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Silvia Quandt & Cie. AG, Merchant & Investment Banking: In-between the lines - Bernhard Eschweiler
Silvia Quandt & Cie. AG, Merchant & Investment Banking / Schlagwort(e): Sonstiges
- US has slowed again yet corporate sector keeps ticking
- China caught behind the curve but set to reaccelerate
- Euro-area muddling through between financial meltdown and moral hazard
Disappointing Chinese and US economic data as well as an escalation of the Euro-area debt crisis around the Spanish banking sector has eroded all remaining market confidence over the previous two weeks. Markets have switched into outright risk-off mode, only to be interrupted by occasional speculation that policy action is imminent. This pattern has not changed this week despite Spain's decision to accept EU funds to recapitalize its banks.
We remain optimistic that the global economy will stay on the recovery track, but caution against hopes that the Euro area will soon take decisive policy action to end the debt crisis. Muddling through is the only politically feasible policy process between financial meltdown and moral hazard problems. We believe this process will succeed and ultimately bring the Euro area closer to a fiscal union. However, the process of muddling through will also be long and vulnerable to periods of escalating tensions. The next stress test will come this weekend when the citizens of Greece go to the ballot for the second time in six weeks.
2010/2011 déjà-vu for the US
The weaker US economic data, most notably the May labor market report with its downward revisions for the previous two months, has sparked fears of a downturn and even recession as well as speculation that the Fed will have to open the monetary floodgates for a third time. The play is likely to follow the scripts of 2010 and 2011. Both times, the US economy proved more resilient. In 2010, the Fed felt compelled to give the economy another kick. Last year, it stayed cool. Ben Bernanke's testimony last week suggests that the Fed is more confident in the economy than the market. Thus, imminent policy action is unlikely unless economic
conditions deteriorate dramatically. To be sure, house-hold deleveraging and fiscal consolidation create headwinds, which make the recovery slower and more volatile. However, these forces have been in place for some time and, yet, failed to derail the corporate recovery (ex construction and finance), which is built on strong balance sheets and earnings performance.
China comes from behind
Like last year, the disappointing US data coincides with weaker Chinese figures. Adding the trouble in Europe and it is not surprising that markets fear again a global recession. Unlike most industrialized economies, China's problem is not deleveraging. Structurally, China needs to shift its economy over time more towards domestic consumption. Yet, the imminent problem is managing the business cycle. Last year, China struggled with inflation. The policy response was slow and authorities were ultimately forced to tighten more than planned. Inflation is now under control, yet at the price of lower growth. The authorities have started to ease policy, but are again caught behind the curve. A grand stimulus program à la 2008/09 is unlikely. Nevertheless, the authorities will make sure that the political transition in autumn will not be overshadowed by bad economic news. Despite micro-level horror stories, the economy is in good shape to respond to the policy stimulus. The slowdown has undermined profit growth, but margins have stayed strong, especially in the private sector.
A long and volatile road to fiscal union
The Spanish bank recapitalization program is another step in the Euro-area's muddling through process. Spain managed to get a banking-only package without extra fiscal conditions. Germany managed to keep the Spanish government responsible for the debt and implementing EU bank restructuring conditions. Spain's reluctance to seek support was as much pride as tactic. For the Euro group, the concern was to contain financial contagion risks, especially prior to the Greek election. In hindsight, the Spanish banking package may prove more important than markets currently appreciate.
To outside observers, the Euro-area's crisis management seems frustratingly slow and half-hearted. Yet, anything else is wishful thinking. The positions, especially between France and Germany, are not yet close enough for grand solutions. Germany is not opposed to fiscal and banking unions, but demands checks and balances, especially the transfer of fiscal sovereignty to Euro-area authorities. Asking German tax payers to transfer funds without retaining some control is politically not feasible. This is also recognized by Germany's opposition social democrats, who favor Euro bonds. On the other hand, Germany is so committed to the Euro and the periphery so dependent on Germany that acute stress is likely to lead to step-by-step compromises. Critical in this long-lasting and volatile process toward fiscal union is the role of the ECB. Indeed, it is reassuring that the ECB has managed to keep interbank spreads stable despite the surge in sovereign spreads.
Germany not immune yet resilient
The German economy is not immune from the crisis in the Euro area. Nevertheless, it has proven to be more resilient than feared. First, exporters are able to compensate weakness in Europe with stronger demand in emerging markets. Second, the previous restructuring makes German corporates more competitive and allows them to pay a dividend in form of higher wages and employment. Third, Germany profits from the reversal in monetary conditions: an undervalued Euro and negative real interest rates. Construction should benefit the most from the favorable shift in financial conditions. Housing supply already lags demand and conditions will tighten further as more people come to Germany in search for work.
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor, and was first published 13 June 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.
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(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.
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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.
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Frankfurt am Main, 13.06.2012
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