(DGAP-Media / 19.07.2012 / 15:07)
– Mid-year review: more volatility yet still on recovery track
– Second half to bring more of the same
– But better economic news from China and the US to improve sentiment
– German growth forecast of 1.5% and DAX at 7,500 still within target
range
Self-reviews are never objective. Nevertheless, they are healthy exercises
that help us learn from our mistakes. That is also true for economists and
their forecasts. In our strategy outlook for 2012, which was published on
December 1st 2011, we were notably more optimistic than consensus. Our key
messages were:
– Euro area slipping into recession, but global economic environment
better than feared;
– Germany to avoid recession, with growth to average 1.5% in 2012 (the
consensus forecast was moving toward zero growth);
– DAX to reach a high of 7,500 in 2012 but volatility to stay high.
There are still more than five months left to prove those forecasts right
or wrong, but we can certainly assess how well the forecasts are tracking
so far.
Reversed order
Economic conditions at the end of last year were weak and we expected a
soft start into 2011. For Germany, we looked at best for zero growth in Q1
to be followed by stronger activity in Q2. Manufacturing data was indeed
soft, but overall business sentiment improved and real GDP rose 2.1% (q/q
saar), boosted by trade and capital spending. The second quarter is likely
to be weaker. Business sentiment has dropped, manufacturing output is
flat, but trade is holding up well. Germany has enough strength to avoid
outright recession, but whether growth will reaccelerate to hit our 1.5%
annual growth target depends largely on external conditions.
US: even a U-shaped recovery has an upside
The rest of Europe will probably remain a drag for Germany. Thus, key are
the US and China. The US started the year buoyant, but momentum fizzled in
spring. In our judgment, the core business sector is strong, but so are
the headwinds. The good news, inventories have dropped, while final demand
seems to pick up a bit. If sustained, this dynamic should give a boost to
production and employment. Another positive is the development in the
housing sector. After a multi-year slump, conditions are finally
improving, although still soft compared to the bubble years.
China accelerating from behind the curve
China has also proved most forecasters wrong. On the one hand, the economy
has not crashed and is unlikely to do so, but it has also not reaccelerated
in the first half as we had anticipated. Three factors play a role: First,
the trade impact of the Euro-debt crisis; Second, the impact of stronger
than planned tightening to combat inflation last year; Third, a reluctance
to reverse policy decisively. Caught behind the curve and inflation now
plunging, Chinese policymakers are accelerating their stimulus efforts.
One big bang as in 2008 is unlikely, but the sum of various monetary and
fiscal measures is set to have a visible impact on economic activity in
time of the autumn leadership change. A key factor is the allocation of
credit. Indeed, new loans reaccelerated significantly in the second
quarter.
Euro area avoids meltdown
The Euro area is the weak link. Key for Germany is that the crisis does
not spiral out of control. The crisis muddling-through process is risky,
but anything else is politically not feasible. As we have pointed out
before, key is the role of the ECB in stabilizing the banking system. We
expect the ECB to prevail, probably using more liquidity operations and
lowering the policy rate to at least 0.5%. The latest round of political
and monetary decisions has calmed markets. We are aware that this can
change quickly. Nevertheless, it is interesting how relaxed markets
responded to the announcement by the German Supreme Court that it would
only decide over the claims against the fiscal pact and the ESM by
September 12th.
DAX even more volatile than last year
The track record of our DAX call has also been mixed so far. We have been
surprised to see how close we came to our target already in the first
quarter only to watch all gains evaporate in the second quarter. The
performance shows that there is perceived value in stocks and enough money
to chase it. However, the ups and downs also show that short-term
sentiment swings caused by economic and policy developments rule the
markets. And these swings have become even more pronounced.
Nevertheless, there is a good chance that
we will hit our target in the second half of the year. The DAX is already
up about 13% since the lows in June. As outlined before, we anticipate an
improvement in global business cycle conditions in the second half, led by
China and the US. The Euro-debt crisis will not go away, yet chances are
good that we are entering a period of relative stability. The combination
of global reacceleration and some progress in stabilizing the Euro-debt
crisis was what lifted markets in the first quarter and may well do it
again. Germany is likely to outperform in this scenario as it did in Q1.
If we are right, investors should view this as a trading opportunity and
not as a new trend. The deleveraging dynamic in western economies will
last much longer and keep equity markets volatile.
Disclaimer
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 19 July 2012, Silvia Quandt Research GmbH,
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Number of recommendations Thereof recommendations for issuers to which
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during
GmbH in 2012 the preceding twelve months
Buys: 72 26
Neutral: 45 7
Avoid: 14 0
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