly sell-side consensus. As can be seen, interesting yields can be found in a variety of places. Global Projected HY 14 Returns by Sector
Tighter Focus IG Re-leveraging Produces Event-Driven Longs (Equities) and Shorts (Bonds) As interest rates continue to rise after a few months of relative calm, we expect re-leveraging to occur a risk to IG prices as companies borrow to finance share buybacks and M&A activity. Besides serving as a trigger - due to the urgency of locking in financing while costs are still low - the rising interest rate environment changes the timing and potential severity of this risk to IG bonds. Share buybacks were particularly effective to enhancing shareholder value in 2013, and we think companies that perceive themselves to be undervalued will look to join in. This is part of the ongoing Social Contract thesis of ours.13 This dynamic may support a short IG view as well as long select equities. The most likely IG companies to choose to leverage up in 2014 are probably those that were successful during the low growth, low interest rate environment 2010-2012 - such as those that have stable cash flows or pay high dividend yields. These companies have underperformed in the stock market since interest rates began to increase and growth is expected to pick up, and thus face pressure to
13
The Seismic Shift towards a New Corporate Social Contract - Implications for Shareholder Friendly Events and Harnessing Social Contract for Returns, Peter M. Lupoff, September 3, 2013


rethink their strategies. Going forward these companies will underperform Cyclical companies as economic growth accelerates unless they turn to financial engineering and add leverage. There exist very strong incentives to replace equity with debt despite the increase and likely continued increase in interest rates. Debt remains simply cheaper to corporate issuers than Equity. Incentives Favor Leveraging to Replace Equity
Source: Federal Reserve, BofA Merrill Lynch Global Research
Whats Bad for IG Bonds is Good for Certain Equities - Share Buybacks and M&A As a consequence of desire to lock in cheap financing, the success of share buybacks on share price and accretion through combination, whats bad for IG bonds is good for carefully selected equities. The Recent Market Rewards Share Buybacks
Source: BofA Merrill Lynch Global Research Equity Strategies
M&A activity as a percentage of market cap is running at just over one third of normal levels. CEO business confidence and equity markets lead M&A by up to a year and are consistent with a tripling in M&A activity. Financing conditions remain abnormally propitious and for over half the market M&A would be earnings enhancing. According to a Deloitte Survey of CFOs, M&A is now the most preferred option for deploying corporate cash. 14 CFOs 2014 Preferred use of Corporate Cash
Source: Deloitte CFO Survey
M&A Doesnt Mean LBOs Necessarily Two developments make us believe that LBO volumes will continue to be rather modest in 2014, than rising to the level of becoming more systemic like the risk of more moderate releveraging discussed in the previous section. First, stock market valuations have materially appreciated and significantly reduced the number of companies for which leveraged buyouts are feasible under reasonable assumptions. Second, during the low growth environment of the past several years, companies have increased profits by driving down costs. That has reduced the scope for private equity to fulfill one their traditional roles - to go in and extract inefficiencies. However,
14
Deloitte CFO Survey, 3Q13


even accounting for these negative developments for LBO volumes, private equity firms continue to have significant dry powder and the incentives to put that money to work. Private Equity Cash Earmarked for Buyouts
Source: The Private Equity Growth Capital Council
REGIONAL COMMENTARY EM 2013 has proved to be a tough year for EM assets. 2014 is unlikely to see the same level of broad-based pressure. The combination of a sharp downgrade to expectations of China growth and risk alongside the worries about a hawkish Fed during the summer taper tantrum are unlikely to be repeated with the same level of intensity. Moreover, after the initial shock and deleveraging and a significant repricing of assets, the fundamental vulnerabilities are lower. We still do not believe, however, that the adjustments in many places are complete. Given the continuing need to address domestic and external imbalances, it is harder to make the case for EM equity outperformance relative to DM, which has tended to characterize environments of accelerating global growth over the past decade. 15 At the aggregate level, EM credit is likely to continue to perform broadly in line with equities as it had in 2013 - but differentiation across credits is likely to increase. 2013 saw countries with high current account deficits, high inflation, weak institutions and limited DM exposure punished much more heavily than the DMs of EMs, which had stronger current accounts and institutions, tepid economies and greater DM exposure. This is still likely to be the crux of EM differentiation in 2014. Within the most vulnerable countries, we could potentially see a greater separation between countries with credible tightening policies (Brazil, India) and those where imbalances are allowed to grow (Turkey). Places with hitherto sound, but deteriorating current account balances (Thailand and Malaysia) may be more affected, although they should be helped by the DM recovery; and the downside risks on commodities (which we discuss further on) may exacerbate pressure on the commodity producers (South Africa and Chile). The EMs most likely to benefit from stronger DM demand (without being hurt by the higher rates that come) are the tepid economies of Central and Eastern Europe (Poland, Czech Republic and Hungary), where we expect to see inflation-less accelerations, and Korea and Taiwan in North Asia.
The global environment will remain challenging for several emerging economies as a result of higher DM yields and EM external imbalances, and there are significant downside risks for EM assets. Political uncertainties surrounding local elections may intensify
15
See our white paper, An Evaluation of Developed Markets versus Emerging Markets Opportunities and Risks, Peter Lupoff, September 20, 2013


some of those risks. The political calendar is heavy in the 12 months ahead including local and general elections in Turkey, Colombia, India, Brazil, South Africa, Indonesia and Hungary. Given the need of many EMs to shrink their Current Account deficits through a combination of weaker currencies, higher rates, and domestic tightening, the impact could be material changes in earnings and valuations in those countries. Since excess credit growth and domestic demand have led the earnings expansions in many of these EMs, consumer sectors often have high valuations and large index weights, which seems risky to us. In addition, the combination of higher rates and falling domestic demand could potentially impact the large banking sectors of certain Current Account deficit EMs, particularly in countries like Turkey, Peru, and Colombia. We think EM exporters into DMs are set to benefit both from stronger end-market demand and from the boost to competitiveness from a weaker currency. Tighter Focus - Europe Its not All Good, is it? Last year was the least tumultuous for the euro zone since Greeces 2009 headlines and issues. The consensus is that 2014 will be just as calm - a view held by some who were predicting the currency bloc's demise little more than a year ago. The political will keep the show on the road has held firm, the European Central Bank's pledge to underpin the euro continues to stave off bond market pressure and there is the prospect of modest economic growth. Spain, Italy and Portugal are all emerging from recession and Greece should follow suit this year. Yet there are plenty of reasons to be cautious. EU Elections - High unemployment, austerity fatigue and still anemic growth offer the perfect backdrop for fringe parties to prosper at May's European parliamentary elections. Some pundits predict a group of anti-euro parties including the National Front in France, Britain's UKIP, Syriza in Greece and the Dutch Freedom Party could capture 20% or more of the seats. Those new powers could pressure the EU's main party groups to tack right and challenge Europe's ability to integrate further, and the parliament will have to rule on the majority of EU legislation. Bank Stress - That the EU has fallen short of its initial plans for a banking union to prevent future financial crises is clear. For several years at least, the buck for a failing bank will ultimately stop with national governments, leaving the "doom loop" ensnaring weak banks and indebted sovereigns unbroken. The ECB will publish health tests of Europe's biggest banks prior to taking over their supervision in November. The scope for a major shock is limited given the extent to which banks have already recapitalized. Still, lending is likely to remain constrained until the tests are complete - hampering economic recovery - and the structure of banking union as it now exists could allow a future crisis to blow up. German Court - The main reason to be cheerful about the euro zone is the markets' unwillingness to test the ECB's safety net. Any hole in that would change the rules of the game. Germany's Constitutional Court will decide soon on the ECB's bond-buying program, its as yet unused mechanism to protect the euro zone. The history of the Karlsruhe-based court has not been to reject outright any crisisfighting measures though it has bestowed greater levels of scrutiny upon Germany's Bundestag. But if it did take the nuclear option, the bond market could declare open season on the currency bloc's weaker members once more, pushing it back into crisis. Reform Zeal - The ECB has consistently said it is buying time for countries to put their houses in order by curbing debts and enacting economic reforms needed to thrive in the 21st century. The main flashpoints are Italy, which has stagnated for a decade and has a coalition government which may lack the cohesion to respond, and France which is teetering on the edge of a new recession. Austerity fatigue is most potent in Greece, the country that sparked the debt crisis. Its coalition government refuses to countenance more cuts and will need some form of debt relief to put its finances on a sustainable path at a time when its parliamentary majority is down to just three seats and the anti-bailout Syriza opposition is ascendant in the polls. Deflation - If deflation took hold - a big if - that would pose the direst threat of all, raising the prospect of a Japan-style lost decade and making national debts even harder to pay off. A plunge in euro zone inflation to just 0.7 percent prompted the ECB to cut interest rates in November but many of its members are viscerally opposed to the sort of money printing that finally breathed life into Japan's economy. Even without deflation, any slippage in debt-cutting and structural reforms may require further action from the ECB. The history of the euro zone crisis shows that while policymakers lose their sense of urgency when the pressure diminishes, they rush to bolster their defenses when the heat comes on and have consistently done so just in time. China Slowdown - Since the recovery in external trade in 2009, euro area total exports (including intra-regional trade) have grown by a cumulative 35% in nominal terms. A significant 65% of this recovery has been led by demand from outside the region, which has grown by 45%.16 More on China to follow. Since 2010, the importance of non-euro area demand has grown even further, with 70% of euro area total export growth since then
16
If China Sneezes, Nomura Global Markets Research, July 2013


explained by demand from outside the region a strong signal of the dependence of the euro area business cycle on foreign demand. A breakdown of euro area exports to the rest of the world shows that since 2009, Asia has made the second-largest contribution to export growth (of 12pp out of 45%) after Greater Europe (including UK, Sweden, Switzerland, Turkey), which accounted for 20pp of the 45% total increase.17 The importance of Asia in contributing strongly to European exports is nothing new and has been noticeable since 2001. Indeed, between 2001 and 2012, export growth to Asia contributed around one-third of euro area export growth outside of the monetary union more than five times the US. Within Asia, China accounted for 10pp of extra euro area export growth over that period, more than twice the contribution from the US. With this said, as noted throughout this writing, we are sanguine in 2014 regarding Europe, all things being equal. Tighter Focus - China Risks China is the key, foreseeable macro tail risk in 2014. China is facing the double challenge of transitioning from an overleveraged condition back to a condition of acceptable debt levels (with private sector debt about 25% above trend levels, significantly above the 10pp level which BIS regards as an early indicator of financial trouble)18, and from an investment-focused growth model to one focused on consumption (with past transitions of this kind typically leading GDP growth rates to drop by between a third and a half). Further, the growth impact of taking on new debt appears to be diminishing (i.e. the amount of extra leverage required to generate one unit of GDP has risen sharply over the past two years). It Now takes 4X Debt to Drive 1% China GDP
Estimates vary on China GDP in 2014 we are leaning towards the lower end of estimates, which would put it sub 7%. We still see the risks skewed to the downside from there, given the high level of leverage in the economy and its slowing potential growth rate. We believe that it is no longer a small tail risk because the economy faces stress from many dimensions, including financial leverage, pollution, and social tensions. Given the high level of leverage in the economy, policy tightening may lead to a faster deleveraging process, higher interest rates and a credit crunch, all of which would combine to cause a sharp slowdown in economic growth. Investment and consumption would both be affected by deleveraging, but investment would likely be hurt more. A wave of bankruptcies across those industries that face overcapacity problems is not too far-fetched, while property and infrastructure investments would slow due to financing constraints. Some non-bank financial institutions such as trusts would likely fail, while the banks face rising NPLs and require government assistance just to remain solvent. Given the size of Chinas economy its nominal GDP at todays market exchange rates is on track to reach US$9trn this year, double the size in 2008 - and its growing connectivity to the rest of the world, there is no doubt that the impact of a slowing China economy on the global economy will be much bigger than it was five years ago. Shadow Banking and Housing in China A Snapshot Lending and Shadow Banking - A third of total lending and half of incremental lending in China is from the shadow banking system where roll-over rates can be sharply above the official prime lending rate. Furthermore, any de-regulation of the deposits rate (as promised under the Third Plenum) risks leading to a higher cost of funding for borrowers. Housing - Housing appears to be in a bubble. Real estate is nearly 20% of GDP, similar to the peak levels seen in Spain and Ireland before the financial crisis. Furthermore, housing starts are around 20% above sales, with 15% to 20% of the housing stock being vacant.
17 18
IBID IBID


China Risk - a Search for Something to Worry About in 2014? Expectations of Chinas growth have reset meaningfully lower as some of the medium-term problems around credit growth, shadow financing and local governance have been widely recognized over the past year. Some of these issues continue to linger: the risks from the credit overhang remain and policymakers are unlikely to be comfortable allowing growth to accelerate much. But the deep deceleration of mid-2013 has reversed and even consensus forecasts of essentially flat growth may be enough to comfort investors relative to their worst fears. The details from the recent Third Party Plenum were also more encouraging about the prospects for further market liberalization and rural/land reform, and have boosted market sentiment. At this juncture, the market pricing of Chinas growth prospects is negative enough that this stability, alongside an improving external impulse, may be enough to be reassuring. If the market were to relax about China growth risk, this would help improve the case for EM equities and credit. This is one we watch closely, and there is a way to mitigate: Short Australia Australian GDP growth has been heavily reliant on mining capex. Over the past two years, 40% of GDP growth has been accounted for by mining capex alone (and we would note this understates the true impact on the economy from mining capex, as it fails to account for second derivative benefits to the economy).19 With signs that mining capex is close to or at a peak, this strong positive contribution is highly likely to drop off in 2014. Domestic demand excluding mining capex has been weak, and, given the headwinds we discuss below, we struggle to see it filling the growth gap. Further, domestic demand excluding mining capex has grown by less than 1% over the past 12 months, with growth having slowed steadily over the last three years. The Australian unemployment rate has been rising since the start of 2012 and is now close to its 2009 peak. 20 Finally, Aussie consumption is off, household debt/GDP is high by global standards and then theres China Aussie Household Debt/GDP Near Top Globally
Source: BIS
The Australian economy would be directly affected by weaker growth in China more than any other economy, in our view. There are two main channels through which the impact would be felt: 1) the direct trade link between the two countries, and 2) the indirect impact coming from the terms-of -trade shock that would result from lower commodity prices. China absorbs about one third of all Australian exports; of which, it also accounts for about 75% of all iron ore exports and about 23% of total coal exports. Moreover, the spillover from weaker Chinese growth on other Asian countries would also affect Australia as about 75% of all exports are destined within the region. 21 A decline in the terms of trade would lead to lower gross domestic income growth, which would be reflected in lower corporate profits, wages and ultimately government revenues, which would all contribute to weaker domestic demand. Big Picture - Commodities Downside Risk Grows The indirect impact of a sharp investment-led China downturn, via a slump in commodity prices, stands to be substantial for some countries. China has become a dominant importer across a range of commodities, most notably hard commodities. In metals, Chin as per capita intensity now rivals that in advanced economies. It accounts for some 30% of the worlds total imports of metals and a full 65% of total iron ore imports globally.22 In energy, Chinas share of world imports is in the high single digits, while for food it is low single digits, with the substantial exception of soybeans, at over 50%. The IMF, using a simple model, has estimated that a 1 pp fall in Chinas GDP growth can result in price declines of 6% for oil and base
19 20 21
Global Equity Strategy, Credit Suisse, December 19, 2013 Bloomberg Australian Department of Foreign Affairs and Trade 2013 Fact Sheet 22 If China Sneezes, Nomura Global Markets Research, July, 2013


metals.23 We suspect though that this is a gross underestimate for three reasons: 1) second-round effects, a China downturn slows growth elsewhere, which further weakens demand for commodities; 2) the high degree of financial speculation in global commodity prices, which is likely to exacerbate the price declines; and 3) the limitation of models. The point estimates from models give the historic average result over the data sample period, yet Chinas economic importance has increased substantially in such a short perio d, the size of its economy doubling in just the past five years. Recursive estimat es by the IMF shows that, in general, Chinas effect on global commodity prices has been growing over the last five years. Commodity prices have been highly correlated to the growth in EM industrial production, with the correlation to developments in the DM world much reduced. Against this backdrop, in many ways, the outlook for growth in EM is the key driver for industrial commodity prices. In line with this, it is notable that despite a strong rebound in global industrial production growth over recent months, EM growth has continued to lag. In large part, this explains the relatively muted rebound in commodity prices. The combination of increased supply for many commodities and continued structurally weaker EM growth is likely to cause many prices to continue to stagnate through 2014, with those commodities experiencing a long-awaited increase in supply coming under the most pressure. Commodities may be at the Start of a Secular Bear Market
Source: Credit Suisse
China Risk Again Now with a Commodities Lens China remains the key source of demand for industrial commodities, and therefore, commodity prices are extremely sensitive to the trajectory of Chinese GDP growth, where we see downside risks in the medium term (see above). In particular, we would note: M2 Money Supply In spite of the recent rebound in Chinese GDP growth (with quarterly annualized growth in Q3 rising to 9.1%), there are already some signs of growth momentum slowing, with macro surprises starting to fall again and M2 growth decelerating, pointing to downside potential for real commodity prices. Steel Consumption - 22% of global steel demand comes from Chinese real estate and, as discussed above, there are signs of a bubble in housing. If the investment share of GDP falls to 40% by 2020 and Chinese GDP growth falls to 6%, then fixed asset investment would slow to 5% from its 10-year CAGR of 27%. Steel consumption per capita is already nearly doubled that of the US (but admittedly below peak levels seen in the US in the 1960s). End of Investment-Led Economy - Under the 12th 5-year plan, China's leadership has committed to shifting from an investment-led to a consumption-led growth model. Not only would such a shift even if successful imply significantly slower overall GDP growth, but it would also be likely to make Chinese growth less commodity-intensive. Announced Reforms a Negative for Commodities - The two main supports for infrastructure investment have been local government and property-related investment. Local government infrastructure spending is likely to fall under the proposed reforms, which would commit local governments to more spending on social welfare (due to Hukou reforms) and receive less revenue, owing to land reform. Commodity Oversupply A Snapshot Most Wall Street strategists are forecasting significant declines (15%+) through 2014 in gold, copper, iron ore, and soybeans.24 Given the robust commodity supply outlook, lack of China growth acceleration and resulting downside commodity price risks, despite any remote EM optimism, commodity-linked sectors (Materials and Energy) and commodity-heavy markets (Russia, South Africa, and
23 24
IMF Country Report No. 11/193 Global Viewpoint, Issue 13/05, Goldman Sachs, November 20, 2013


Brazil) may be at risk, given our core set of views. Significant Supply Pressures Weigh on Commodity Prices
Source: Wood MacKenzie
If China Sneezes If China sneezes, Australian and EM catch a bad cold. The US markets and most of DM have some immunization in our view. What to Worry About in 2014 There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know. Donald Rumsfeld All of the commentary within this Tiburon 2014 Panorama, so far, has been what we foresee as risks and opportunities. Frankly, if we can, wed aim to profit from both. Think of all this as known knowns things we know we know (or at least recognize are plausible and predictable with some level of probability). Heres some of the rest the stuff to worry about. This is an Illusion of Harmony What if this Panorama, consisting of Big Pictures, Tighter Focus, Snap Shots and various use of lenses, gives us a warped and unrealistic picture of the investing landscape? What if we are drawing the wrong conclusions from all these observances? It is plausible that enough pundit and bureaucratic jawboning can drive some biases and mistaken believes. It is possible that projecting out, looking back in the rear view mirror at jobs, durable goods orders, industrial production, flows, etc, gives us the wrong forward direction. After all, the rear view mirror is not a GPS. With this concern that this harmony is an illusion - we take solace in our methodology (BRACE) and culture (Tiburon) carefully honed to wring out biases and allow many voices of reason. We are comforted by shared economic interest between Tiburon investment professionals and our investors and the talented people that we work with, to insure that we change direction as often as necessary to deliver indices-beating high risk-adjusted returns regardless of what the markets give us. The Iran Rabbit Hole It appears likely that Iran and the UN Security Council plus Germany will reach a deal related to forestalling Irans nuclear aspirations and capability. However, if diplomacy fails, the world would face a greater threat of Israeli and/or US military strikes, though immediate military action would remain improbable. Irans breakout time - how long it would take for it to build a bomb - would stand at roughly two months.25 Under the ascendance of hardliners, Tehran would likely return to pedal -to-the-metal development of the nuclear program and adopt a belligerent foreign policy, increasing the likelihood of strikes. Should strikes not occur, Iran would be on a direct path toward becoming a nuclear-weapons-capable power, though one under severe sanctions and with a sclerotic economy. In response, Saudi Arabia would probably obtain nuclear weapons itself, and/or lead the world to believe it had them. In the longer term, the potential for maintaining broad-based sanctions could be undermined by efforts by China and Russia to blame the US and its allies for a breakdown of talks, creating an erosion of the US-led coalition and ultimately strengthening Iran. But in the nearer term, a pronounced spike in the oil price would result, with investors fearing military strikes and Saudi proliferation adding to geopolitical tensions - leading to a spike in the Iran premium. Russia President Vladimir Putin is one of the most powerful individuals in the world. Two worrying trends are converging in Russia: First, his popularity has steadily slipped to its lowest level since he came to power in 2000; second, Russias economy is stagnating. After a decade in which Putins dominance was underpinned by rapidly rising economic expectations, thats a problem. The implications of an all-powerful leader with a shrinking support base and a flair for the unpredictable are worrisome.
25
Eurasia Group


Cyber Attack and Massive Digital Misinformation The global risk of massive digital misinformation sits at the center of a constellation of technological and geopolitical risks ranging from terrorism to cyber attacks and the failure of global governance. Our reliance on digital delivery and interface comes with a broad variety of risks from petty crime to risk of systems failures, large scale financial fraud and sovereign, corporate and personal risk of attack and damage. Digital Wildfires in a Hyper-connected World Constellation
Source: World Economic Forum
Water Scarcity Water scarcity is the lack of sufficient available water resources to meet the demands of water usage within a region. Water scarcity already affects every continent. Around 1.2 billion people, or almost one-fifth of the world's population, live in areas of physical scarcity, and 500 million people are approaching this situation. Another 1.6 billion people, or almost one quarter of the worlds population, face economic water shortage (where countries lack the necessary infrastructure to take water from rivers and aquifers).26 Water use has been growing at more than twice the rate of population increase in the last century, and, although there is no global water scarcity as such, an increasing number of regions are chronically short of water. Water scarcity is both a natural and a human-made phenomenon. There is enough freshwater on the planet for seven billion people but it is distributed unevenly and too much of it is wasted, polluted and unsustainably managed. It is feasible that an exogenous and unpredictable (terrorist, weather-related, etc) event may damage supply, causing pricing and political dislocation. Infectious Diseases Every year, more than two million people in the US get infections that are resistant to antibiotics and at least 23,000 people die as a result.27 The Centers for Disease Control and Prevention (CDC) recently reported a first-ever snapshot of the burden and threats posed by the antibiotic-resistant germs. The CDC has dubbed 2014, The End of the Antibiotic Era and Deputy Director Michael Bell, MD has said, we are approaching a cliff. If we dont take steps now to slow or stop drug resistance, we will fall bac k to a time when simple infections kill people. Increased Severe Weather Phenomena There has been increased incidence of Severe Weather Phenomena, or weather that poses risks to life, property or requires the intervention of authorities. Changing weather risks not only affect society in general but also have a huge impact on the insurance industry, which needs to find adequate responses in the form of innovative insurance solutions. Such severe weather weighs on resources, GDP and can be destabilizing.
26 27
United Nations Centers for Disease Control and Prevention


.And Everything Else - A Snapshot Top Five Global Risks in Terms of Impact and Likelihood, 2007-2013
Source: World Economic Forum
In summary, we anticipate a relatively calm 2014, one in which we prefer equities to bonds, Developed Markets to Emerging Markets. Cyclicals should outperform Defensives as market participants likely will have increased confidence in economic soundness and the cyclical story. Companies in (or believing they are in) a growth cycle, having wrung out as much bloat as possible and managing aged fixed assets, will likely finally make meaningful capital expenditures. Others that are more in a mature phase, should continue to buy back shares and initiate/increase dividend payments. Each will seize upon the cheap and ample access to capital markets which is perceived to be getting costlier, to finance capex and/or shareholder-friendly behaviors. All will consider strategic M&A. Investment Grade companies will leverage up meaningfully to do such things and whats good for equities will be less so for these companies bonds. On the risk side, a China slowdown with concomitant impact on commodities and therefore, Emerging Markets is the most clear and present item. Toppy equity valuations and increasing interest rates are of a concern but manageable with careful selection, and parsing of select opportunities, all through the lens of our proprietary methodology - BRACE. Well monitor myriad risks and await the unknown, unanticipated ones as well. Sleep well. Good luck and good fortune in 2014. Best Regards,
Peter M. Lupoff Chief Investment Officer

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Tiburon Capital Management

A GrayCo Alternatives Company

1345 Avenue of the Americas 3rd floor New York, NY 10105

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Goldman Sachs Global Investment Research

Institute for Supply Management

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Thomson Reuters

Credit Suisse research

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Credit Suisse research

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Goldman Sachs Global Investment Research

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Thomson Reuters

Source: Compustat, Goldman Sachs Global Investment Research

Source: Credit Suisse research

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Thomson Reuters

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Goldman Sachs Global Investment Research

Fixed Income Commentary

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

European Companies Hording Cash

Source: BofA Merrill Lynch Global Research

Source: BofA Merrill Lynch Global Research

Source: BofA Merrill Lynch Global Research

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Federal Reserve, BofA Merrill Lynch Global Research

Source: BofA Merrill Lynch Global Research Equity Strategies

Source: Deloitte CFO Survey

Deloitte CFO Survey, 3Q13

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: The Private Equity Growth Capital Council

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

If China Sneezes, Nomura Global Markets Research, July 2013

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Credit Suisse research

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Credit Suisse

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: Wood MacKenzie

Tiburon Capital Management

1345 Avenue of the Americas 3rd floor New York, NY 10105

Source: World Economic Forum

United Nations Centers for Disease Control and Prevention