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Quick Update: France and Germany emerge from recession! August 14, 2009
Germany and France have both reported positive GDP growth for 2Q 09, effectively ending their recessionary spells.
Author : iFAST Research Team


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Chart 1
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Chart 2
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Chart 3
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Key Points

  • France and Germany have both emerged from recession
  • Both reported 0.3% quarter-on-quarter growth in 2Q 09, better than consensus expectations
  • Germany’s record 1Q 09 contraction revised upwards from -3.8% quarter-on-quarter to -3.5% quarter-on-quarter
  • Leading indicators have bottomed and are turning up
  • Valuation for European market undemanding, maintain our 3.0 star “attractive” view

Better-than-expected GDP growth

Germany and France jolted European markets with positive growth shocks, each reporting a 0.3% quarter-on-quarter growth in the second quarter of 2009. According to consensus estimates by Bloomberg, Germany’s economy was expected to shrink by 0.2% from the previous quarter, while the French economy was forecast to contract by 0.3%.

After contracting for four straight quarters, the German economy has finally emerged from a long-drawn recession with positive 0.3% quarter-on-quarter growth. Also, the contraction in 1Q 09 was revised from a record 3.8% to a slightly milder decline of 3.5%. A change in fortunes for the largest economy in Europe is a positive development for the rest of the Euro-zone, which is widely seen as a region of weak growth. Recent OECD estimates were for a 4.8% contraction in the Euro-zone GDP in 2009, with zero growth in 2010, but with the latest data, estimates are likely to be revised upwards.

Similar to the German economy, the French economy has contracted for four consecutive quarters, with the latest 0.3% quarterly growth taking France out of a recession. GDP was boosted by increased exports of automobiles while domestic demand held up strongly.

Leading Indicators show improving conditions

Two important leading indicators we observe have turned up (see Chart 3), with the German ZEW Survey spiking up to 44.8 in June, the highest since May 2006, before falling slightly to 39.5 in July. The latest figure for August (to be released on 18 August 2009) is expected to show an improvement to 46.5. Also, the OECD Europe leading indicator has been rising for 5 straight months since bottoming in January 2009, which should be a positive indicator of improvements in the overall Euro-zone economy in months to come.

Valuations undemanding

As at 14 August 2009, the European market (as represented by the DJ Stoxx 600 index) has gained 16.2% year-to-date in EUR terms, and has risen 45.9% since bottoming out on 9 March 2009. Despite the strong rebound, valuations remain undemanding with the market trading at an estimated PE ratio of 12.5X and 10.6X based on forecast 2010 and 2011 earnings. The current market dividend yield of 3.8% is also higher than the five-year average dividend yield of 2.7% between 2002 and 2007. 

 


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

 


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