Germany – from Powerhouse to Safe Harbour

German equity markets might be the best bet of a troubled Eurozone group in 2012, but few asset managers expect Europe’s largest economy to be immune from its indebted neighbours, as Berlin has to open its chequebook for them, or let Frankfurt’s European Central Bank do so.

The outlook they give for Europe’s biggest economy next year is miles away from the 2011 prognosis onlookers gave German business a year ago.

In January 2011 Germany’s IFO business climate index hit its highest point since East and West Germany reunified. In the 1990s reunification – die Wende – opened up a new set of workers and consumers for German industry.

Some 20 years later, it was emerging market consumers, combined with a weak euro, that was helping Germany export, and domestic unemployment hit its lowest point since reunification.

Yes, Commerzbank and its subsidiaries were hit by a Moody’s downgrade in January, then in March George Soros said Germany was ‘partly to blame’ for the eurozone’s developing problems, because it saw these as a debt crisis that the debtors had to solve.

But German business and their equities seemed able to ignore this. The Dax was up in January. Apart from a fortnight in March, the benchmark remained positive for the year, until early August.

Then, the eurozone’s debt and political crisis sharpened.

It reached a zenith in December’s EU leaders summit in Brussels. That month, Germany’s role as the eurozone’s chief financier weighed on markets, and they rejected 35% of a €6bn Bund auction.

Alan Mudie, CIO of $72bn Swiss bank and client asset manager UBP, says this “left us in an astonishing situation. The eurozone not having a true ‘risk-free asset’ underlines the risks and imbalances with the financial system, and we take it very seriously indeed. The disappearance of ‘risk-free’ in the eurozone ticks the box [of being a Black Swan]. The impact of this, we think, cannot be overestimated.”

Equity investors were also increasingly turning their back on Germany, sending the Dax negative for 2011 in early August. Between then and mid-December it failed to recover its level at the start of 2011.

But many European fund managers felt they had nowhere else to hide in a crisis except Germany, and six-month Bund yields turned negative in November, for the first time since 1999.


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