German elections have shown promising results for the mainstream parties already in power (CDU and SPD) but also saw more gains from the anti immigration party (the AFD). This comes at a time when the German economy has contracted in the second quarter and could enter a recession in the 3rd. This is in contrast with France who has seen their economic numbers beat expectations over the summer. This trend in Germany underperforming and France being resilient is due primarily due to the fact that the German economy is heavily reliant on exports while the French economy has a good portion of internal demand.
Longer term, this could prove to be a good thing. In the past when the eurozone was slowing down, the lack of unity on what action to take to stimulate a 2 speed Europe caused austerity to be the only viable option. This was due to the core countries not wanting to subsidize stimulus for the periphery countries. Now that Germany is in the same boat and in need of more stimulus, there could be more direction on the French president's desire to integrate the Eurozone economies more. This unification of fiscal stimulus will allow the euro to become more competitive against the US and China as they start to build a more unified economic model. If these changes occur it will help to stem the negative yielding debt we have seen in countries like Germany as their credit worthiness is coupled together with Italy, Spain, and other countries. As these levels of debt rise, and inflation starts to take hold, we would see a gradual rise in the yield curve across many countries. This would most benefit the banks in the countries as they will have the ability to lend at profitable rates. With the book value of some of these banks at steep discounts, there could be some longer term buys in play. A rush into the market is not needed to gain on these opportunities as the ECB is looking at more rate cuts and stimulus to boost growth. If we get the old core countries like Germany to start looking at fiscal stimulus however, we could be at a good buying point.
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June 2020
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