Barron\'s - 22.07.2019

(C. Jardin) #1

M6 BARRON’S July22,2019


EuropeanTrader


Germany Needs a Jolt


ByPierreBriançon


SO MUCH FOR THE EUROPEAN UNION’S SO-CALLED ECONOMIC POWERHOUSE: GER-


many will bethe slowest-growing European economythis year—save for


Italy, crippled by many years of weak growthand a populist government.


German gross domestic product will grow only by 0.5% in 2019 versus 1.5%


in 2018, according to the government’s own forecast. That compares to an


average euro-zone growth rate estimated at around 1.2% this year.


Germany, an export-oriented economy, has been hard hit by the turmoil


in global trade. Thus, its slowdown shouldn’t come as a surprise. If the cur-


rent slump continues and worsens, the governing coalition of Chancellor


Angela Merkel might finally pay heed to the many economists


and international organizations urging Berlin to temper its


longstanding aversion to deficits and debt. The German gov-


ernment has proved skilled in recent years at playing deaf to


the choir of economists—not only foreign; some are even Ger-


man—exhorting Berlin to stop obsessing about public finance.


Merkel & Co. need not worry that efforts to boost the economy by mov-


ing away from an economic model based on savings and huge current-ac-


count surpluses will dent the German stock market. That’s because Ger-


many’s biggest companies are global players, and their profitability no


longer is tied to the economic vagaries—or policies—of their home country.


To look at the performance of German stocks since the beginning of


2019, you’d hardly notice something is amiss. The benchmark DAX index


has performed in line with other European bourses since January and is


up 18% this year. That is comparable to gains in the French CAC 40 and


the Euro Stoxx pan-European indexes, and well ahead of the United King-


dom’s Brexit-affected FTSE 100 (+12%).


In its latest report on Germany, the International Monetary Fund


praised the cautious attitude of Berlin governments past and present, but


emphasized that now should be the time to reap the fruits of a decade of


thriftiness. The IMF says Berlin ought to “support potential growth


through public investment...and to provide further tax relief for low-income


households which, along with stronger wage growth, would restore their


purchasing power.”


There is “ample fiscal space” to do so, the IMF noted. The German gov-


ernment, after all, has booked a fiscal surplus for five years in a row, and


debt is fast shrinking toward 50% of GDP—well below the EU’s theoretical


60% limit, not to mention the 80% average in the rest of Europe.


The IMF also noted that disposable income and spending among Ger-


man households have declined for five consecutive years. Those numbers


hardly suggest unmitigated economic success.


If Merkel’s government finally wakes up to the necessity of boosting


demand and consumption, most large German companies will take it in


stride. The DAX index is heavy with automobile manufacturers and indus-


trial-goods giants. It counts only two consumer-goods makers—and one of


them, Adidas (ADS.Germany), has a footprint, so to speak, that extends


well beyond its home market. Less than a third of the company’s sales are


booked in Europe. Adidas shares are up more than 54% this year—a clear


illustration of the disconnect between Germany’s economy and its big com-


panies’ finances.


European


Markets,


page27


EmergingMarkets


Mexico: Be Ready to Bail


ByCraigMellow


MEXICO’S ECONOMIC OUTLOOK IS GOING FROM BAD TO WORSE EIGHT MONTHS INTO


PresidentAndresManuelLopezObrador’sadministration,withtheresignation


ofrespectedfinanceministerCarlosUrzuaandaslow-motiontrainwreckat


state oil company Pemex. On the other hand, Mexican assets are priced for


risk:Therealyield(interestrateminusinflation)onpeso-denominatedgovern-


mentbondshoversaround4%.Multiplesonstocksaresignificantlybelowtheir


historic averages.


These considerations fought to a draw after Urzua quit on July 9. The


iShares MSCI Mexico exchange-traded fund (ticker: EWW) has fallen by


3.5%,whilethepesoislittlechanged.Butthegameisincreasinglynotworth


thecandle,emergingmarketsproswarn.“ShruggingoffUrzua’sdepartureis


thewronginterpretation,”saysAlejoCzerwonko,emergingmarketsstrategist


atUBSGlobalWealthManagement.“Theeconomyhasbecometoodependent


on one person, the president.”


AMLO,asthe65-year-oldchiefexecutiveisknown,hastriedtojoltMexico’s


slow-but-steadygrowthandfulfillegalitarianpromisesbyincreasingminimum


wagesandencouragingmoreconsumerlending.Butthatefforthasbeenmore


thannegatedbyhisquirkypopulism’sdepressingeffectoninvestment.Theecon-


omy contracted in the first quarter, and a recession may be imminent.


That’sabadrecipeforstocks,despiteaverageforwardprice/earningsratios


of13.5,comparedwithahistorical16,saysNurCristiani,headofMexicoequity


researchatJPMorgan.Thatfigureassumesdouble-digitearningsgrowth(in


pesos);shethinks6%to7%ismorerealistic.“WeunderweightedMexicaneq-


uities in late May,” she says.


The bond-market calculus is more complicated. Mexico remains a bastion


offinancialstabilitycomparedwithothercountriesofferingsimilaryields,like


Turkey, and AMLO is not deaf to investors’ concerns. He replaced Urzua at


financewithano-lessesteemeddeputy,ArturoHerrera.Hehaskepthisbud-


getlean,thoughatthecostoflosingmanytalentedcivilservantswhosepay


was summarily slashed.


AMLOhasputoneloyalistonMexico’scentralbankboard,Czerwonkosays.


Butheisnotovertlyinterferingwithahawkishlinethathasnearlyhalvedin-


flationoverthepast18monthsandstabilizedthepeso—twobullishmarkers


for fixed-income investors. “The peso is at 19 to the dollar, which is where it


wasin2016and2018,”saysEdwardAl-Hussainy,seniorinterestratesandcur-


rencyanalystatColumbiaThreadneedleInvestments.“Iwouldn’tsayinvestors


are voting with their feet to dump Mexican assets.”


YetUrzua’sresignationsignaledthathealthyfinanceswon’tsurviveanother


five-plusyearsofAMLO.“Itshowsanadministrationdividedbetweenamoder-


ate minority and a more radical group that is gaining the upper hand,” says


Mauro Roca, who covers Latin American sovereigns for bond investor TCW.


Another alarm bell was a newly minted Pemex business plan that under-


whelmedinvestorsconcernedaboutthecompany’s$106billionindebt,which


was downgraded to junk status by Fitch Ratings last month. “Pemex’s weak


financialconditionisoneofthemainloomingriskstoMexico’smacroeconomic


outlook,”saysMartinCastellano,headofLatinAmericanresearchfortheIn-


stituteofInternationalFinance.“Astructuralsolutionforthecompanyishard


to foresee in the absence of foreign investment.”


A 4% yield is tough to turn down in a world with $14 trillion in negative-


yielding bonds. But be prepared to get out of Mexico fast.

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