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Saturday, 16 December 2017

Slumping equities: place your bets on the Bundestag; O'Bama's New New Deal

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After Monday’s 5% drop in the Dax, German stocks are looking cheap. Has the great run for German manufacturing truly hit the wall?   Anthony Peters looks at the numbers and how it all might play out in the Bundestag.

Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

Monday was horrid, no arguing on that point. Within Europe, the FTSE 100 stuck out as the grand outperformer by “only” dropping 3.58% while most major indices lost between 4% and 5%. The Dax led the way down by 5.28%.

In normal times, the Dax will trade between 1,000 and 1,200 points above the FTSE but at the moment that spread has shrunk to 144 points. Closing at 5,246.18 pts, the Dax is on a P/E ratio of 9.3 which historically looks very cheap indeed. Just four months ago, on May 2nd, it hit the year’s high at 7,600.41, since when it has  dropped over 31%.

If we are agreed that the German economic miracle of the past years stemmed from the euro opening markets within the Eurozone for their citizens to buy German goods which the importing countries couldn’t have otherwise afforded, then the pervasive pessimism in German equities is telling us that there would appear to be a nagging sense that the party is over for German manufacturing. Newtonian physics even applies to Eurozone economics in that to every force….and so on.;

While we are sitting around waiting for the Bundestag (for non-German speakers, I’d like to clarify once and for all that it is pronounced Bundes-tag and not, as loved by TV presenters, Bunde-shtag being Bundes, the genitive of Bund or federation and tag being the abbreviation of Tagung or assembly) to vote on the various Eurozone support proposals at the end of the month, equities are telling us what they think is ahead of us. If you are confident that Mutti Merkel will get the proposed measures passed in their entirety and the Eurozone will be able to ride off into the sunset in the company of Hans Sixpack in a white hat and on a white horse, then the Dax, even including some of the banks, is a screaming buy. Pays’ yer money, takes yer choice.

O’Bama’s New New Deal and Japan

A propos, cowboys. I watched President O’Bama doing his thing in Detroit on Labor Day where he leapt up on the stage, sleeves rolled up, hugged union officials and looked all the man when he announced yet again “a new way forward on jobs”. He was pretty light on details as he suggested that everyone should “tune in on Thursday” –  still saying that he would make it possible for millions of unemployed workers “to get dirty” as construction work on roads, bridges and other infrastructure projects would be given high priority. This looks like his second “New Deal” initiative and once again he will walk into a brick wall of Republican opposition to further deficit funding. His first $800bn stimulus package looks to have gone nowhere in particular and that one was passed when Democrats controlled both houses of Congress. With his approval rating in the mid 40s and the GOP making the news as it seeks its presidential candidate, the prospect of an autumn of more Washington DC deadlocking and filibustering fills me with horror. America needs to undertake a root and branch review of its tax structure, as must pretty much every Western nation, as they face the imbalance between revenues and expenditure.

We keep on hearing of comparisons to Japan and to its lost decade but unless my maths is worse than even my long suffering teachers had assumed, the lost decade has lasted for nearly twenty years. Let’s be rash and call that two decades and let’s stop beating about the bush in terms of what is probably ahead of us. Tokyo has launched one ineffective infrastructure spending initiative after the other and has seen its Debt/GDP ratio rise to something currently in the region of 225%. The US one is still only a relatively modest 60%. However, Debt/GDP is a spurious measure as the government does not have the whole of GDP at its disposal.

A much more honest measure would be Debt/Fiscal Revenues as would Deficit/Fiscal Revenues, in other words one would measure expenditure to disposable net income. With tax take in most of the industrialised world at, give or take, 40% of GDP, the deficit figures we are dealing with suddenly look a lot more scary and with America so keen in its low taxation levels, the Debt/GDP ratio tells little of the ability to service debt out of current revenue.

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