Monthly Letter September 2014

Madrague has been a believer in the European recovery. We have believed that the earnings recovery poten al in Europe is greater than the con nua on of earnings increases in the US. We have previ- ously pointed out in our monthly comments that earnings need to improve for Europe to outperform. This has not materialized. European earnings expecta ons for 2014 have been con nuously down- graded throughout the year. Nothing unusual about that, we saw the same phenomenon in 2013. In 2013 the equity markets were happy to wait for 2014. The market has not been as forgiving this year. Cyclical growth has been underperforming and the best 3 sectors in Europe so far in 2014 are Health Care (+21%), U li es (+17%) and Real Estate (+12%). The outperformers are defensive and character- ized by their real assets (at least U li es and Real Estate). Neither of these sectors are focus areas for Madrague.

We s ll believe that Europe will recover even if we are humbled by the poor economic data. The is- sues facing the economy are very di cult. The dependence on monetary s mulus is worrying. The in- creased regulatory hurdles make bank borrowing more expensive. The general uncertainty regarding the economic outlook (take your pick on what to worry about: in a on, de a on, Chinese proper es, GDP growth etc.) is a drag on capital forma on. Companies rather buy back shares or buy compe tors than invest in new capacity. We believe this is cyclical, but indicators looking at historical rela onships like PMI’s versus capex have diverged for quite some me now.

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