Westend Brokers AG
Silvia Quandt & Cie. AG, Brokerage & Investment Banking: In-between the lines – Bernhard Eschweiler
Silvia Quandt & Cie. AG, Merchant & Investment Banking / Key word(s): Miscellaneous – Markets waiting for outcome of US election and next Euro area moves – Inflation concerns are rising in Germany – However, monetary and real economic inflation flags are missing so far Financial markets have been moving sideways since the rally reached a peak in September. The initial euphoria over central bank actions, especially the OMT announcement by the ECB and the launch of QE3 by the Fed, is gone, but market sentiment remains positive despite disappointing earnings releases and mixed economic news (economic figures in Europe were mostly weaker, but the rest of the world was doing a tick better, notably the US and China). In our judgment, markets are poised to move higher, but two obstacles have to be overcome. – The most immediate issue is the US election. Our guess is as good as those of the bookmakers and polls, but we fear that the fiscal policy implications are underestimated. We share the consensus view that eventually a compromise will be reached to avoid the fiscal cliff and raise the debt ceiling. However, gridlock may well prevent a fiscal compromise before yearend, which would imply a temporary (albeit reversible) step over the fiscal cliff. – The other issue is the next steps in coping with the Euro-debt crisis. In the forefront is Greece. Even Germany is starting to accept that more time will be needed. However, the German government remains set to avoid any vote on Greece in parliament. Thus, most likely is a fudge, which allows the disbursement of the next payment later this month and postpones the final decision on additional support for Greece. Spain has done its funding for this year, but riding just on the ECB OMT announcement is unlikely to be enough for next year. Both Spain and Germany (where the parliament would have to vote on a precautionary credit line for Spain) are playing for time. In our judgment, bad news from Spain and market pressure will force both sides’ hands between yearend and the first quarter of next year. Thus and as we wrote before, there is significant risk that markets will experience a temporary setback due to these two issues. However, we are also confident that these issues will be overcome and that a more positive economic and financial picture will emerge in the course of next year. German inflation angst The ECB’s OMT announcement has also reduced fears among Germans that the Euro may break up. At the same time, it has created more inflation angst. That the public is worried is no surprise, given Germans’ inflation DNA. Shocking is how little those who should know better, namely the German academic elite, are doing to dispel the inflation angst. In fact, it seems that they enjoy adding fuel to the fire. Milton Friedman said that inflation is always a monetary phenomenon. That is true, but cannot be reduced to the quantity identity as a causal relationship between the central bank money supply and inflation, as many German academics like to do. As we wrote before, the relationship between monetary action and broad money supply (money multiplier) has broken down. While the ECB’s balance sheet has mushroomed, broad monetary aggregates have stalled (the multiplier has nearly halved since 2007, see first chart on previous page). The reasons are the well-known troubles in the banking system. As a result, banks prefer to park extra cash at zero interest with the ECB rather than lending it to others. The flipside is a poor credit performance, which in fact is contracting (see second chart on previous page). Furthermore, the issue is not just an impaired banking sector. The problem is also generally weak demand due to the deleveraging dynamics in most parts of the economy. Some argue that the excess liquidity could lead to asset bubbles, which eventually could boost goods demand and inflation. To be sure, central banks operating at the zero-interest-rate margin, notably the Fed, hope that their policies will lift asset prices and through that channel stimulate economic activity. However, even if successful, that is unlikely to lead to a bubble. Missing is the key ingredient of any bubble, excessive leverage. Will German inflation rise above euro average? While the fear that ECB policy will inevitably lead to more overall inflation in Europe seems misplaced, there are good reasons to believe that the inflation dynamics within Europe should reverse. In the decade prior to the crisis, Germany underperformed the rest of the Euro area and had lower-than-average inflation. This should reverse as Germany consistently outperforms the rest of the region. So far, however, that has not been the case. German inflation is roughly half a percentage point lower than the euro average. The reason may simply be distortions due to hikes in sales taxes and public-service fees in the crisis economies. If true, those distortions should fade in the course of next year. On the other hand, wages in Germany are accelerating, while they are decelerating if not declining in other parts of Europe. In some sectors, inflation is clearly picking up. Most notable are the increases in house prices and rents. But even those are modest by international standards. Missing in Germany as in the rest of the Euro area are signs of monetary excesses and leverage. The German component of Euro-area M3 is growing less anemic, but not out of line with the economy and past standards. Moreover, much of the recent pick-up in German M3 growth was driven by people moving into cash (checking accounts). The high preference for liquidity is a sign of uncertainty among retail investors and not pending consumer demand. Indeed, bank credit to households and companies is hardly growing, which is a sign that parts of the German banking system are also struggling as well as companies either finding other funding sources or being reluctant to invest more. Disclaimer This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor, and was first published 5 November 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):
Company disclosures 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 This publication is issued in the United Kingdom only to persons described in Articles 19, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 and is not intended to be distributed, directly or indirectly, to any other class of persons (including private investors). Neither this publication nor any copy of it may be taken or transmitted into the United States of America or distributed, directly or indirectly, in the United States of America. Frankfurt am Main, 05.11.2012
End of Corporate News 05.11.2012 Dissemination of a Corporate News, transmitted by DGAP – a company of EquityStory AG. The issuer is solely responsible for the content of this announcement. DGAP’s Distribution Services include Regulatory Announcements, Financial/Corporate News and Press Releases. Media archive at www.dgap-medientreff.de and www.dgap.de |
191492 05.11.2012 |