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Market Insight 2012 Q2 Frankfurt

German business confidence grew for the sixth consecutive month in April, according to a closely-watched indicator of economic health. The Ifo Business Climate Index, which is based on the views of 7,000 companies on their current situation and future prospects, gained 0.1 points to reach 109.9.

Although the benchmark remains several points below the levels it recorded last summer, its steady rise since October 2011 shows that the German economy is “proving resilient” in the face of the eurozone crisis, said Hans-Werner Sinn, president of the Ifo Institute.

News Roundup
• German labour union Verdi repeated its call for a 6% wage increase for 220,000 workers at the nation’s banks before a third round of talks started on May 4. Moderate wage claims helped Germany fight recession during the past 2-3 years, but have been abandoned.
• Germany’s unemployment rate fell to 7% last month, with 2.96 million registered as jobless in April – the lowest figure for the month in 20 years.
• Switzerland and Germany signed an amended withholding-tax agreement in April to end a dispute over tax evasion. The Swiss financial industry, apart from some “very small” private banks and asset managers, should expect the repatriation of German funds as they represent 12% of non-resident money in Switzerland, according to Edison Investment Research.
• The Pirate Party, which supports a platform of copyright reform and online privacy, picked up an electoral victory of four seats in the Saarland regional parliament, in elections held at the end of March. Across Germany polls indicate that it is fast becoming the third-most popular political party, with a share of nearly 13%.

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Weathering the turmoil

Investors have not escaped the crisis unscathed, and property portfolios in particular have faced difficulties – several real estate mandates have been forced to suspend client redemptions in recent months, owing to liquidity concerns.


But despite these problems, asset managers and fund selectors largely share the view of businesses that the German economy has weathered the turmoil well. As a result, many of the investors we interviewed at the end of March were maintaining their asset allocations and expressed little appetite for “safe haven” investments.




Investment flows

Data from BVI, the German asset management association, suggests that investment flows are holding up well. Demand for institutional mandates (“spezialfonds”) rose sharply month-on-month in February – gaining €7.8bn, compared with €2.4bn in January.

The inflow also compared favourably with the equivalent period in previous years – up from €6.2bn and €3.3bn in 2011 and 2010 respectively, and an outflow of €2.2bn in 2009. Total asset management inflows (including retail funds and investments outside funds) were almost €12bn in February 2012.


While fund selectors are upbeat on the German economy, they have become cautious in relation to government debt. With yields on ten-year bunds at all-time lows and the eurozone crisis still unresolved, investors say the asset class is no longer attractive on a risk/reward basis.

Instead, some are turning to high yield corporate bonds as a fixed income alternative. While this is not a big allocation shift in absolute terms, asset managers report increased demand in this area.

A lack of certainty on the future direction of markets is also pushing some institutional investors towards multi-asset and absolute return solutions. Fund selectors expressed the view that multi-asset strategies allow them to lessen the odds of missing out on a market rally.


Demand for European equities is muted, meanwhile, and the investors we spoke to were only interested in certain European stock sectors – notably market leaders and companies with strong export businesses. With indices unlikely to make attractive gains in the near future, many fund selectors were also focusing on European equity income strategies, which are less dependent on rising stock prices, owing to their ability to generate a yield in sideways markets.

Outside of Europe, investors were less negative on US equities, compared with 2011. Two-fifths said they expected to reduce their exposure to US stocks last year – but this proportion had fallen to just one-fifth by March, with two-fifths planning to increase their weightings.

Final frontier

Fund selectors were most upbeat on emerging market equities. Investors were confident that developing economies can continue to deliver growth, and singled out India as particularly attractive. However, they also expressed a growing desire for exposure to smaller “frontier” emerging nations such as Vietnam and Turkey, which they no longer perceive as high risk.


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