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DGAP-News: Silvia Quandt & Cie. AG, Merchant & Investment Banking: In-between the lines - Bernhard Eschweiler (deutsch)

Veröffentlicht am 11.11.2011, 08:51
Aktualisiert 11.11.2011, 08:52
Silvia Quandt & Cie. AG, Merchant & Investment Banking: In-between the lines - Bernhard Eschweiler

DGAP-News: Silvia Quandt & Cie. AG, Merchant & Investment Banking /

Schlagwort(e): Sonstiges

Silvia Quandt & Cie. AG, Merchant & Investment Banking: In-between the

lines - Bernhard Eschweiler

11.11.2011 / 08:51

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- Falling in line behind Merkel

- Draghi adopts Bundesbank pragmatism

- The German economy between Euro-area recession and global expansion

- How to spend it!

A pattern is emerging out of the chaos of the Euro-debt crisis: Germany is

setting the direction and one-by-one the others are falling in line. The

latest example is Greece. The decision to delay the next payment of the

EU-IMF support program until Greece reaffirms its commitment to the latest

EU summit results was a risky gamble, but it worked. It made clear to all

Greeks (government, opposition and the public) that they have to decide

between the Euro and going it alone. The Greeks will probably try again

having it both ways, but the answer from Berlin should remain the same.

Other countries are falling in line as well without the kind of pressure

applied to Greece. However, as in Greece, these changes are coming with

political change.

- The first was Ireland, where the government changed at the start of the

year. Ireland has made the most progress, with unit labor cost down

20% and the current account shifting from deficit into surplus.

- Portugal followed with a new government in June and has since then

adopted tighter fiscal rules, including a constitutional debt brake.

- Spain adopted a constitutional fiscal break as well and, on November

20th, the Spanish will most likely elect a new government, which

promises much tougher fiscal measures.

- France is not facing an imminent crisis, but the heat is on and

President Sarkozy is well behind in the polls running into next

spring's election. Suddenly, Sarkozy is courting Chancellor Merkel and

rushing new fiscal tightening measures through parliament.

Political change is also taking place in Italy. The announcement by PM

Berlusconi to step down after fiscal measures demanded by the EU have been

passed in parliament is a first step. Unlike Greece, however, Italy has to

do more to save itself. The good news is that Italy already has a primary

budget surplus (the only Euro zone member besides Germany). Furthermore,

the private sector has little debt and substantial savings. Thus, to

reduce the deficit and/or secure funding the new government has to force

the public to pay a wealth tax or buy tax-exempt government bonds. Most

likely, market pressure has to build further to make this as well as more

structural reforms happen. Bond yields feel already unsustainably high,

but by shifting the funding to the short end the government can probably

afford paying higher interest rates for a while. In contrast to Greece,

Germany has little leverage to force a change in Italy, but it is unlikely

to help either. That is also true for the ECB, which already let Italian

yields drift higher since PM Berlusconi reneged on his fiscal promises in

September.

The German government's success in pushing other Euro members into line

helps build credibility with domestic voters. However, that is no reason

for being complacent. In return for good behavior, other Euro members will

demand more support. Specifically, pressure to upsize the EFSF will

increase as it becomes clear that the financial engineering to leverage the

EFSF does not work. Greece will also not be able to manage its debt burden

unless the Troika of EU, IMF and ECB accepts a haircut on the holdings of

Greek government debt. The German government should start to build a

political consensus on these issues and explain that to the public.

Bundesbank déjà-vu

Last week's decision by the ECB to cut interest rates came as a surprise to

most, including us. The consensus view was that the new President Draghi

would not risk moving at his first meeting in the face of high headline

inflation. Instead, Draghi surprised in a way reminiscent to the old

Bundesbank. Despite its anti-inflation stance the pre-Euro Bundesbank was

much more pragmatic than its reputation, which often took markets by

surprise. An example similar to the current situation was 1994. Global

growth was rebounding after the recession, oil prices soared, the Fed

raised interest rates by 300 basis points, yet the Bundesbank eased policy

despite headline inflation at 3%. The Bundesbank recognized correctly that

restoring fiscal health and competitiveness following unification would be

disinflationary.

The fact that the ECB's rate-cut decision was unanimous gave Draghi instant

credibility. The ECB's new forward-looking approach makes a second 25

basis point move in December or January a near certainty. The probability

is also rising that the ECB will not stop at 1% and cut rates further

should the economic situation not improve in the course of the first

quarter.

A different look at German output and order data

The rest of the world, led by China and the US, is showing better momentum.

The Euro area is unlikely to bring the global economy down unless the debt

crisis spirals into a world-wide financial crisis. Germany, on the other

hand, is too close for comfort. After a very strong third quarter, real

GDP is set to dip in Q4. However, much of that is due to special factors.

The biggest driver of the 2.7% drop in September industrial production was

the car sector (down 11%). That followed a 17% increase in July and August

when several car manufactures continued production through the summer

holidays.

The divergence between the Euro area and the rest of the world was visible

in German September manufacturing orders. Orders from the Euro area

plunged 12%, orders from the rest of the world were flat. Foreign orders

in the car sector rose 1.6%, while foreign orders of aircrafts, ships and

trains dropped 58%. This suggests: First, demand in the car sector outside

the Euro area continues to do well; Second, the decline in Euro-area orders

was probably exaggerated by the plunge in aircrafts, ships and trains,

which are notoriously volatile.

A token tax cut to keep the coalition happy

Germany's buoyancy also helped the fiscal performance. In the year to

September, revenues of the federal government rose 6.4%, thanks to stronger

tax incomes. Expenditures, on the other hand, declined 1.4%, largely

because the social security system did not require transfers. Overall, we

expect Germany will run a general government deficit of just 1% of GDP this

year and manage to balance its budget in 2012. Our more optimistic outlook

is based on the view that growth in 2012 will hold up better than expected

by the government and consensus and that lower unemployment will lead to

more social security savings.

The coalition government agreed to spend Euro 6 billion of the savings on

tax cuts in 2013 and 2014 (roughly 0.1% of GDP per year). The compromise

was a concession to the two junior coalition partners (FDP and CSU).

Finance Minister Schäuble managed to keep his fiscal powder dry. This may

come handy should the economy go soft and require a fiscal boost (less

likely) or should Germany have to put up more money to save the Euro (more

likely). As long as the economy is holding up, as we expect, and monetary

conditions remain super easy for Germany (negative real interest rates and

an undervalued currency) there is no need to provide extra fiscal stimulus.

In fact, that would risk overheating the economy and waste resources that

will be needed later.

Disclaimer

This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,

and was first published 11 November 2011, 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 2011 the preceding twelve months

Buys: 102 35

Neutral: 37 6

Avoid: 9 0

Company disclosures

Article 34b of the German Securities Trading Act (Wertpapierhandelsgesetz)

in combination with the German regulation concerning the analysis of

financial instruments (Finanzanalyseverordnung) requires an enterprise

preparing a securities analysis to point out possible conflicts of interest

with respect to the company or companies that are the subject of the

analysis. A conflict of interest is presumed to exist, in particular, if an

enterprise preparing a security analysis:

(a) holds more than 5 % of the share capital of the company or companies

analysed;

(b) has lead managed or co-lead managed a public offering of the

securities of the company or companies in the previous 12 months;

(c) has provided investment banking services for the company or companies

analysed during the last 12 months for which a compensation has been or

will be paid;

(d) is serving as a liquidity provider for the company's securities by

issuing buy and sell orders;

(e) is party to an agreement with the company or companies that is the

subject of the analysis relating to the production of the recommendation;

(f) or the analyst covering the issue has other significant financial

interests with respect to the company or companies that are the subject of

this analysis, for example holding a seat on the company's boards.

In this respective analysis the following of the above-mentioned conflicts

of interests exist: none

Silvia Quandt Research GmbH, Silvia Quandt & Cie. AG, and its affiliated

companies regularly hold shares of the analysed company or companies in

their trading portfolios. The views expressed in this analysis reflect the

personal views of the analyst about the subject securities or issuers. No

part of the analyst's compensation was, is or will be directly or

indirectly tied to the specific recommendations or views expressed in this

analysis. It has not been determined in advance whether and at what

intervals this report will be updated.

Equity Recommendation Definitions Silvia Quandt Research GmbH analysts rate

the shares of the companies they cover on an absolute basis using a 6 -

12-month target price. 'Buys' assume an upside of more than 10% from the

current price during the following 6 - 12-months. These securities are

expected to out-perform their respective sector indices. Securities with an

expected negative absolute performance of more than 10% and an

under-performance to their respective sector index are rated 'avoids'.

Securities where the current share price is within a 10% range of the

sector performance are rated 'neutral'. Securities prices used in this

report are closing prices of the day before publication unless a different

date is stated. With regard to unlisted securities median market prices are

used based on various important broker sources (OTC-Market).

Disclaimer This publication has been prepared and published by Silvia

Quandt Research GmbH, a subsidiary of Silvia Quandt & Cie. AG. This

publication is intended solely for distribution to professional and

business customers of Silvia Quandt & Cie. AG. It is not intended to be

distributed to private investors or private customers. Any information in

this report is based on data obtained from publicly available information

and sources considered to be reliable, but no representations or guarantees

are made by Silvia Quandt Research GmbH with regard to the accuracy or

completeness of the data or information contained in this report. The

opinions and estimates contained herein constitute our best judgement at

this date and time, and are subject to change without notice. Prior to this

publication, the analysis has not been communicated to the analysed

companies and changed subsequently. This report is for information purposes

only; it is not intended to be and should not be construed as a

recommendation, offer or solicitation to acquire, or dispose of, any of the

securities mentioned in this report. In compliance with statutory and

regulatory provisions, Silvia Quandt & Cie. AG and Silvia Quandt Research

GmbH have set up effective organisational and administrative arrangements

to prevent and avoid possible conflicts of interests in preparing and

transmitting analyses. These include, in particular, inhouse information

barriers (Chinese walls). These information barriers apply to any

information which is not publicly available and to which any of Silvia

Quandt & Cie. AG and Silvia Quandt Research GmbH or its affiliates may have

access from a business relationship with the issuer. For statutory or

contractual reasons, this information may not be used in an analysis of the

securities and is therefore not included in this report. Silvia Quandt &

Cie. AG and Silvia Quandt Research GmbH, its affiliates and/or clients may

conduct or may have conducted transactions for their own account or for the

account of other parties with respect to the securities mentioned in this

report or related investments before the recipient has received this

report. Silvia Quandt & Cie. AG and Silvia Quandt Research GmbH or its

affiliates, its executives, managers and employees may hold shares or

positions, possibly even short sale positions, in securities mentioned in

this report or in related investments. Silvia Quandt & Cie. AG in

particular may provide banking or other advisory services to interested

parties. Neither Silvia Quandt Research GmbH, Silvia Quandt & Cie. AG or

its affiliates nor any of its officers, shareholders or employees accept

any liability for any direct or consequential loss arising from any use of

this publication or its contents. Copyright and database rights protection

exists in this publication and it may not be reproduced, distributed or

published by any person for any purpose without the prior express consent

of Silvia Quandt Research GmbH. All rights reserved. Any investments

referred to herein may involve significant risk, are not necessarily

available in all jurisdictions, may be illiquid and may not be suitable for

all investors. The value of, or income from, any investments referred to

herein may fluctuate and/or be affected by changes in exchange rates. Past

performance is not indicative of future results. Investors should make

their own investment decisions without relying on this publication. Only

investors with sufficient knowledge and experience in financial matters to

evaluate the merits and risks should consider an investment in any issuer

or market discussed herein and other persons should not take any action on

the basis of this publication.

Specific notices of possible conflicts of interest with respect to issuers

or securities forming the subject of this report according to US or English

law: None

This publication is issued in the United Kingdom only to persons described

in Articles 19, 47 and 49 of the Financial Services and Markets Act 2000

(Financial Promotion) Order 2001 and is not intended to be distributed,

directly or indirectly, to any other class of persons (including private

investors). Neither this publication nor any copy of it may be taken or

transmitted into the United States of America or distributed, directly or

indirectly, in the United States of America.

Frankfurt am Main, 11.11.2011

Silvia Quandt Research GmbH

Grüneburgweg 1860322 Frankfurt

Tel: + 49 69 95 92 90 93 -0

Fax: + 49 69 95 92 90 93 - 11



Ende der Corporate News

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11.11.2011 Veröffentlichung einer Corporate News/Finanznachricht,

übermittelt durch die DGAP - ein Unternehmen der EquityStory AG.

Für den Inhalt der Mitteilung ist der Emittent / Herausgeber

verantwortlich.

Die DGAP Distributionsservices umfassen gesetzliche Meldepflichten,

Corporate News/Finanznachrichten und Pressemitteilungen.

Medienarchiv unter http://www.dgap-medientreff.de und

http://www.dgap.de

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