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
19.05.2011 / 16:07
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- Germany poised to grow 3.5% in 2011
- German government finances enjoy strong tail winds
- Euro rally runs out of steam, .
- . while debt crisis remains a mess
News from Euro land has been mixed over the last two weeks. The economic
data has been better than expected, led by strong first quarter growth
data. Financial markets, however, were more concerned with the unresolved
sovereign debt problems, most notably those of Greece. Spreads have
widened and the Euro ended its four-month rally. Hidden behind the
headline figures are widening discrepancies within the Euro area. Yet,
stuck in one boat, policymakers will be forced to compromise. This means
no swift resolution to the debt crisis and less monetary tightening than
the market is currently anticipating.
More growth and taxes
Germany was the best performer in the first quarter. With 6.1% annualized
growth from the previous quarter, the German economy exceeded consensus
forecasts as well as our own optimistic expectations. Details have not yet
been released, but the biggest push came from domestic demand. Favorable
weather conditions undoubtedly helped, especially after an early winter
depressed fourth-quarter growth. Seasonal volatility and other short-term
effects also mean that second-quarter growth will probably come in much
lower. Nevertheless, the favorable starting position plus the strong
underlying momentum put 3.5% growth for 2011 now comfortably in reach (only
2% annualized growth is needed for the rest of the year to achieve 3.5% for
the whole year).
The impact of strong growth is not only visible in the labor market. A key
beneficiary is the government. The latest official estimate puts annual
tax revenues roughly 2% of GDP higher than the forecast a year ago. Until
2014, the government is expected to collect EUR 180 billion more taxes
than was estimated in May last year. Moreover,
these estimates are based on conservative growth assumptions. For 2011,
for example, the tax appraisers assumed 2.6% real growth. Using the Silvia
Quandt Research forecast, the government can count on additional revenues
of EUR 10-to-15 billion in 2011 alone. That would put 2011 tax revenues
above the pre-crisis level. The Finance Minister was quick to point out
that the additional tax revenues were already earmarked for debt repayments
and special situations, like the Euro debt crisis. Indeed, the government
is well advised to resist spending any windfall tax gains. Yes, Germany's
deficit will fall this year below the 3% of GDP line, but the government
should really aim for a surplus to get its finances in shape for future
rainy days and compensate for the fact that ECB policy, while broadly
appropriate for the Euro are as a whole, is too easy for Germany.
The Euro, the Fed and the ECB
Last year, we predicted that the Euro would be trading in a range of 1.25
to 1.45 versus the Dollar in 2011. In late April, the Euro broke through
1.45 and 1.50 was close. Two weeks ago, the uptrend suddenly broke despite
thefavorable economic news. The reversal was mostly blamed on Greece and
growing speculation that a debt restructuring or even a departure from the
Euro would be imminent. Neither happened and the Euro stabilized just
above 1.40. The unresolved state of the debt crisis will remain a
liability for the Euro. More importantly, the other key driver of Euro
strength, namely the widening interest rate differential with the Dollar,
is running out of steam.
Our main misjudgment so far this year was the ECB's decision to start the
process of policy normalization earlier. The first indications of a policy
change drove interest rate expectations higher. Yields of 2-year German
Bunds, for example, jumped about 100 basis points between the end of last
year and mid April. In contrast, 2-year US Treasury yields stayed in a
range. We believe a further widening of interest rate differentials is
unlikely going forward.
- The ECB is poised to raise the refi rate again by 25 basis points in
the summer, but the overall extend of monetary tightening will probably
fall short of market expectations. As we argued two weeks ago,
persistent high unemployment and fiscal consolidation in most parts of
the Euro area, not just the crisis economies, will have an increasingly
visible disinflationary impact.
- The US is not in better shape, in fact its problems are similar, but
the risk of recession and, thus, the need for more monetary stimulus
has been significantly reduced. The Fed is unlikely to hike interest
rates this year, but the probability that interest rates will fall is
even lower.
On balance, this means that the differential in expected interest rate
policies, as reflected in the differential
between 2-year yields, will stabilize in the current range. That still
gives the Euro a carry advantage of 100 to 150 basis points, but that is
not enough to justify large risk positions. There are far more attractive
FX carry-trade opportunities. Bottom line, we still believe Euro and
Dollar will trade in a range this year and only see a need to revise that
range to 1.30-to-1.50 USD/EUR.
Euro leaders play tough with Greece for now
A key driver of volatility within this range is the Euro debt crisis.
Greece is bankrupt and on a standalone basis should be restructured with
sizable haircuts. Ireland and Portugal are not much better off. But fact
is also that the situation remains highly systemic and restructurings
cannot be done in isolation. A big risk is that any action could threaten
Spain, which for the first time has a chance to make it on its own. The
major Euro leaders are playing tough with Greece and seem willing to let
the situation escalate. But when push comes to shove, a compromise is the
most likely outcome consisting of more funds in return for bigger reform
efforts and perhaps a debt 're-profiling' (maturity extension and interest
rate reductions of loans from official entities) or a voluntary debt
exchange. This muddling-through strategy is not the final solution, but
will probably last until official entities hold enough crisis-country debt
to implement a restructuring outside the market. This will save the Euro,
but is bad for tax payers and reducing moral hazard.
Disclaimer
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 19 May 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: 96 37
Neutral: 401
Avoid: 4 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
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positions, possibly even short sale positions, in securities mentioned in
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performance is not indicative of future results. Investors should make
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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
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Frankfurt am Main, 19.05.2011
Silvia Quandt Research GmbH
Grüneburgweg 1860322 Frankfurt
Tel: + 49 69 95 92 90 93 -0
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125488 19.05.2011
Datum: 19.05.2011 - 16:07 Uhr
Sprache: Deutsch
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