german-hawk-group
Subprime Crisis: Looking for safe havens
Market Letter #1 '08
A financial crisis – the subprime crisis – hits the markets.
Besides Swiss banks, most prominent US banks like Citi Group, Merrill Lynch,... are struggling with the subprime crisis. And the worst is not over yet. According to Joseph Stiglitz, Nobel Laureate in Economics, a mid to long-term economic downturn is more than likely. A recession in the US economy is seen as a realistic scenario.
This in turn will have an impact on the world economy, but it will only have a limited impact on the German economy.
Evidence indicates that big banks and investment firms – once invulnerable cash machines – are suffering huge write-downs, because of bad speculation. And once again it turns out that statistics and risk management, if applied at all, can’t rule the market.
Against the background of est. USD 300 bn losses so far, a senior International Monetary Fund official recently expressed his concerns about potential write-downs reaching around USD 800 bn.
Sharp interest cuts by the FED (300 bps from 5.25 % in September to 2.25 % in March) did not have much of an effect so far. Nor did governmental announcements of bringing in an economic ‘stimulus plan’ have any substantial positive effect on the markets. After all, cheap money can’t cure the financial disease. Instead, it can only worsen the situation.
So far, we have seen many parallels to the past situation in Japan. From 1956 to 1989, Japan experienced an extraordinary economic upswing and it appeared to have established an economy of persistent growth. Japanese production management systems like TQM (Total Quality Management) or Kaizen modernised out-dated production worldwide. The rapid growth and expansion was backed by the Ministry of International Trade and Industry (MITI), which supported companies wherever possible.
Accordingly real estate prices rose significantly. The Royal Palace in Tokyo was said to be worth more than whole of southern California. In 1990, the success story ended in financial disaster and Japan is still licking its wounds. Japan slid into financial recession. Even the push of a 0 % interest rate policy by the Bank of Japan and large governmental ‘stimulus plans’ couldn’t get the economy back on track. Japan is now recovering step by step from that downturn. But the lesson we’ve learned is that irrational exuberation ends in tears and sometimes only time heals wounds.
As a consequence of a weak US-economy and low interest rates, the US-Dollar will become less attractive against other currencies, most of all against the Euro. In the last two years, the USD has depreciated by around 30 % against the Euro.
The financial crisis is not limited to the US economy. Even countries like UK, Ireland and Spain are in trouble displaying financial aberrations similar to the US economy.
The situation is forcing international investors to rethink their portfolios and look for safe havens in terms of solid economies and solid assets to generate stable and sound returns.
As the biggest economy in Europe and No. 3 worldwide, Germany has much appeal for foreign investors. Whereas many countries are suffering from the financial crisis, Germany seems to be following its own rules so far. Some key facts substantiate that statement:
- Germany was (once again) world champion in merchandise exports in 2007 (by the way: Germany’s export to the USA is only around 8 %)
- The currency is Euro, which has appreciated significantly because of weak US economic prospects
- The German economy shows significant signs of rebounding with its unemployment rate decreasing, business climate indexes rising and a balanced budget for 2007.
Even if the OECD forecasts a sound growth rate for Germany, mid-term prospects may be affected by the subprime crisis. This is the point at which a solid asset class will be the only way to produce stable returns.
How to take advantage:
It seems that Germany’s economy has been little affected by the financial crisis so far. The reasons may well be years of very modest labour increases as well as strict cost-cutting plans. The economy is on solid ground with a savings rate of around 11 % (around 0 % in the USA). And most of all, a resurrection of self-confidence in the population coupled with German quality looks likely to weather the financial turmoil. For investors, this should be reason enough to diversify into Germany. While the stock market shows high volatility and uncertainty, we recommend real estate investment to achieve appropriate returns.