On February 6, the German Dax index refreshed its all-time high to a new all-time high of 17,049 points, and the head of technical analysis at HSBC believes that breaking through the key resistance level opens up room for the German index to rise further. However, neither the economic fundamentals nor the corporate news in Germany have been able to boost the stock indexes in a substantial way.
On the one hand, from a technical point of view, HSBC's head of technical analysis broke through the key resistance level, and the next short-term target will be 17200 points, after which the German Dax index will test 17410 points.
On the other hand, pessimism about the German economy in 2024 continues to spread, and the sharp interest rate hikes in the past two years have made the German economy even worse, especially exposing the problems of the real estate market. Deutsche Bank said it increased its loan loss provision due to continued weakness in the housing market.
At the same time, Germany continues to face challenges due to economic stagnation, a commercial real estate crisis and the highest rate of corporate insolvencies in Europe. Brian Mangwiro, a fund manager at the Bank of Bahrain, bluntly said that Germany was "in trouble" and that all large manufacturing economies were slowing down, while in Germany, rising energy costs were exacerbating the situation.
As pessimism about the German economy continues, private equity firms have set their sights on highly leveraged companies in Germany's financial weakness, hoping to make a profit by offering high-interest loans or acquisitions, while shorting German companies with €5.7 billion.
The commercial real estate crisis spread to Europe
The ECB's aggressive interest rate hikes over the past few years have increased borrowing costs, which means higher financial costs for real estate companies that rely on loans to invest and operate. For consumers, the increase in the cost of housing loans has also reduced purchasing power and dampened demand for real estate.
Germany's Deutsche Pfandbriefbank (PBB) is the latest victim of real estate market problems. PBB, a leading European specialist bank specializing in real estate finance and public investment financing, said in its latest announcement on February 7 that it had further increased its risk provisions in the fourth quarter of 2023 due to continued weakness in the real estate market.
For the full year 2023, the bank expects a risk provision of between €210 million and €215 million, with a profit before tax of €90 million. PBB has called the current turmoil "the biggest real estate crisis since the financial crisis."
And this is already the second German bank to issue a warning in two weeks. Last week, Deutsche Bank announced that it had increased its provisions by 123 million euros in the fourth quarter of last year to absorb possible losses from commercial real estate in the United States. This is equivalent to four times the amount reserved for the same quarter of the previous year.
The Bundesbank reportedly warned last year about the risks of commercial real estate, saying a "major correction" could take place, leading to higher default rates and credit losses. The Bundesbank said that the balance of loans issued by the German banking system to the U.S. commercial real estate market is relatively small, but relatively concentrated in individual banks.
Germany's economy is under pressure
In January, more than $13.6 billion in loans and bonds issued by German companies were in trouble, 13 times more than Italy. According to a report by consulting firm Alvarez & Marsal, about 15% of companies in Germany are currently in trouble, the highest percentage among eurozone countries.
Due to economic stagnation, the commercial real estate crisis and the highest corporate insolvencies in Europe, bondholders demand bond spreads from German companies above the Eurozone average.
Christian Ebner, managing director of Alvarez & Marsal's financial restructuring advisory team, said the distress was spreading outside sectors such as real estate, construction and retail, which had been hit by inflation and rising borrowing costs. The manufacturing sector is starting to suffer, and the automotive industry will continue to be an issue.
Private consumption in Germany will also be affected, with real household consumption falling by 0.8% in 2023 from the previous year, below the pre-crisis level in 2019 (1.5%), and the decline in real spending on durable goods such as furniture and household appliances, which rely on credit goods in particular (-6.2%).
After the German economy contracted in the last quarter of last year, a preliminary survey for 2024 shows that the economic situation is still not optimistic. Borrowers' demand for investments in areas such as machinery, plant and technology has declined, and Germany's long-term economic growth could be hampered as companies focus on navigating the current woes, the analysis notes.
According to the analysis, preliminary full-year GDP forecasts confirm that Germany's performance is likely to continue to lag behind other large economies. As of the third quarter of 2023 (other countries have not yet released their Q4 2023 GDP), Germany's GDP was 0.3% higher than in the fourth quarter of 2019, compared to 1.7% in France, 2.1% in Spain and 3.4% in Italy.
At last month's World Economic Forum in Davos, executives were also not optimistic about the German economy, arguing:
As technology advances and competition intensifies in everything from machinery to automobiles, Europe's largest economy has lost its reputation for stability and will face a period of struggle.
"Shorting" Germany is being launched
Media analysis points out that this scenario is not limited to equity and debt markets. Short bets on German companies have reached 5.7 billion euros, and hedge fund Qube has made short bets on German companies of more than $1 billion, including Volkswagen, Deutsche Bank and Siemens.
Over the past two weeks, Qube has increased its short position in German companies, including Volkswagen, to about $131.8 million in Deutsche Bank. According to the disclosed data, Qube is the largest short seller in the German stock market.
According to the media, it is worth noting that Qube's short position in the German giant company accounts for 50% of its publicly disclosed short size, and all of them were made when the German DAX index is near its all-time high.
Media reports pointed out that Qube became independent from Credit Suisse in 2018 with $1 billion in assets and was mainly engaged in quantitative investments. Thanks to its outstanding performance, Qube reached approximately $11 billion in assets under management and valued at $14 billion last year, with an annualized return of more than 20% as of the end of November 2023. In 2022, both of Qube's flagship funds also returned more than 20%.
But the short selling comes at a time when private equity (PE) funds and banks are "sniffing" opportunities to make profits by offering high-interest loans or acquiring highly indebted companies with poor financial positions.
Victor Kholsa, founder and chief investment officer of Strategic Value Partners, said the current economic environment could be used to buy precarious German companies by lending at high interest rates or by injecting capital into companies with higher debt ratios.
Large investment firms such as Ares Management Corp. and Blackstone have begun to set up offices in Frankfurt, Germany, to lend to scarred German companies or fund private equity acquisitions.
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