Industry Updates

German ETFs suffer as central bank fears the country edges towards a recession

George Geddes

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Germany’s central bank, the Bundesbank, has said the country is likely to head into a recession in the next two months as a result of a significant reduction in exports as well as a decline in industrial production.

In Bundesbank’s monthly report for August (German version only), it says Germany’s GDP fell by 10bps quarter-on-quarter and its bund yields fell to a historically low level.

Despite the country’s poor export statistics and low industrial production, government and domestic spending was high as well as business activity remaining robust.

Amid a cooling economy, banks’ lending business to non-banking sectors were significantly positive, such as household loans as a result of the need to re-finance while interest rate levels are low.

Outside of Germany, Bundesbank highlights the US suffered a slowing economic expansion, the UK’s GDP also fell as well as China’s economy declining slightly. The main factor for these issues being the trade war between the US and China.

Investors adopt ETFs in fear of recession 

Timo Pfeiffer, head of research and business development at German-based Solactive, is more concerned whether the economy is moving towards a broader and longer downturn for the economy, in both Germany and the wider Eurozone.

“It makes it a political question around issues like trade tensions between the US and China and the US and Europe – already the rhetorics so far have had a negative impact on the global economy and have created massive uncertainties,” said Pfeiffer.

“The same can be said for yet another prolonged period of Brexit debates,” he added.

ETFs exposed to the German equity market have had a bad start to Q3 2019. The iShares MSCI Germany (EWG) had a good first half of the year as its net asset value climbed 10.9%. However, this performance changed direction in July as its NAV has fallen 7.7% so far in this quarter.

German bonds ETFs, on the other hand, have been on an upward trend for the majority of 2019. The iShares Germany Govt Bond UCITS ETF (IDEU), has a year-to-date return of 6.9% which includes a 0.6% dip since last Thursday.

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IDEU (Black) and EWG’s (Yellow) YTD Performance – Source: Bloomberg

Pfeiffer added: “All in all, there is more uncertainty and a high chance of a negative economic impact, especially for an export heavy economy that we run here in Germany.”

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