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Nachricht vom 13.03.2012 | 09:49
Silvia Quandt & Cie. AG, Merchant & Investment Banking: In-between the lines - Bernhard Eschweiler
Silvia Quandt & Cie. AG, Merchant & Investment Banking / Schlagwort(e): Sonstiges/Sonstiges
- This week's correction was the first real setback in this year's equity rally
- Not all is fine in Euro land, but the rally is probably not yet over
- While market confidence recovers, most of the real adjustment still lies ahead
- East Germany's integration with the West shows what is still to come
European equity markets experienced their first meaningful correction this year. On Tuesday, European stock markets lost on average over 3%. Between last week Thursday and this week Tuesday, the Dax and the EuroStoxx50 fell by 4.3% and 4.1% respectively. The correction is modest compared to last year's experience and markets have already recovered some losses. Nevertheless, it is the first real break in the stellar performance so far this year and has raised questions whether the rally is over. The correction has been triggered by a number of factors of which three stand out:
- Premier Wen Jiabao's announcement that China has cut its growth target for this year to 7.5%;
- Renewed worries that Greece's debt restructuring with private creditors may run into difficulties;
- Concerns that the conflict with Iran may escalate and have severe implications for oil supply.
The last point is a real risk and has the potential to derail the rally for good if the conflict leads to military action. Concerning the first two points, however, markets have overreacted. The real message from Wen Jiabao is not that China is in trouble but that inflation has been tamed and that policy can now refocus on growth and employment. This shift has already started at the end of last year and is to continue. On the Euro side, reports from banks and insurance companies suggest that Greece will have at least 75% voluntary participation in the debt exchange. If support falls short of the 90% target, Greece will most likely activate the collective action clause, which should not come as a surprise.
Labor market adjustment has only just started
The recovery in financial markets so far was driven by signs that global growth conditions are improving after last year's downturn and that the Euro debt crisis is not spiraling out of control, thanks in large part to the ECB's liquidity support. In our judgment, these developments have still momentum left and will drive markets higher. The real adjustment in the Euro area, however, has only just begun and is likely to have deeper implications than markets and policymakers are currently anticipating. In particular, not fully appreciated is the likely labor market fallout, for which East Germany's integration with the West provides an insightful case study.
East Germany's integration revisited
The generous terms of monetary union, the decision to adjust wages to West German levels as fast as possible and poor productivity standards boosted East German real unit labor cost by more than 50% after unification. The result was an almost immediate collapse in production and a 25% decline in employment in the first two years after unification. Productivity improved after a couple years, but not rapid enough to restore competiveness. In response, employment fell further. By the late 1990s, the unemployment rate reached nearly 20% and more and more people moved to West Germany to find a job.
The situation only stabilized in 2005. Employment has risen modestly in recent years and the unemployment rate declined to about 11%. However, much of the dislocations are irreversible. Employment in the east is 40% below the pre-unification level, while employment in the west rose by 20%. The population in the east declined by 3% and in the absence of large annual fiscal transfers would probably have fallen further. In contrast, the population in the West increased by 6%.
Lower wages and more migration
The regional competitiveness gaps within the Euro area build up over time and came not as a sudden shock, but the implications are similar to the case of East Germany. In the ten years prior to the financial crisis, Germany became 30% more competitive, while the periphery lost about 15%. The gap increased during the financial crisis and narrowed only a bit during the recovery. Unemployment has doubled in response and keeps rising. Interesting are the divergences. Ireland has made the most progress in reducing the gap with Germany and its labor market is stabilizing, albeit at a high level of unemployment. Spain has also reduced the gap to Germany, but that has not been enough to stop the rise in unemployment. Greece, Italy and Portugal have so far made no meaningful progress.
With less of a fiscal transfer cushion, the labor market adjustment to come is likely to require more flexibility than in the case of East Germany. Wages in the periphery will have to fall, certainly in real terms but probably also in nominal terms. That is already the case in Ireland and is
implied in the latest Greek restructuring plan. However, can labor costs be sufficiently reduced to restore pre-crisis employment? Probably not! On the other hand, the periphery cannot count on generous fiscal transfers as in the case of East Germany. The result is most likely increased migration to the core, especially Germany. First figures already provide evidence for this emerging trend. For Germany that would mean less wage pressure and more domestic demand, especially for housing.
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor, and was first published 13 March 2012, Silvia Quandt Research GmbH, Grüneburgweg 18, 60322 Frankfurt is responsible for its preparation. German Regulatory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), Graurheindorfer Str. 108, 53117 Bonn and Lurgiallee 12, 60439 Frankfurt.
Publication according to article 5 (4) no. 3 of the German Regulation concerning the analysis of financial instruments (Finanzanalyseverordnung):
Article 34b of the German Securities Trading Act (Wertpapierhandelsgesetz) in combination with the German regulation concerning the analysis of financial instruments (Finanzanalyseverordnung) requires an enterprise preparing a securities analysis to point out possible conflicts of interest with respect to the company or companies that are the subject of the analysis. A conflict of interest is presumed to exist, in particular, if an enterprise preparing a security analysis:
(a) holds more than 5 % of the share capital of the company or companies analysed;
(b) has lead managed or co-lead managed a public offering of the securities of the company or companies in the previous 12 months;
(c) has provided investment banking services for the company or companies analysed during the last 12 months for which a compensation has been or will be paid;
(d) is serving as a liquidity provider for the company's securities by issuing buy and sell orders;
(e) is party to an agreement with the company or companies that is the subject of the analysis relating to the production of the recommendation;
(f) or the analyst covering the issue has other significant financial interests with respect to the company or companies that are the subject of this analysis, for example holding a seat on the company's boards.
In this respective analysis the following of the above-mentioned conflicts of interests exist: none
Silvia Quandt Research GmbH, Silvia Quandt & Cie. AG, and its affiliated companies regularly hold shares of the analysed company or companies in their trading portfolios. The views expressed in this analysis reflect the personal views of the analyst about the subject securities or issuers. No part of the analyst's compensation was, is or will be directly or indirectly tied to the specific recommendations or views expressed in this analysis. It has not been determined in advance whether and at what intervals this report will be updated.
Equity Recommendation Definitions Silvia Quandt Research GmbH analysts rate the shares of the companies they cover on an absolute basis using a 6 - 12-month target price. 'Buys' assume an upside of more than 10% from the current price during the following 6 - 12-months. These securities are expected to out-perform their respective sector indices. Securities with an expected negative absolute performance of more than 10% and an under-performance to their respective sector index are rated 'avoids'. Securities where the current share price is within a 10% range of the sector performance are rated 'neutral'. Securities prices used in this report are closing prices of the day before publication unless a different date is stated. With regard to unlisted securities median market prices are used based on various important broker sources (OTC-Market).
Disclaimer This publication has been prepared and published by Silvia Quandt Research GmbH, a subsidiary of Silvia Quandt & Cie. AG. This publication is intended solely for distribution to professional and business customers of Silvia Quandt & Cie. AG. It is not intended to be distributed to private investors or private customers. Any information in this report is based on data obtained from publicly available information and sources considered to be reliable, but no representations or guarantees are made by Silvia Quandt Research GmbH with regard to the accuracy or completeness of the data or information contained in this report. The opinions and estimates contained herein constitute our best judgement at this date and time, and are subject to change without notice. Prior to this publication, the analysis has not been communicated to the analysed companies and changed subsequently. This report is for information purposes only; it is not intended to be and should not be construed as a recommendation, offer or solicitation to acquire, or dispose of, any of the securities mentioned in this report. In compliance with statutory and regulatory provisions, Silvia Quandt & Cie. AG and Silvia Quandt Research GmbH have set up effective organisational and administrative arrangements to prevent and avoid possible conflicts of interests in preparing and transmitting analyses. These include, in particular, inhouse information barriers (Chinese walls). These information barriers apply to any information which is not publicly available and to which any of Silvia Quandt & Cie. AG and Silvia Quandt Research GmbH or its affiliates may have access from a business relationship with the issuer. For statutory or contractual reasons, this information may not be used in an analysis of the securities and is therefore not included in this report. Silvia Quandt & Cie. AG and Silvia Quandt Research GmbH, its affiliates and/or clients may conduct or may have conducted transactions for their own account or for the account of other parties with respect to the securities mentioned in this report or related investments before the recipient has received this report. Silvia Quandt & Cie. AG and Silvia Quandt Research GmbH or its affiliates, its executives, managers and employees may hold shares or positions, possibly even short sale positions, in securities mentioned in this report or in related investments. Silvia Quandt & Cie. AG in particular may provide banking or other advisory services to interested parties. Neither Silvia Quandt Research GmbH, Silvia Quandt & Cie. AG or its affiliates nor any of its officers, shareholders or employees accept any liability for any direct or consequential loss arising from any use of this publication or its contents. Copyright and database rights protection exists in this publication and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of Silvia Quandt Research GmbH. All rights reserved. Any investments referred to herein may involve significant risk, are not necessarily available in all jurisdictions, may be illiquid and may not be suitable for all investors. The value of, or income from, any investments referred to herein may fluctuate and/or be affected by changes in exchange rates. Past performance is not indicative of future results. Investors should make their own investment decisions without relying on this publication. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this publication.
Specific notices of possible conflicts of interest with respect to issuers or securities forming the subject of this report according to US or English law: None
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Frankfurt am Main, 13.03.2012
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