Europe’s reluctant giant: Germany wary of global leadership role ahead of national polls
If you look at Capital Expenditures (Capex) to GDP3, it’s currently near an all-time low in Europe. An increase in output, when it comes, could disproportionately boost profits. As sales begin to grow in a firm with excess capacity, few incremental costs are associated with the higher sales and most of the increase comes through as profit. The prospect of the US Federal Reserve “tapering” its asset purchase program has been communicated as data dependent, so I think that is the key; the tapering will likely only occur amid a strong and broad US recovery. However, I don’t think it’s going to be a big disruptive force in the long term. We currently have accommodative monetary policy in both Europe and in Japan, so all the large monetary authorities in the world are in stimulative mode and running very low interest rate policies. In the case of Europe, the economy has been held back to some extent because it hasn’t had the same luxury of fiscal stimulus the US has had. Austerity measures in Europe have kept fiscal stimulus to a minimum, but I believe that as austerity begins to ease a little bit, that factor could diminish. (click to enlarge) The Investment Case When we think through the economic cycle and where European profitability ought to be on a normalized basis, we see a lot of interesting stock ideas in Europe. For the last two years we have favored financials, energy and healthcare in Europe. An example in the European financial space that we like is ING4. The core of ING is a bank, but it also has insurance businesses around the world, which it’s in the process of selling off. We think its insurance disposals could potentially generate close to 10 billion, and its market cap today is about 30 billion5. This is a bank with a long-term record of profitability, recently trading at roughly half of tangible book value. ING represents the kind of value that we find attractive today in Europe.
RELATED MOSCOW: When Arkadiy Dobkin emigrated to the US two decades ago, his first job was washing dishes. Now he employs 10,000 programmers in his native Belarus and elsewhere in eastern Europe, developing software for clients such as Barclays Plc and Expedia Inc. Dobkin’s Epam Systems is among a slew of eastern European firms seeking a piece of the $48 billion global outsourcing market. The companies are building on engineering expertise grounded in the Soviet era to challenge Indian programming giants such as TCS . In the Soviet Union, engineers worked on “all these military machines during the Cold War”, Dobkin said while navigating his laptop to pull up data about the company. “It’s not like India, where IT education was mainly an answer to market demand.” Soviet-era knowhow and teaching methods have been preserved, so graduates of the region’s schools have skills suited for broader problem-solving rather than just narrow programming tasks, said Dmitry Loschinin, CEO of Luxoft Holding Inc, an Epam rival that employs more than 6,000 in the region doing work for customers such as UBS AG, Boeing, and Ford Motor . “Indian programmers have traditionally worked on the back-office, system administration and support,” Loschinin said. “We can develop complex solutions.” His team has worked on derivative trading systems for banks and computer-vision navigation that matches a moving image from a camera mounted in a car to locations on a map. For Deutsche Bank AG, Luxoft created software that helps speed decisions on whether to grant a customer a loan. Luxoft had “teams of experts ready to grill you with tough questions”, Daniel Marovitz, COO for Technology at Deutsche Bank’s global banking unit, said in a statement. “And that’s what you need on complex projects.” This year, 16 of 24 finalists of Google Inc’s annual Code Jam programming competition were from central and eastern Europe. The region also accounted for 8 of 13 winners at this year’s ACM International Collegiate Programming Contest sponsored by IBM . Though eastern European programmers earn more than those in India, the region’s firms say they can justify the higher price with contracts for more sophisticated work than their Indian rivals can manage. A software engineer makes an average of $17,000 a year in Belarus and $20,000 in Russia outside the biggest cities, according to Otkritie Capital.
Indian IT’s competition in Eastern Europe
But Germany is a reluctant giant and this Sunday’s national elections are unlikely to change that. If the political debate ahead of the election proved anything, it’s that neither incumbent Angela Merkel’s conservative forces, nor her center-left rivals nor indeed the German people at large have any appetite to take center stage as a European or global leader, despite the unmistakably German flavor of the continent’s response to its debt crisis. Germany seems content to lurk in the shadows, perhaps quietly pulling strings or exerting pressure, but unwilling to assume the risks that true political leadership entails. That fact has been reflected on the campaign trail, with little discussion of Germany’s role in Europe and the wider world, or the future of the common euro currency. Such issues have taken a back seat to more mundane matters such as higher taxes for the rich or a national minimum wage. And both Merkel and challenger Peer Steinbrueck were quick to rule German participation in any military strikes against Syria. To be sure, since Greece’s debt troubles ignited Europe’s debt crisis nearly four years ago, Germany’s economic firepower has made it the country without which few significant decisions can be made in Europe. Sixty-eight years since the collapse of Adolf Hitler’s Nazi regime, Berlin is in a novel position of pre-eminence after decades of being on equal terms with France as the continental heavyweight. But with Europe often seen as rudderless, some even among former victims of German World War II aggression would like Germany to embrace its leadership role openly. Foreign Minister Radek Sikorski of Poland, a country traditionally wary of its bigger neighbor, has said that “nobody else can do it.” “I fear German power less than I am beginning to fear German inactivity,” Sikorski told a largely German audience in late 2011. Merkel is fond of saying that Europe must become more competitive as China and other powers rise. “The world doesn’t sleep,” she said recently. However, she hasn’t coupled that with any grand visions for a continental revival. In Europe, Merkel an instinctively cautious politician concentrates on what she calls her “step-by-step” approach of methodically tackling the continent’s debt and competitiveness problems, keeping a tight hold on Germany’s purse strings. And if Germany’s allies want it to exert more than economic “soft power,” they are likely to be disappointed.
10 that there will be slightly positive growth in European auto-industry deliveries next year. Registrations in the region slipped 4.9 percent at Turin, Italy-based Fiat. Renault (RNO) , which has its headquarters in the Paris suburb of Boulogne-Billancourt, outperformed other mass-market carmakers. Regional sales at Europes third-largest auto manufacturer gained 5.8 percent in August. Renault CEO Carlos Ghosn said last week that the car market may expand slightly more than 1 percent in 2014. Fords Strategy Ford Motor Co. (F) s European sales decreased 0.9 percent in August. Stephen Odell, head of the Dearborn, Michigan-based carmakers business in the region, said on Sept. 9 that it does feel like were running along the bottom of the auto-market contraction. He outlined plans for Ford, which is forecasting a loss of $1.8 billion in Europe for 2013, to expand model introductions over the next five years to 25 from an earlier projection for 10 new vehicles. Bayerische Motoren Werke AG (BMW) , the worlds biggest luxury-vehicle producer, posted 9.9 percent more registrations in Europe. Sales in the region at Daimler AG (DAI) rose 5.5 percent as the Mercedes-Benz division, the third-ranked luxury-auto maker, reported an 8.5 percent gain, versus a 24 percent plunge in demand for two-seat Smart cars. Chief Executive Officer Dieter Zetsche said at the Frankfurt show that Mercedes doesnt have enough production capacity to meet global demand as sales of its A- and B-Class compacts grow. Opel Models General Motors Co. (GM) s sales in Europe last month rose 0.7 percent as an 18 percent gain by the Chevrolet brand more than offset a 3.4 percent decline at the Opel division.