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Hedley Market Commentary - December 2019

Updated: Mar 11


Over the past few days there have been a number of headlines in the financial media, highlighting the fact that the likes of J.P. Morgan and UBS have turned more positive on the European economy and stocks.


In addition, US investors are investing more in European ETF’s believing that the worst is now over for the region. Investors poured $1.5 billion into U.S. ETFs focused on European assets in November which puts the funds on track to take in the most cash in almost two years.


Improved economic data is tempting investors to take a look at the region. A gauge of European manufacturing rose to a three-month high in November, while another report showed Germany unexpectedly dodged a recession, expanding 0.1% in the third quarter. It’s hardly a huge improvement, but for some it suggests Europe has stabilized and is starting to bounce back.


As the world’s largest free-trade area, it would certainly be possible for the European Union to reverse its sluggish economic growth but any renaissance would certainly need Germany at the forefront. In practical terms, that would mean the use of Germany’s massive budget surplus of 3.2% of GDP to revive its moribund economy, which grew at an annual rate of 0.6% in the first nine months of this year, a pace of advance that is less than half of Germany’s potential and noninflationary growth rate.


Germany certainly has the potential firepower with over 1.7 trillion Euro’s of net foreign assets (end of 2017) accumulated from its large trade surpluses. An acceleration of German economic growth would immediately trigger an increase in German purchases of goods and services from its European trade partners, which in the first nine months of this year amounted to 563 billion Euro’s of imports.


The U.S., in particular, would also have a chance to increase its tiny $45.3 billion exports to Germany (data for the first nine months of this year). But there would also be more U.S. sales because a faster growing German economy would expand all European markets, an area that is currently taking almost a quarter of America’s total exports.

So everyone would be a winner. But what could trigger this change because Germany has always steadfastly refused to change its export-driven growth model and will it happen?


Inflated rhetoric about a political mission to change by a new cast at the European Central Bank is hitting the wall of German politicians. However, Berlin is very worried about the dire effects of negative interest rates, and what they see as speculative horrors of cheap money reflected in Frankfurt’s booming skyline, where prices of luxury real estate soared 10.3% in the year to September. Remember Greece, Ireland and countries which used cheap money to fuel an internal boom.


The change is coming, though, with pressures from growing anti-German and Eurosceptic right wing political forces in Italy and France which are continuing to strengthen. There is also pressure from Merkel’s political allies the SPD who are pushing for more fiscal stimulus and the Green Party who are advocating spending much more to combat climate change ….. and then there is President Trump.


So far the US has been waving a stick and threatening the car industry, in particular, with added tariffs, this would have a serious impact on Germany. The US President does have a point here as there is a serious imbalance in trade between the US and Germany and it does seem to be causing concern in Berlin.


So while the champagne corks aren’t popping just yet there are just one or two signs that change, for the better, might be coming for a struggling European economy and any lifting of the gloom would certainly be good news for the much better valued European shares.


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