Germans show signs of taking the risk-averse route of Japan
By Ad van Tiggelen
Published: September 1 2010 17:44 | Last updated: September 1 2010 17:44
I am a bit of a control freak. As such, I love to visit countries where life is well organised and where high quality is taken for granted. No wonder Japan and Germany rank high on my list of favourite destinations. In the cultures of both countries, “control” tends to be seen as a virtue rather than a vice.
I used to visit Japan frequently in the 1990s, when I was head of Far Eastern equities at ING Investment Management. Afterwards, as head of European equities, Germany became an important focus. The similarities between the two countries never failed to amaze me.
Recently, I read one broker report that warned of a potential Japan-style outcome for the eurozone economy and one that argued that such an outcome was highly unlikely. Both reports made sense and both were based on sound economic assumptions. But what I missed was a reflection on cultural similarities. Why?
Well, Germany is the most important economy in the eurozone and I would argue that spending patterns of German consumers will provide a déjà vu experience for global investors. After all, real growth in consumption in Germany has been stagnant for 10 years (although it showed some improvement recently), a development that appears to be echoing the Japanese experience. Also, the Germans share quite a few behavioural characteristics with the Japanese. Both are people who – more than average – want to be in control of their lives. Both are disciplined and well organised, and they produce products of a very high quality. It is no coincidence that many of the top car brands in the world originate from these two countries. And neither is it a coincidence that both are successful exporters of high-end goods.
“Being in control” also determines the extent to which people feel a need to plan their (financial) futures. Germans tend to be planners, more than most.
The Japanese are also planners. Twenty years ago, Japanese consumers were hit by a financial shock; the collapse of the equity and the real estate markets. This provided them with a wake-up call, underlining the need to prepare well for the future. This short-term shock was followed by a longer one: the effects of an ageing society. An ageing society gradually needs fewer new houses and new cars, and fewer labour/commodity-intensive products (which tend to be major drivers of inflation). Conversely, an ageing society needs to own huge amounts of low-risk investments in order to secure a steady income for all its pensioners. Therefore, the Japanese are still happily buying their local government bonds, even if they yield barely 1 per cent.
Similarities to the developments in Japan in the 1990s can be seen now in what is happening in Germany (and most other eurozone countries). They have just faced a financial shock and the demographics are starting to mirror those of Japan in the early 1990s.
This brings the danger that German consumers will react in the same way as the Japanese have done, by “digging in”, postponing consumption and saving more. There is nothing wrong with such financial prudence, but in Japan it has proved to be a recipe for disinflation and, finally, outright deflation.
Many economists believe there is no need for Germany to follow the Japan route. For example, the country has not faced an asset price bubble. German housing is even very affordable.
But the Germans have had to deal with the consequences of bursting bubbles in the financial sector and also feel burdened by the aid they have to provide to the southern eurozone countries. So they have had their short-term shock. And recent discussions about the expected erosion of pension plans highlight the long-term problems associated with an ageing society.
Furthermore, German consumers are unlikely to be stimulated by their budget-conscious government or by a European Central Bank that has to be mindful of the German inflation trauma from the 1920s, which means it limits its use of unconventional policy.
This year we have witnessed the yields of German 10-year government bonds falling to almost 2 per cent. These low yields are not just the result of haven status. The Japanese experience has showed that investors who have been “shocked” into risk aversion, and who realise that they need to beef up their pensions, are willing to accept very low risk-free yields indeed.
Of course there are differences between Japan in the 1990s and Germany in the present – big differences. However, my guess would be that demographic and behavioural similarities will weigh more heavily and that inflation and interest rates in Germany and its neighbours will remain low for a very long time.
Ad van Tiggelen is senior investment specialist at ING Investment Management Europe |
