This document provides an outlook on the global economy and financial markets for 2010, with a focus on opportunities and risks in equities, fixed income, currencies, real estate, and specific Harvest funds. Key points include expected continued recovery in the global economy and equities in 2010, with attractive valuations in European and UK stocks. Specific financial stock picks in Greece and Cyprus are highlighted, with expectations that market volatility will decline in the second half of the year. Restrictions and risks discussed include the potential for fiscal weakness in peripheral Eurozone countries.
1. HARVEST MARKET INSIGHT 2010
“ Serving the International Investor”
Harvest Financial Services Ltd
Regulated by the Cyprus Securities and Exchange Commission,
License Number 021/03 – Member of the Investor Protection Fund (TAE)
CONTACT: Telephone + 357 22 552800 info@harvestgroup.com.cy
This document is for informational purposes only. This document does not constitute an offer, an invitation to offer, or a recommendation to enter into any transaction, nor does it
constitute investment advice. This material does not constitute a solicitation to buy or sell securities in any jurisdiction in which such a solicitation is not authorized or to any person
to whom it is unlawful to make such a solicitation.
2. Table of Contents
I. Economic Outlook
I. Economic Outlook
II. Equities
II. Equities
III. Fixed Income
III. Fixed Income
IV. Currencies
IV. Currencies
V. Real Estate
V. Real Estate
VI. Harvest Funds
VI. Harvest Funds
2
3. Market Outlook 2010
The recovery that was expected after the devastating crisis is expected to be
underway and extending into 2010
Expectations 1H 2010:
• Uncertainties to continue
• Government support reduced
• Volatilities to slowly decline
Expectations 2H 2010:
• Deflationary pressures to end
• Rising commodities = higher inflation levels
• Huge stimulus packages to result in better consumption and labor market
recovery
All these given the timing economies plan their monetary and fiscal exit
strategies
3
6. Equities Outlook
Global economic and corporate recovery is likely to continue well into 2010
Equities remain attractively valued and globally trading at a P/E multiple of 14
Top Equity Picks = Europe and UK
→ P/E 12
→ High dividend yields
→ Forecasted market return 11%
Disadvantages:
→ High risk
→ High Volatility
→ Fear of sovereign default of the PIGS: Portugal, Ireland, Greece & Spain
→ USD 13bln taken out of EU markets since Q3 2009
Forecast CITI Bank, UBS
Source (Bloomberg)
6
7. Focus on Greece
Current Situation
→ Undergone major downgrades
→ Fiscal deficit 12.7% of GDP
→ Fear of sovereign default
→ Uncertainty whether EU or IMF will help
→ Investors’ sentiment bottomed
Our View
→ Panic state (short term unattractiveness)
→ Market nearing a bottom
→ Strong demand for the new government bond issued surpassing supply by 4 times
→ ECB & IMF showed strong confidence in the government measures
→ EU preparing a draft bill to protect fiscally weak nations against derivative attacks
which would minimize the pressure in few months
→ A sign of confidence needed from the Greek government to prove credibility of the
stability program and restore confidence in the market
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9. Focus on Cyprus
Current Situation
→ Crisis effects being felt across the whole economy
→ The economy is under pressure (unemployment and government spending)
→ Developments in Greece are negatively affecting the market outlook
→ Market is gloomy due to uncertainties within EU and the Euro
→ Investors’ sentiment is low and very cautious
Our View
→ Panic due to developments in Greece
→ Market is bottoming out after mass sales in January
→ Better position and sounder fundamentals than Greece
→ Gradual recovery expected in 2010-2011 as confirmed by EIU (Economist
Intelligence Unit)
→ Strong earning signs from local listings could trigger a boost to the market
→ Good signals from Greece could spark an upside reversal of the market
9
11. Current Situation: Cyprus & Greece
• The stock markets in Cyprus and Greece are trading at near bottom levels
• Correction was expected after the strong rally of March to December 2009
• Volatility is expected to remain high throughout 2010 given the current situation
• Constant derivative attacks have weakened the Greek market
• More than $439bln has been wiped from stocks worldwide since Jan 14 since
Greek deficit news became widespread
• Greek five year bond yields have surged to their highest point in a decade
• The decline of the Euro has worsened the situation
• Credit default swaps on Spain and Portugal have risen to a record rate
→ Consistent negative news are pricing in the market
→ Markets are at a crucial point where they signal short term negative outlook
→ The market is in a panic state which is undermining fundamentals
11
12. Our View: The Market
• EU, G7, IMF, ECB and other institutions have shown their support and
confidence in Greek market signaling better days ahead
• Greek tax revenues in January have exceeded forecasts showing early
signs of success towards cutting budget deficit
• Credible researchers and economists have already confirmed the scenario
that Greece is the victim of speculative attacks and does not need bailout
Source: (Wall Street Journal)
→ Opportunity to use the emotional market environment and build positions
→ Good time to start entering the equity market at near bottom attractive rates
→ Invest within February and March prior to corporate announcements’ season
→ Investing with a short term mindset (less than 6 months) is not an attractive
option as small margins can only be obtained within this timeframe
→ Invest with a long term mindset and hold at least 12 months and wait for
cyclical recovery to have a winning portfolio
→ Fundamentally sound listings (mainly financials) seem attractively priced
12
13. Restrictions to our expectations
• If the Greek government does not show any signs of confidence within the year
• If the Greek stability program does not show any results by mid year
• If the state puts pressure on Greek banks to buy its government bonds
• If Moody’s downgrades Greece below its A2 rating leaving its debt ineligible as
collateral at the ECB and disqualify from ECB repo funding
• If EU members and ECB change their stance and show no support to Greece
• If signs of fiscal weakness from Portugal, Ireland and Spain persists
• If the spreads of Greek government bonds do not tighten within the year
• If banks in Cyprus and Greece do not reveal good results by March
• If strikes persist in Greece on a constant basis bringing the economy to a halt
13
15. Picks for 2010 (Financials)
CITI Bank JP Morgan & HSBC
(10 Feb 2010) (15 Jan 2010)
National Bank of Greece National Bank of Greece
Marfin Popular Bank Alpha Bank
Bank of Cyprus Bank of Cyprus
Our Picks For 2010
National Bank of Greece
Alpha Bank
Bank of Cyprus
Hellenic Bank
Marfin Investment Group
Merrill Lynch Marfin Analysis
(2 Feb 2010) (5 Jan 2010)
National Bank of Greece National Bank of Greece
Piraeus Bank Alpha Bank
Alpha Bank Bank of Cyprus
15
16. Our Picks for 2010
ETE Alpha BOCY HB MIG Industry Sector S&P 500
Capital Base 11.10% 9.10% 11.10% 13.00% 9.10%
Dividend Yield 3.23% 2.13% 3.60% 1.80% 1.10% 14.00% 5.00% 1.69%
Dividend Payout 14.00% 43.00% 29.00% 33.00% 5.43% 16.18% 4.63% 24.37%
EPS 2.120 0.790 0.449 0.066 0.070 12.49% 9.53% 5.95%
ROE 16.59% 8.34% 19.22% 7.04% -1.39% 7.81% 3.12% 9.99%
P/E 6.79 4.98 6.18 17.30 4.50 11.00 25.58 14.31
ROA 1.30 0.43 1.10 0.24 -0.65 0.21 1.27 4.20
Price/cash 7.02 8.37 5.21 11.08 25.49 2.60 0.89 7.13
Source (Reuters Analysis, Financial Times, Athex)
Remarks:
ETE: Strong capital base and 50% of income from non Greek sources (e.g. Turkey)
ALPHA: Conservative asset mix and most loans from non Greek/Cypriot mortgages
BOCY: Strong exposure to Russia
HB: P/B 0.78 times making it undervalued by almost 25%, possible merger talks
MIG: Conservative asset mix and over 25% of revenues is outside Greece
16
17. Fixed Income
• Large investment institutions (UBS, HSBC, CITI) are neutral for bonds in 2010
• Spreads declined substantially in 2009
• 2010 valuations expected to be better after the second half of the year
• Corporate fundamentals expected to improve over the next few quarters
• Improvements are usually followed by improved credit rating trends
• Inflation rates and Interest rates are expected to soar in 2010 to catch up with
expected economic recovery
• Corporate bonds preferred over government bonds in 2010 (higher yields)
→ Given the expected economic cycle, it favors equities
17
18. Fixed Income Greece & Cyprus
The new 5 year bonds issued by the Greek government
Demand €20bln = 4 x €5bln Supply
→ Greek fiscal debt worries forced the bond to carry record high interest rate
spreads
→ The premium demanded to hold 10Y Greek government bonds is over 400
basis points over the German Bunds (Euro zone benchmark bonds)
→ Speculators can borrow at 1% from ECB and lend to Greece for 7% (sovereign
bonds)
→ Greek government has to refinance €54bln in 2010
→ If it fails, Moody’s would downgrade Greek Debt below A grade
→ Greek banks could not benefit from ECB refinancing schemes
→ Chain reaction that could crash the market further
A move within the fixed income markets of Cyprus or Greece would be advised
only after better answers are available regarding convincing solutions to the
Greek sovereign debt within the next few months
18
19. Bonds List: Cyprus & Greek Financials
Bonds List Cyprus & Greece
Annual Fixed /
Issuer ISIN Cur Start Payday Floating CPN Maturity Call. Offer YTM Dur Denom Market S&P Moody's
GREECE
ALPHA CREDIT GROUP BV XS0288206153 EUR 23/02/2007 23-Feb Floating 0.92 23/02/2010 N 99.85 2.67 0.09 50,000 Germany BBB A2
ALPHA CREDIT GROUP BV XS0222205600 EUR 21/06/2005 21-Mar Floating 0.96 21/06/2010 N 99.29 2.68 0.42 50,000 Germany BBB A2
ALPHA CREDIT GROUP BV XS0229291603 EUR 20/09/2005 20-Mar Floating 0.96 20/09/2010 N 98.85 2.68 0.67 50,000 Germany BBB A2
ALPHA CREDIT GROUP BV XS0290074466 EUR 07/03/2007 7-Mar Floating 0.94 03/07/2011 N 97.47 3.18 1.12 50,000 Germany BBB A2
ALPHA CREDIT GROUP BV XS0432214343 EUR 09/06/2009 9-Jun 4.63 06/09/2011 N 100.49 4.24 1.34 50,000 Germany BBB A2
ALPHA CREDIT GROUP BV XS0269115910 EUR 27/09/2006 all term Floating 0.96 27/09/2011 N 96.29 3.18 50,000 Germany BBB A2
ALPHA CREDIT GROUP BV XS0282533206 EUR 17/01/2007 17-Jan Floating 0.93 17/01/2012 N 94.66 3.68 1.98 50,000 Germany BBB A2
ALPHA CREDIT GROUP BV XS0451674617 EUR 17/09/2009 17-Sep 3.88 17/09/2012 N 96.00 5.52 2.54 50,000 Germany BBB A2
COCA COLA HBC FINANCE BV XS0405567883 EUR 17/12/2008 15-Jan 7.88 15/01/2014 N 117.65 3.10 3.60 50,000 Germany A A3
EFG HELLAS PLC XS0294698492 EUR 12/04/2007 all term Floating 0.80 12/04/2010 N 99.58 2.68 50,000 Germany BBB A2
EFG HELLAS PLC XS0451430150 EUR 14/09/2009 14-Mar Floating 1.96 15/03/2011 N 98.60 3.18 1.14 50,000 Germany BBB A2
EFG HELLAS PLC XS0429895500 EUR 26/05/2009 26-May 4.25 26/05/2011 N 100.06 4.19 1.31 50,000 Germany BBB A2
EFG HELLAS PLC XS0443680052 EUR 11/08/2009 11-Feb 4.38 11/02/2013 N 97.23 5.38 2.87 50,000 Germany BBB A2
EFG HELLAS PLC XS0284635702 EUR 05/02/2007 7-Feb Floating 0.92 05/02/2014 N 89.39 3.68 3.96 50,000 Germany BBB A2
FAGE DAIRY INDUSTRIES SA XS0210695150 EUR 21/01/2005 15-Jan 7.50 15/01/2015 N 94.00 9.02 4.23 5,000 Germany B- B3
PIRAEUS GROUP FINANCE XS0293447792 EUR 29/03/2007 29-Mar Floating 0.91 29/03/2010 N 100.40 3.44 0.19 50,000 Germany BBB A2
PIRAEUS GROUP FINANCE XS0433067666 EUR 15/06/2009 15-Jun 4.50 15/06/2011 N 100.78 5.27 1.36 50,000 Germany BBB A2
HELLENIC REPUBLIC GR0110019214 EUR 01/02/2008 20-Mar 3.80 20/03/2011 N 99.67 6.03 1.13 1,000 Germany BBB+ A2
HELLENIC REPUBLIC GR0114022479 EUR 28/01/2009 20-Aug 5.50 20/08/2014 N 88.87 6.43 4.00 1,000 Germany BBB+ A2
HELLENIC REPUBLIC GR0124031650 EUR 11/03/2009 19-Jul 6.00 19/07/2019 N 76.11 6.39 7.19 1,000 Germany BBB+ A2
HELLENIC REPUBLIC GR0133004177 EUR 10/11/2009 20-Mar 5.30 20/03/2026 N 99.68 2.68 10.86 1,000 Germany BBB+ A2
HELLENIC REPUBLIC GR0138002689 EUR 06/02/2007 20-Sep 4.60 20/09/2040 N 100.21 4.32 14.91 1,000 Germany BBB+ A2
GREECE VARIABLE NOTES
ALPHA GROUP JERSEY LTD DE000A0DX3M2 EUR 18/02/2005 Feb Fixed 6.00 VAR 18/02/2015 54.00 1,000 Lux B+ Baa1
EFG HELLAS FUNDING LTD XS0232848399 EUR all term 4.57 VAR 50.00 7.55 B+ A3
EFG HELLAS FUNDING LTD XS0234821345 EUR 09/11/2005 Nov Fixed 6.00 VAR 71.00 8.57 1,000 B+ A3
NBOG FUNDING LTD XS0272106351 GBP 08/11/2006 Nov Fixed 6.29 VAR 72.00 5.64 1,000 Lux BB- A2
CYPRUS
BANK OF CYPRUS LTD XS0307782945 EUR 28/06/2007 all term Floating 0.91 28/06/2010 99.77 1.46 50,000 Lux A- A2
BANK OF CYPRUS LTD XS0251356282 EUR 04/05/2006 all term Floating 1.32 04/05/2016 90.00 3.01 50,000 Lux A3
CYPRUS GOVERNMENT BOND XS0432083227 EUR 3.75 03/06/2013 101.75 3.19 A+ Aa3
MARFIN POPULAR BANK PLC XS0453035229 EUR 4.38 21/09/2012 99.00 4.77 A3
REPUBLIC OF CYPRUS XS0143546207 EUR 5.50 27/02/2012 106.38 2.36 A+ Aa3
REPUBLIC OF CYPRUS XS0196506694 EUR Jul 4.38 15/07/2014 104.50 3.28 3.12 1,000 Germany A+
Hellenic Bank Ltd - Capital Securities HBCS EUR 6.450% 18/04/2018
Hellenic Bank Ltd - Bonds 2011 HBDE EUR 6.000% 28/04/2011
Hellenic Bank Ltd - Bonds 2016 HBDF EUR 1.550% 01/07/2016
Hellenic Bank Ltd - 2019 EUR Variable 7.500% 11/03/2019
Bank of Cyprus Conv. Bonds 2013/18 BCCB EUR 2.322% 30/06/2018
Source (Athex, Intellistock, Credit Suisse, Rotschild)
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20. Currencies (FX)
• Global economy recovering at a faster pace than anticipated
• U.S. growth is expected to outperform other major economies, especially EU
• In case of a rebound failure due to fiscal issues in EU risk aversion will prevail
• Continuous low interest rates to push commodity prices even higher
• Commodities (e.g. Gold) have positive correlation to the peaks and troughs of USD
→ USD tends to rally when risk aversion rises
→ US has low interest rates = carry trade currency of choice
→ USD is expected to perform positively in 2010 either way
Recommended Strategy:
Long USD/EUR 1.24 - 1.28 (1st of Feb = 1.3884)
Short EUR/USD
Source: Morgan Stanley, CITI, UBS, HSBC, RBS
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22. Real Estate - Cyprus
Real Estate in Cyprus - Statistical Data
Sales Documents (12month)
Number of foreign buyers & sellers
2008 2009 Change%
Nicosia 3,256 2,235 -31 Date Buyers Sellers
Limassol 3,240 2,007 -38 Jan.08 98 103
Larnaca 2,887 1,469 -49 Feb 126 116
Famagusta 1,995 881 -56 Mar 122 97
Paphos 3,289 1,578 -52 Apr 143 135
Total 14,667 8,170 -44 May 142 171
Jun 117 188
Number of properties sold to Non-Cypriots Jul 118 202
2008 2009 Change% Aug 72 104
Nicosia 283 219 -22.6 Sep 89 134
Limassol 730 415 -43.2 Oct 76 149
Larnaca 1,122 314 -72 Nov 54 111
Famagusta 919 249 -72.9 Dec 57 113
Paphos 1,498 379 -74.7 Jan.09 22 55
Total Saless 4,552 1,765 -61.2 Feb 53 77
Mar 34 102
Total Volume of Property Sales (€ bn) Apr 42 71
2002 1.2 May 145 77
2003 1.6 Jun 87 131
2004 1.9 Jul 45 121
2005 1.9 Aug 25 67
2006 3 Sep 42 98
2007 5.2 Oct 48 98
2008 3.5 Nov N/A 47
2009 1.7 Total 1,757 2,567
Source: CySTAT, Stockwatch
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23. Real Estate – Eastern Europe
SWOT ANALYSIS BULGARIA ROMANIA
Strenghts Currency Pegged to EURO Size, Natural Resources
Weaknesses Corruption Weak Currency
Opportunities Industry: Logistics and Tourism Industry: Agriculture
Prolonged recession and IMF
Threats Prolonged recession funding that slows the economic
growth
23
24. Real Estate – Eastern Europe
Current Situation:
Bulgaria:
• Heavy reliance on real estate and tourism has created a gap in the market
between supply of real estate and occupancy rates
Romania:
• Overall market of real estate has experienced a substantial fall except in
premium real estate areas where the market is recuperating
Real Estate Opportunities:
Bulgaria:
• Fundamental need for developing and enhancing tourist products and
infrastructure
Romania:
• Need for the development of industrial buildings
• Need for residential developments to cater low to middle income earning
population
Source: Colliers International, Balkan Insight, Eurostat
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25. Harvest Stargate Fund
Investment Policy Statement Summary
Investment Goal:
• Above average returns
Return Objective:
• Absolute returns of 8% - 10% annually
• Capital appreciation
Risk Objective:
• Low volatility
• Diversify across asset classes and geographically
Asset Allocation:
30% Real Estate
30% Equities
30% Structured Products – Bonds
10% Cash and Cash Equivalents
Current State: Maximum prudency and retain as much as possible in cash and its equivalents
25
26. Harvest One Percent Fund
Investment Policy Statement Summary
Investment Goal:
• Above average returns
Return Objective:
• Absolute returns of 1% per month
• Outperform selected benchmarks
Risk Objective:
• Lower volatility than selected indices (benchmarks)
• Diversify across asset classes
• Careful stock picking
Asset Allocation:
70% FTSEB Index components and Equities
15% Bonds and Alternative Investments
10% Cash and Cash Equivalents
Current State: Maximum prudency and retain as much as possible in cash and its equivalents
26
28. Disclaimer
• This report has been prepared by the asset management team of Harvest Financial Services Ltd (Investment Firm License No. 021/03),
regulated by Cyprus Securities and Exchange Commission and a member of the Cyprus Stock Exchange and the Athens Stock Exchange.
• The information in this report is given in good faith and it has been obtained from published information and other sources believed to be
credible and reliable at the time of preparation. However, Harvest Financial Services Ltd does not guarantee its accuracy as it may be
condensed, summarized or incomplete. The information mentioned herein are subject to change without notice as market conditions change
consistently. Securities mentioned in this publication are subject to investment risks, including the possibility of losses.
• The material provided herein is for informational and analysis purposes only. It has been prepared solely with the intention that it will be for
the use of selected recipients only. It does not constitute an offer to sell or a solicitation of an offer to buy any securities relating to any of
the products referenced herein, notwithstanding that any such securities may be currently being offered to others.
• None of the authors, associates or any person involved in the preparation of this publication is under any obligation if any of them become
aware of a change or inaccuracy. Also neither of them accepts any liability or responsibility whatsoever for the accuracy or completeness of
this publication and none of them makes representation or warranty in relation thereto. Moreover, the authors, associates and every person
involved in the preparation of this publication expressly disclaim all liability from any loss or damage of whatsoever kind which may arise
from any persons acting on any statements contained in this publication.
• This presentation does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not
authorized or to any person to whom it would be unlawful to make such offer or solicitation. It is the responsibility of any person or persons
in possession of this material to inform themselves of and to observe all applicable laws and regulations of any relevant jurisdiction.
Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable
taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant to the
subscription, purchase, holding, exchange, redemption or disposal of any investments.
• Past performance is not a guide to future performance and the value of investments and the income derived from those investments can go
down as well as up. Future returns are not guaranteed and a loss of principal may occur. Harvest Financial Services Ltd makes no warranty
or representation that the security and or recommendation made are appropriate for all recipients and investors.
• Opinions expressed are current opinions as of the date appearing in this material only. No part of this material may be i) copied, photocopied
or duplicated in any form, by any means; or ii) redistributed without the prior written consent of Harvest Financial Services Ltd.
2010 Harvest Financial Services Ltd
28
