GAMAX Management: Germany is the lynchpin of Europe

June 15 2014
Another key juncture has been reached in the euro crisis. Spain, the fourth largest eurozone economy, has requested a bailout from the European Financial Stability Facility (ESFS). In Greece, the elections of June 17th will determine whether the country will ultimately exit the single currency bloc. Germany has been pushing strict austerity and making clear that it will not support the introduction of eurobonds. And, rightly so, says the german fund manager of the GAMAX Funds FCP and CEO of DJE Kapital AG, Dr. Jens Ehrhardt:

“One can only applaud Chancellor Merkel for her stance that Germany has already done all it can to stimulate growth.” Dr. Ehrhardt's outlook for Germany and equity markets is decidedly upbeat.

The latest developments in Spain and Greece reveal a complex picture of the economic turmoil, currency evisceration, indebtedness and democratic destabilisation facing the Eurozone. In Spain, the falloff in industrial production has been more severe than anticipated: The country is reporting a decline of 8.3 percent for April, much more than the expected 6.5 percent. Credit flows have dried up, and Spain’s banking sector is more or less dead in the water. Now, for the first time, Prime Minister Mariano Rajoy is speaking openly in favour of Eurobonds. 

In Germany, discussions are ongoing as to whether the ESFS can cover a Spain bailout – and whether direct support for the Spanish FROB bank rescue fund is possible. In Greece, the story – which began in a similar way as Spain’s – has progressed a step further: On June 17th voters will also decide whether or not the country is to remain in the Eurozone.

Germany a Driving Force for the Global Economy

The push for austerity by Germany is being met with growing opposition. France and Spain are now united in their call for the introduction of Eurobonds and are putting pressure on Angela Merkel. Other voices are joining in, including US economist and Nobel laureate, Paul Krugman, whose recent comments called Berlin’s austerity drive “deeply destructive” for Europe and the US. 

The fact of the matter, however, is that Germany has been fuelling international economic growth with enormous sums for decades. Even before the crisis in 2008, roughly EUR 800 billion were invested in US mortgage-backed securities – “bailout funds” for the United States, most of which German investors have had to write off. Within Europe, well before the launch of the common currency, Germany contributed tens of millions of DM to the EU budget, providing substantial economic impetus to other member states.

Not to mention the fact that Germany – which annually exports roughly USD 1,200 billion to the United States and China – is one of the strongest drivers of global growth. Altogether, the country’s exports and imports represent 80 percent of GDP (43 percent exports, 37 percent imports). To compare: Imports and exports in France total 50 percent of GDP, 43 percent in India, 61 percent in China, 33 percent in Brazil – and just 26 percent in the US. 

These realities tend to support the position of Germany’s government with respect to Eurobonds: 

“Given rising interest rates, the issuing of Eurobonds would spell the end of Germany’s interim recovery and eliminate all motivation for the Mediterranean countries to stop their extremely unsound financial practices. Pressure from Germany is the only thing that can prevent the other European countries from carrying on with their irresponsible economic policies,” says Ehrhardt.

Final Option for the ECB

Financial markets have recently been marked by growing pessimism. Accordingly, equities have likely changed from weak to strong hands that hold on to them long-term. “Despite the ongoing uncertainties in Europe, especially when it comes to Greece and Spain, and looking at the declining growth numbers in China, this means that markets are technically primed for prices to rise. Before the rally gets going, however the EUR could fall to USD 1.20, which would result in a higher volume selloff,” explains Ehrhardt.

Prices for CDS on Spanish government debt have continually set new records, but lending supports by the ECB have served to increase the interdependencies between government and the banking sector in Spain and Italy. 

“This is why assistance must be equally strong for these states and their banks. Unlike Greece, the EU will not allow Spain and Italy to fall,” Ehrhardt is convinced. 

In addition to the favourable situation on the technical side, the weakening of the trade-weighted EUR – which has now been ongoing for some time – should have a positive impact on European markets. 

The ECB can combine its one trillion euro plus injection to the banking sector with liquidity policies and even lower interest rates to depreciate the currency and provide impulses for the EMU economy – as well as helping to save the euro. “Whether or not this will work is a question nobody can answer. But, it is the final option for the ECB,” says Erhardt.

The Facts Speak for Germany

Because of the limited range of alternatives when searching for a safe haven for their capital, investors will find high dividend-yielding value stocks to be one of their best bets. The real estate sector is another popular target. Germany has managed to avoid formation of a bubble in property prices. 

Foreign investors are also currently active in the German real estate market, as an appreciation of currency in the long term will be forced by the strength of the marketplace. This in turn should serve to render currency gains for other European investors.

Germany’s domestic economy is characterised by rising wages and relatively low rates of unemployment in an environment of excellent corporate profit margins and – above all – extremely low interest rates.

"As long as interest rates in Germany remain at such low levels, this will bolster the domestic economy and the property market will continue to thrive. 

The resulting wealth effects should serve to further strengthen domestic economic activity and consumption,” says Ehrhardt, adding: 

“With the exception of China, there are very few countries where real wages are rising as much as in Germany. And, don't forget, inflation has been understated in many countries, so that real wage growth there has been lower than reported.”