DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the lines - Bernhard Eschweiler
(firmenpresse) - DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking /
Key word(s): Miscellaneous
Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the
lines - Bernhard Eschweiler
25.08.2011 / 13:51
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- Equity market turmoil shows first hit on economic sentiment
- Will Fed and ECB act in response?
- Ratification of extended EFSF mandate becomes next test of market
sentiment
After the plunge in stock prices in late July and early August, equity
markets have moved into a very volatile range over the last two weeks,
testing and in some cases hitting new lows. The initial plunge was driven
by a sharp reduction in growth expectations and frustration over the poor
handling of fiscal affairs in the US and Europe. The recent volatility
reflects uncertainty over what comes next from the economic data and
policymakers. Data releases so far have been mixed. Hard figures for Q3
have been stronger, but sentiment indicators have dropped sharply. The ECB
has done a good job squeezing bond spreads and keeping the banking system
afloat. All eyes are now on the Fed and Bernanke's message from Jackson
Hole.
The German equity market, which has been one of the best performing in the
first half of the year, was one of the worst hit in the turmoil (down 22%
since July 22nd, versus -11% for the DOW and -19% for the EuroStoxx50). We
have lowered our GDP estimates for Germany on account of negative sentiment
effects, but feel comfortable with our view of continued positive growth in
the second half of 2011 as well as 2012. Still, markets are likely to stay
volatile and could even fall further as the point of investor capitulation
has not yet been reached.
Stronger data versus weaker sentiment
The contrast between stronger data and weaker sentiment was most evident in
the US. July output jumped 6% annualized from Q2, but the Phily Fed survey
for early August plunged from +3.2 to -30.7. It is too early for a
definitive view on how households and businesses will change their
behavior, but we believe the probability of a recession in the US has
crossed the 25% mark and will rise the longer the uncertainty persists.
In Germany, the market has been spooked by the near-zero growth in Q2.
Shocking is how little market participants have looked through the seasonal
distortion. Very mild weather boosted Q1 growth, especially construction
and consumption. The payback came in Q2 compounded by the global
manufacturing dip triggered by the Japanese earthquake and the temporary
shutdown of several nuclear plants. The run rate of the two-quarter
average, however, shows little signs of softness. That is consistent with
business surveys, which show very strong current activity in Q2 as well as
July and even August.
Going forward, however, August surveys show a visible impact on business
confidence. The expectations component of the Ifo survey dropped to a
level, that implies managers being evenly divided between optimists and
pessimists. That is consistent with a slowdown to trend growth, but not
recession as implied by the ZEW survey. The drop in sentiment will
undoubtedly have an impact on business behavior, but inventories, capex and
employment are not excessive. The experience of the last recession made
many companies cautious, but that will probably prove to be temporary once
managers realize that the global economy does not face a financial meltdown
and recession as in 2008. Encouraging was the stable reading of the GfK
consumer confidence indicator, which suggest that households do not fear a
negative impact on employment and incomes.
Against this background, we have revised our growth outlook for Germany.
The main assumption is weaker growth in the US and most of Europe
(0.5%-to-1.0% run rate in the second half of 2011 and into 2012), yet
5%-to-6% growth in Emerging Markets, with Asia outperforming thanks to the
rebound in Japan. For Germany, we expect activity to slow to 1.5% in the
second half of the year. Going into 2012, we see the momentum picking up
towards potential growth of 2.0%-to-2.5%. As a result, the full-year
growth forecasts have been lowered from 3.5% to 3.0% in 2011 and from 2.5%
to 2.0% in 2011.
All eyes are on the Fed
This outlook is preconditioned on the assumption that central banks succeed
in preventing the equity turmoil turning into a widespread liquidity and
credit crisis. So far, central banks have prevented the worst, but there
are some cracks. Banks in Europe are more reluctant to lend to each other,
with the ECB increasingly filling the gap. The US interbank market
functions more normal, but rumors of problems at some banks persist.
Market participants are hopeful that Fed Chairman Bernanke will announce
further measures at the Jackson Hole meeting on Friday. In our judgment,
Bernanke will probably signal that more measures are likely to come,
including a new round of quantitative easing, but disappoint expectations
of immediate action. Activity and financial indicators warrant immediate
action, but inflation still seems too high for comfort. Thus, triggers for
a future move are either a notable drop in inflation or a further
deterioration in economic and financial conditions.
The ECB is unlikely to give much guidance until the next council meeting on
September 8th. A change in the interest rate policy at the next meeting is
unlikely, but the language of the ECB statement should point to more growth
risks and less inflation concerns. That implies no further interest rate
hikes and possibly a rate cut later in the year if economic conditions
deteriorate further. Possible is also, depending on interbank conditions
between now and the meeting, the announcement of further liquidity
measures.
The next stage of the Euro debt crisis
The balance of economic news and monetary policy action will probably keep
equity markets in their current volatile range for now. However, it is too
early to call this a bottom. There are still too many weak market
positions that have not yet capitulated and news are still more likely to
surprise markets on the negative side. One source of potential trouble is
the Euro debt crisis. ECB interventions have successfully put a lid on
spreads, especially for Italy and Spain. However, the ECB is eager to pass
this responsibility to the EFSF, which is not possible until all member
countries have ratified the decisions of the last EU summit.
Most important is the outcome of the parliamentary vote in Germany. Lower
and upper house will vote on the new laws on September 22nd and 23rd
respectively. Of interest is also how the German constitutional court will
rule on the case against the first Greek rescue package and the EFSF on
September 7th. Most likely, the new laws will pass and the constitutional
court will not rule against the Greek rescue package and the EFSF.
However, the debate will highlight the extent of disagreement, especially
within the ruling coalition. Several members of the coalition are set to
vote against the new laws. Indeed, there is the risk that the government
may need opposition support to pass the new laws.
For markets, that has two discomforting implications. First, the Euro-debt
crisis has the potential to break the current coalition and lead to either
a change in coalition partners or new elections. Second,support for more
rescue measures, such as an increase in the size of the EFSF, will be even
more difficult to get from Germany, not to mention the introduction of Euro
bonds.
Disclaimer
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 25 August 2011, 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):
Number of recommendations Thereof recommendations for issuers to which
from Silvia Quandt Research investment banking services were provided
during
GmbH in 2011 the preceding twelve months
Buys: 102 37
Neutral: 35 1
Avoid: 5 0
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
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affiliates, its executives, managers and employees may hold shares or
positions, possibly even short sale positions, in securities mentioned in
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its affiliates nor any of its officers, shareholders or employees accept
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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
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Specific notices of possible conflicts of interest with respect to issuers
or securities forming the subject of this report according to US or English
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Frankfurt am Main, 25.08.2011
Silvia Quandt Research GmbH
Grüneburgweg 1860322 Frankfurt
Tel: + 49 69 95 92 90 93 -0
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