Global Trends in Family Offices #1:

Investing in the Eurozone

By David Drake
(Note: This article is the first in a series on Global Trends in Family Offices Investments.)

The current economic move towards recovery is expected to continue at a modest pace over the
coming months due to growing domestic demand, according to 3 leading European think tanks. Ifo of
Germany and its French and Italian counterparts all made a joint statement that they are expecting a
small acceleration in quarterly growth in GDP. The statement said the groups anticipate 0.3% growth
in the second, third, and fourth quarters of 2014 compared to 0.2% in the first quarter. The single
currency bloc ran a surplus in 2014 equivalent to 2.3 per cent of GDP, and this is predicted by the
International Monetary Fund (IMF) to rise to 3.3 per cent this year and to 3.1 per cent by 2016. The
recovery is expected to cover all sectors, mainly because of continued improvement in domestic

demand. The 18 member Eurozone started to recover from its longest-ever recession in the second
quarter of 2013, but growth has remained relatively weak since then, which analysts attribute to a
range of factors including weak demand from emerging countries, security concerns in Eastern Europe
and the continuing conflicts in Iraq and Syria.

The statement said the groups anticipate 0.3% growth in the second, third, and fourth quarters of
2014 compared to 0.2% in the first quarter.

Productivity Gain
European Central Bank (ECB) president Mario Draghi has delivered on last years promise to do what it
takes to keep the Eurozone intact by initiating further monetary easing to stimulate economic growth.
This included the hitherto unprecedented step of reducing to below zero the interest rate that the ECB
pays on deposits from banks, which would penalize banks that conserve cash instead of lending it out.
Because devaluation has been ruled out, European policymakers have to focus on achieving
productivity gains. This is now starting to deliver growth and is an important consideration for
investing in the Eurozone.

In order to achieve overall balance, Eurozone core countries must also reduce their productivity.

Spain and Ireland have introduced structural reform to improve productivity. Portugal and Greece have
also shown progress. In order to achieve overall balance, Eurozone core countries must also reduce
their productivity. Germany has reduced its trade surplus with the rest of the Eurozone to nearly zero,
while it continues to increase trade with countries outside the Eurozone.
The problem for potential Eurozone investors is that the focus on productivity has not yet resulted in
strong economic growth. The ECB recently cut its economic growth forecast to 1.1% from 1.2%.
However, it is worth noting that European companies only generate around 50% of their revenue from
within Europe. Therefore global growth is at least as important a factor as growth within the Eurozone.

Investment Considerations

The markets for IPOs as well as credit markets are showing new signs of life. IPOs from two Spanish
REITs attracted considerable investment interest.

European equities have lost some of their allure compared to opportunities in other developed
markets, primarily because of the lack of potential for individual companies to grow their revenues and
earnings. Markets in the US and Asia have rebounded to levels similar to those preceding the 2008
crisis, whereas they continue to lag in Europe. The differentiating factor in European investments has
to do with the type of investment. The markets for IPOs as well as credit markets are showing new
signs of life. IPOs from two Spanish REITs attracted considerable investment interest.

The Danger of Deflation

The markets for IPOs as well as credit markets are showing new signs of life. IPOs from two Spanish
REITs attracted considerable investment interest.

The World Bank recently warned about the dangers of deflation because downward movements in
inflation rates could unleash a cycle of debt, and deflation could sharply restrict the ability of the ECB
to continue to support recovery in the Eurozone. Inflation rates remain well below what the ECB
regards as the danger zone of 1% against an inflation target of 2%. If prices stop growing or start to
fall, it could trigger a dangerous process in which consumers postpone purchasing in the anticipation
of even lower prices. This could lead businesses to postpone investment and put the Eurozone
economy on the verge of collapse. The ECB has few tools at its disposal apart from interest rates.
However, it has adopted the quantitative easing programme that favors the economy. Negative
interest rates are not in themselves a solution, and there is no universal solution. Because of its
unified currency, devaluation by individual countries cannot occur.

David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a
300 family office network; LDJ Real Estate Group and Drake Hospitality Group;
and The Soho Loft Media Group with divisions Victoria Global Communications,Times
Impact Publications, and The Soho Loft Conferences. Reach him directly
at David@LDJCapital.com.