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Fiddler and conductor
As a solo performer, Germany has few rivals and many fans, striking all the right notes and rising sublimely above Europe’s discord as the DAX posts all-time highs, data show a growing economy, and unemployment dips to the lowest rate since unification.
But the continent’s star performer has been struggling with some bad strings. An ageing population, decaying infrastructure and reliance on imported energy weaken the melody, and the shipping industry may be one of the biggest threats to German banks due to rising NPLs.
On top of that, Germany has had to expend its creative energy striving for greater harmony: stuck between a country it does not want to offend, Russia, and a country it used to admire, the US, while trying to conduct the distracted and uncertain European orchestra.
EU commitments will have to be weighed against bear-baiting, although diplomacy these days is a key lyric in the German political hymn sheet. Its negotiating skills have been much in evidence for a few years, notably in the aftermath of the eurozone crisis, where it rescued the euro project back from a disastrous premier.
Much of its domestic success has been predicated on the Mittelstand. Frustratingly, however, from investors’ point of view, it is difficult to gain exposure to this rich vein of success, such is the paucity of their funding needs. What little they need to raise is adequately catered for by the loan and Schuldschein markets. Bond investors have been presented with more choice, but even here the returns on offer are often less than they would wish for.
Evidence of joined-up thinking has been evident in the bond markets. Six cities in the state of North Rine-Westphalia – each a minnow in DCM borrowing terms – clubbed together to access funding in a demonstration of the country’s trademark co-operative approach.
But traditional bond fare is increasingly difficult to find. The country’s flagship asset class – the Pfandbrief – has been in decline for a number of years.
The question is where the sector goes from here.
SME loan-backed structured covered bonds from Commerzbank and aircraft Pfandbriefe from Nord/LB elicited mixed reviews. If nothing else, however, they proved that this asset class is not beyond development.
But those hell-bent on gaining exposure to the German banking system will have other means at their disposal. As this report went to press, Deutsche Bank was at last boosting its capital base through both straight equity and Additional Tier 1 capital raising, the latter offering an array of currencies and structures.
For many, the corporate sector has been the source of alternative investment opportunities, with automakers leading the line when it comes to bond issuance. While Daimler and BMW have been active, it is Volkswagen that has caught the eye, seemingly barely a week passing by without it issuing in one market or another.
There is a danger that such a heavy schedule could impact on spreads, but it does speak of an industry that is on the mend, both at home and abroad.
Consequently, not only major currencies have been on their menu but also non-core markets, most notably renminbi as a result of the growing importance of China to their businesses. This gave rise to issuance in both the onshore (Panda) and offshore (Dim Sum) markets and it is on the latter that aspirations are focused in the battle to be European hub for renminbi issuance.
Germany may be China’s largest European trading partner, but Frankfurt faces an uphill battle to overcome Luxembourg and London, which already boast strong renminbi capabilities.
Nonetheless, Germany’s orchestral manoeuvres are clear: already a maestro within Europe, it has its eyes on a global audience.