Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the lines – Bernhard Eschweiler

Silvia Quandt&Cie. AG, Merchant&Investment Banking /
Schlagwort(e): Finanzen/
Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the
lines – Bernhard Eschweiler

DGAP-Media / 20.04.2012 / 09:32

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– Market volatility more likely temporary correction than new downtrend

– Global macro picture continues to brighten and broaden

– Euro area better positioned to contain renewed tensions than last year

The first-quarter equity rally broke between the second half of March and
last week. The DAX, for example, lost 8% between the peak on March 16th
and the end of last week. A notable exception was the Chinese market. The
Shanghai Composite rose 4.2% during the first two weeks of April. The
downward move was triggered by two developments: first, renewed worries
over the situation in Europe, triggered by disappointing Spanish fiscal
news; second, a number of weaker economic data releases, such as the March
US labor market report and Chinese first-quarter GDP.

Market sentiment improved this week, but the question remains whether the
setback marks the beginning of a new downtrend or was just a temporary
correction? In our judgment, the global economic picture has not
deteriorated and Europe is better positioned to contain the debt crisis.
Thus, the recent downward move should be seen as a healthy correction after
a quarter of double-digit equity gains. Having said that, the next few
weeks are likely to remain volatile and could produce more declines, as the
market digests the outcome of the French presidential election.

Growth is spreading

The better-than-expected growth picture so far this year was largely driven
by the US. Markets were disappointed by the March labor market report, but
the underlying trend remains healthy. Employment excluding the bubble
areas (finance and construction) as well as the public sector is growing at
a robust 2+% annual pace. Most parts of the US corporate sector are in
good shape, a fact that the first quarter earnings reports have so far more
than validated. As we move into the second quarter, there are more signs
that the positive US growth picture is being supported by better economic
news from other areas.

– The strongest growth sprouts are coming from the tech-heavy economies
in Asia. These contributed much to the global downswing in the second
half of 2011 and are now bouncing back. Orders are rising sharply,
while inventories are low.

– Emerging markets policymakers are stepping up their easing efforts.
Latest examples were Brazil and India. A special case is China. Its
export sector has clearly been hurt more than anticipated by the
weakness in Europe. Second, policy easing has unfolded slower than
expected. Nevertheless, monetary policy is turning and starting to
have an impact. More important than interest rates and reserve ratios
is the direct allocation of credit. New loan growth surged in March
after a year of stagnation. And while Q1 GDP disappointed, March
figures were stronger, notably retail sales. The outperformance of
Chinese stocks so far in April suggests that the market is sensing
better news.

– Europe is at the tail end, yet recent upward revisions of forecasts bythe IMF and others, although small, suggest that the region is not in
an unstoppable downward spiral. Within the Euro area, however, the
growth gap between the core and the periphery remains wide.

– As in China, the impact of the Euro debt crisis on Germany has been
larger than anticipated. This was evident in production and order
figures. However, that has not dented business sentiment and
employment growth. Indeed, the leading German economics institutes all
raised their growth forecast for 2012 as well as 2013.

Muddling through continues

The renewed tensions in the Euro area are often interpreted as proof that
monetary policy is running out of options. That is wrong. It is the
credibility of policies in countries like Spain and Italy and not the
failure of monetary policy that lies behind the widening of sovereign
spreads. The primary aim of the ECBs liquidity operations was to avert a
banking crisis. That banks used some of the money to buy government bonds
was a welcome side effect. Reports from the banking sector as well as
interbank spreads (OIS-Euribor) show that the ECB–s liquidity operations
remain a success.

The recent tensions have been a wakeup call for those who thought that the
Euro debt crisis may be coming to an end. As we have pointed out before,
the ECB can ensure that the financial system will not collapse, but it
cannot solve the fiscal and structural problems. That is the job of
governments. In fact, the widening of spreads – as long as it does not get
out of control and create systemic risks – helps put pressure on
governments to stay on course. The key here is credibility. Announcing
optimistic growth and budget targets and then failing to reach them does
not help credibility. More important is consistent reform progress.

In that respect, the labor market reforms in Spain and Italy, although not
as radical as some had hoped, are important steps forward in a process that
is likely to take several years. ECB, EFSF/ESM and IMF have so far stayed
on the sidelines. That was good so and markets should not underestimate
their capacity to intervene if necessary. The Euro zone is better
positioned than last year should tensions turn into turmoil. The ECB is
ready and able to put out any acute fire, especially through liquidity and
direct market operations, while the EFSF/ESM can provide more long-term
funding, thanks to its increased size and mandate. In the case of Spain,
for example, the EFSF/ESM may help the most by assisting the bank
recapitalizing through debt-equity swaps.

Disclaimer

This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 20 April 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):

Number of recommendations Thereof recommendations for issuers to which
from Silvia Quandt Research investment banking services were provided
during
GmbH in 2012 the preceding twelve months
Buys: 93 34
Neutral: 50 6
Avoid: 12 0

Company disclosures

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Frankfurt am Main, 20.04.2012

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Ende der Pressemitteilung

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20.04.2012 Veröffentlichung einer Pressemitteilung,übermittelt durch
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