Germany loses its lustre among fund managers

The golden sheen Germany has shown during the eurozone’s crisis is fading as fund managers criticise Berlin for giving too little detail on its expectations to save the bloc, others short previously bullet-proof sovereign debt, and statistics show an economy near standstill.

The change in sentiment towards the eurozone’s largest economy was expressed in comment from Goldman Sachs Asset Management, via bearish bund positions by fixed income specialists at GAM, and in views on its slowing economy by Swiss & Global and Baring Asset Management.

All the assessments came as the ZEW economic sentiment index, measuring expectations of German investors and analysts, fell more sharply than predicted this month to its lowest since December 2008.

Germany’s IFO index also fell. Although the gauge of the climate for business remains above its long-term average, Stefan Angele, head of investment management at Swiss & Global AM said it was “clearly in a downward trend.

“Germany’s economic picture continues to deteriorate. The indicators do not point to a recession yet, but they signal that Germany is also moving towards sluggish growth.

“The question is if the deterioration is merely a reflection of concerns about the bailout packages and their impact on German economic growth, or if further worsening is ahead.”

Rob Smith, manager of Baring Asset Management’s German Growth Trust, said preliminary German GDP figures released last week – showing 0.1% second quarter growth – indicates “even Europe’s biggest economy is starting to adjust to a wider eurozone and global slowdown this year”.

While year-on-year GDP growth is still good, Smith said homes “appear to be adopting a more cautious position, through either saving more or deferring spending until the outlook is clearer”. He pointed to exporters, and decade-low unemployment at 7%, as bright spots.

Tim Haywood, co-fund manager of three absolute return bond funds at GAM, has used options to take bearish positions in German debt – typically a safe haven for European fixed income managers – though he said Germany would not tip into recession, despite slower economic activity.

“The current market environment feels like the fourth quarter of 2008, but at about one third of the intensity,” he said.

“To profit, not just recover, from the current unexpected turn of events, funds need to capture the twin re-convergence themes, firstly within European government debt and secondly between corporate bonds and underlying government bonds. This will entail accurate timing of the switch out of extremely expensive core government paper into beaten-up bonds.”

Meanwhile, at JP Morgan Asset Management, Talib Sheikh, manager of the JPM Cautious Total Return fund, said he is monitoring the spread between Bunds and French debt: “The crisis is currently accelerating more quickly than politicians are able to respond, so we’re keeping a close eye on spreads of French over German bonds – if they widen significantly, investors may begin to question the solvency of the European Union.”

Speaking politics, GSAM chairman Jim O’Neill used his weekly briefing note to argue smaller eurozone countries lacked “clear signs” from the bloc’s main members including Germany on how they believed the common currency could survive, and then thrive.

“In Germany, there remains considerable hostility to the notion of anything ‘more’ in terms of German financial aid for the more challenged euro area members,” O’Neill said.

He said all this left the impression of knowing “what Germany doesn’t want – no rush to Euro bonds, for example – but we have no real indication of what German leaders really do want from the rest of the member countries”.

However, he suggested eurozone countries were slowly getting the message from Berlin on spending discipline as France, Italy and Spain each move towards constitutional amendments for tougher discipline.

While it remains unclear if each will become law, O’Neill said proposals tabled in France and Italy are “similar to the German balanced budget amendment”, while Spain’s is “a touch less austere. Given that these four economies account for the vast majority of the EMU area, maybe, just maybe, there are signs that this crisis is not entirely going to waste.”


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