September 2019: Market Viewpoints

By Manish Singh | Market Viewpoints

Sep 27

Summary

Get the Latest Investment News


Subscribe to our weekly newsletter to get the best deals straight to your inbox.

In further evidence of business morale plunging in Germany the factory activity in Germany shrank at the fastest pace in a decade. Furthermore, the weakness in Germany's huge industrial sector is spilling over into the rest of the economy and impacting the service sector. The Ifo Institute forecasts 2019 economic growth in Germany at +0.5%. It now seems Germany may struggle to record any economic growth this year. The manufacturing downturn has deepened and job creation has stalled, amid greater pessimism for the future. Bottom line: Germany is in recession. However, I am not entirely bearish on the prospects of the Euro area in the short term and this is largely due to policies announced recently by the European Central Bank (ECB) and a hint that the Euro area may finally be moving (albeit very gradually) to a more counter-cyclical fiscal stance. Highly indebted Euro area nations, particularly Italy will benefit the most from the latest ECB largesse.

Despite this week’s violent US Money Market jitters, the US Federal Reserve (Fed) looks to have a clear plan for managing monetary policy and liquidity conditions. The Fed is now considering growing its holdings of US Treasurys for the first time in five years. During the month of September, the US-China trade narrative has continued to evolve, in a positive light, as President Donald Trump has toned down his abrasive tone and sought reconciliation. While the two sides are still far from a final deal, the chances of a compromise are growing. No further escalation in the trade spat should be seen as a short term deal and one that will help risk assets rally further.

As for Brexit, with the Supreme Court wading into the debate via its unanimous judgement this week, in my view, an immediate General Election is the only way forward in order for the electorate to get back into the Brexit debate - which has become the property of vested interests, professional well-funded lobbies and lawyers.


UK: A General Election now!

The UK Supreme Court has spoken and it has ruled the prorogation of parliament by the government of Prime Minister Boris Johnson unlawful. The emboldened opposition is up in arms and wants Johnson gone. If only there were democratic means to get rid of Johnson. Oh wait, it’s called a General Election, and the opposition won't have it despite calling for it consistently over the last six months!

With the Supreme Court wading into the Brexit debate via its unanimous judgement this week, in my view, an immediate General Election is the only way forward in order for the electorate to get back into the Brexit debate - which has become the property of vested interests, professional well-funded lobbies and lawyers.

The state of UK politics is such, that in the House of Commons, we have Members of Parliament (MPs) who purport to represent the will of the people and who have changed parties - sometimes more than once - without doing their constituents the courtesy of asking them for their permission by standing in a by-election. We have Green, Labour and Liberal Democrat MPs demanding a second referendum, before the first one has been implemented, whilst declaring that they would reject the result of that second vote if it went against them. We have backbench MPs in charge of the most important foreign policy - Brexit deal/no Deal outcome. So much for upholding democracy and the will of the people!

We must have a General Election now. Maybe the people's 2016 choice to leave the European Union (EU) has truly changed. Maybe this Supreme Court ruling has produced serious doubts about the current government and the judgement of the Prime Minister. Let’s find out.

The British voters are slow to anger but when they are treated with the contempt shown by the politicians, as is the case now, watch out for their wrath and its various manifestations.

Germany is “in recession”

Earlier this month the influential Ifo Institute predicted that Germany would suffer its worst economic growth in six years, as production in German factories continued to slow down. It warned that the German economy would likely contract by -0.1% in the third quarter. This Monday, we received another set of data which has all but confirmed that Germany is in recession. Germany’s economy contracted by -0.1% in the second quarter. A recession is defined by a period of negative economic growth for two consecutive quarters.

In further evidence of business morale plunging in Germany, September’s Manufacturing PMI reading came in at a woeful 41.4 (MPMIDEMA in the chart below). A reading below 50 is a sign of economic contraction. Factory activity in Germany shrank at the fastest pace in a decade. Furthermore, the weakness in Germany's huge industrial sector is spilling over into the rest of the economy and impacting the service sector (MPMIDESA) which is also losing momentum fast. Germany also recorded its first Composite PMI (MPMIDECA) reading of less than 50 since 2013. The Ifo Institute has its forecast for Germany’s 2019 economic growth at +0.5%. It now seems Germany may struggle to record any economic growth this year. The manufacturing downturn has deepened and job creation has stalled amid greater pessimism for the future. All of this whilst enjoying the enormous benefit of the weak Euro exchange rate compared to if it had its own currency.

Germany’s pain: Germany’s private sector is suffering from the worst downturn in over 7 years

Germany’s pain: Germany’s private sector is suffering from the worst downturn in over 7 years

Source: Bloomberg

If that were not enough, these are febrile days in East Germany. The right-wing Alternative for Germany (AfD) party, is firming up its support. After becoming the largest opposition party in the Federal Parliament two years ago, the AfD has now established itself as a dominant force in Germany’s former German Democratic Republic (GDR), home to about one fifth of the population. In the recently concluded elections in Brandenburg and Saxony, where more than 5 million people were eligible to vote, the AfD notched stellar numbers. In Brandenburg, the AfD nearly doubled its vote share from 12.2% to 23.6% and finished just 2.6% points behind the ruling centre-left Social Democrats (SPD) which has run the state since German reunification in 1990. In Saxony, the AfD tripled its share from for 9.7% to a whopping 27.8% and finished just 4.5% behind the ruling Christian Democrats (CDU). As Germany’s economic woes deepen, the East-West divide will only get worse. The Euro area economy is contracting and Germany is a proxy and lead indicator. The European Union (EU), which for years managed to follow protectionist policies and safeguard its manufacturing, now lies exposed as the cost of protection ratchets up

Germany, as the Eurozone’s largest economy, should be playing a pivotal role in combating the economic slowdown. Yet, it just drags its feet.

  • In 2018, Germany recorded a budget surplus of +1.7% of GDP which amounts to approximately €58 billion
  • Over the last five years, Germany has accumulated a budget surplus of €160 billion. In the same period, France, Italy and Spain have accumulated budget deficits of - €363 billion, - €212 billion and - €231 billion respectively

We hear rumours that Germany is getting ready to spend and steer away from running a balanced budget, as it has for the last five years. However, you can be sure that the politics in Germany will stifle any meaningful fiscal spending and, even if one comes, it will be spread over a long period instead of being front-loaded to provide immediate help to the European economy. German Chancellor Angela Merkel’s coalition is very fragile and an early election in Germany has been on the cards for some time. In such conditions, with opinion polls in Germany showing that fiscal prudence remains highly popular, it will take longer for German politicians to break free of the five years of budget surpluses.

Eurozone Net Government Interest Payments as a Percentage of GDP

Eurozone Net Government Interest Payments as a Percentage of GDP

Source: Bloomberg

However, I am not entirely bearish on the prospects of the Euro area in the short term and this is largely due to the policies recently announced by the European Central Bank (ECB) and the hint that the Euro area may finally be moving (albeit very gradually) to a more counter cyclical fiscal stance.

Newsletter

Sign up for the CONNECT Newsletter

Follow Us