From Barron's Penta blog:
Europe will be the hot equity play of 2014, claims JPMorgan Private Bank. If you are of a similar view, we have a less obvious way you might play the turgid European recovery—distressed debt. Large tranches of nonperforming European loans, priced at 30 to 50 cents on the dollar, are about to come onto the market.
European banks are saddled with a bad-loan problem similar to what the U.S. faced four years ago, when borrowers walked away from their outsize mortgages, after the value of their properties collapsed. The problem persists in European commercial real estate where nonperforming loans—the borrower has not made scheduled payments for at least 90 days—are sitting on the balance sheets of the Continent’s banks.
According to a PwC estimate, the value of those bad European loans is somewhere between one trillion euros and €1.5 trillion ($1.3 trillion and $2 trillion) in 2012, up from €514 billion in 2008. By comparison, U.S. lenders now have less than $200 billion of these clunkers on their balance sheets.See also this week's Barron's Fund of Information column:
The euro-zone banks have let these loans fester on their balance sheets, says Robert Klein, president of JPMorgan Alternative Asset Management, because they don’t have the ability to sell on a robust securities aftermarket. Furthermore, taking losses on these loans would have further damaged the European banks’ already fragile reputations.
But recent earnings releases from recovering banks like Deutsche and Barclays have shown promise, and the prospect of absorbing these losses is suddenly more palatable. Perhaps more importantly, the Continent’s foot-dragging bankers are facing up to a new reality, as the European Central Bank finally pushes them hard to grapple with their problems. Specifically, the ECB’s round of stress tests next year—and the initial rollout of Basel III global banking standards starting in 2015, with stricter standards to follow in 2019—is focusing many a euro banker’s mind.
Enter opportunity. In the past few years, private-equity firms like KKR, Blackstone Group, Cerberus, and Apollo Global Management have been quietly snapping up a steady trickle of deals. Last year Blackstone’s real-estate group bought $3.5 billion worth of distressed European mortgages and properties, the most it has ever invested in the Continent in a year. In the process, these private-equity firms have built banking relationships that translate into best pricing, an advantage they have backed with turnaround operations and manpower on the ground in Europe, capable of efficiently managing and restructuring the deadbeat loans.
The problem for everyone else is that it takes time and huge effort to realize a profit from these bad loans, so even $100 million-plus family offices so far have struggled getting into the game and becoming players. But that, too, is changing rapidly. Citi Private Bank, JPMorgan Private Bank, and Deutsche Bank Wealth Management are teaming up with the private-equity firms so their clients can get some of the action....MORE
A Big, Dispassionate Bet on Europe's Recovery
Hedge-fund manager Stephen Roberts of Horseman Capital got the Continent's turnaround right. And why he's still short Newmont Mining.
Stephen Roberts attributes a lot of his recent investment success to avoiding the passion—and occasional panic—of the markets. He used to keep to himself in the library-like offices of Horseman Capital Management in London. In 2011, he took it a step further. He bought a tranquil, manicured estate in the British tax haven of Jersey in the Channel Islands off the coast of France. Roberts wanted to "isolate" himself from the "noise and distraction" of the European financial centers of London, Frankfurt, Zurich, and Milan. As a rule, Roberts never visits a company he invests in or meets its managers. Instead, he monitors his Bloomberg screen, listens to earnings calls and reads regulatory filings and news reports online.
Staying far from the madding crowd seems to work for him. The 41-year-old portfolio manager of the Horseman European Select long-short equity fund has nearly three quarters of its $550 million in European shares, much of that acquired at the beginning of this year, when the region's prospects seemed far dicier. Europe has attracted a lot more hedge-fund money this year, but Roberts got in early. His hedge fund has delivered a 26.6% return, net of its 1.5% management fee and 20% performance fee, from Jan. 1 to Oct. 31. The return trounced those of the vast majority of equity-oriented hedge-fund managers.
Roberts put down some bets in Europe when it was in the throes of its crisis in 2010. At that time, he decided that the "emerging wealth" of Asia would keep revenue flowing into European luxury brands, which today make up 40% of the fund's gross assets. China accounts for about 20% of the $330 billion in global consumption of luxury goods, up from less than 10% a decade ago. Many of these purchases are made by tourists at the fashionable stores on Fifth Avenue in New York and the Champs Elysées in Paris, he says. Even as China's economy slows down to a more mature growth rate, he expects the number of Chinese people who earn $30,000 a year to more than triple over the next decade from just 3% of the population today. As a result, luxury brands are still a favorite of his.
Roberts' biggest single holding is Cie. Financière Richemont (ticker: CFR.Switzerland), a Swiss firm that's sitting on about 3.2 billion euros ($4.34 billion) in cash and owns numerous luxe brands including Cartier and Montblanc. The stock is up 123% since he started buying the shares for 41.20 Swiss francs ($45.44) in March 2010, and he thinks it can go higher still....MORE