September 16th, 2022 | 12:52 CEST
German economy is in danger of crashing: E.ON, Globex Mining, Deutsche Bank and Commerzbank in focus
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"[...] China's dominance is one of the reasons why we are so heavily involved in the tungsten market. Here, around 85% of production is in Chinese hands. [...]" Dr. Thomas Gutschlag, CEO, Deutsche Rohstoff AG
Born in Munich, he first studied economics and graduated in business administration at the Ludwig-Maximilians-University in 1995. As he was involved with the stock market at a very early stage, he now has more than 30 years of experience in the capital markets.
E.ON - Cancellations of electricity contracts now taking place
In the first half of the year, 51.6% of the German electricity mix consisted of renewables, according to official figures. The fossil share was split between lignite, hard coal and gas and has been shrinking considerably for years. Gas and nuclear power, which are being phased out, now only have a 3-4% share, and oil has already been eliminated from public electricity production. Despite this, there is a strong price dynamic in Germany that no one can really understand.
While until now, only electricity customers of smaller energy suppliers have had to worry about whether their provider will get rid of them due to dramatically rising procurement costs, the first customers of E.ON are now also being hit. The energy giant plans to cancel the first contracts. As reported by WirtschaftsWoche, the Company does not want to renew numerous existing contracts. So far, E.ON has not commented on how many customers are specifically affected by the terminations. However, some have no financial reserves to pay for the dramatic adjustments. The call for more regulation, like in France, is getting louder.
For E.ON shareholders, things are looking gradually better. The former core business of conventional power generation was spun off in good time and placed on the stock market under the name Uniper. This may have been one of the best management decisions in history, as Uniper is now dependent on government bailouts. After the July low of EUR 7.72, the E.ON share price worked its way up to EUR 8.86 despite the adverse environment. On a 12-month view, there is still a gap of 19.8%, but the analysts are no longer too negative and 70% rate the stock as a buy. The average price target is calculated at EUR 11.94. Calculated over 12 months, that is a plus of 35%, and there is a 5.7% dividend yield to boot.
Globex Mining - Silver spin-off in Saxony
The environment for mining stocks is not exactly favorable, given rising energy costs and falling precious metal prices. The shares of Globex Mining (GMX) have also been hit hard in recent months, with the share price falling by half from CAD 1.60 to 0.80. But anyone who talks to industry veteran and CEO Jack Storch is met with a smile because he has been in the business forever and has been pursuing a successful and well-diversified investment strategy for years.
Global networking, access to deals and a consistent desire to sail on the pulse of the times make the Canadians very successful in their investment strategy and robust even in difficult times. In addition to its many holdings in gold, silver, copper, platinum and palladium, as well as base and specialty metals, the Company also has a sufficiently well-filled treasury. This good diversification allows the Company to repeatedly increase its holdings or make new acquisitions if necessary. The opportunities in the bombed-out resources sector are now more enormous than ever. Currently, GMX is valued at only about CAD 44 million, which is just twice the cash on hand and still includes over 200 invested projects.
At Excellon, a company in the portfolio, a related spin-out exists from Silver City, an 800-year successful silver mining site in Saxony, Germany. Excellon holds prospecting licenses totaling 340 sq km over a significant epithermal silver system with many high-grade intercepts. The exploration team and institutional support for Silver City in Saxony are exceptional. The activities are now to be spun off into a separate publicly traded company. Per se, this looks like another good deal for Globex, and the share price should also really take off again when precious metals recover. The current highly-inflationary environment could set this movement in motion soon. Collect!
Deutsche Bank and Commerzbank - Threats to SME lending
When it comes to fulfilling their wishes, German consumers will probably have to finance more with credit in the future, as average household budgets are already being eaten up by high prices for food, energy and heating. Consumer protectionists are even painting the horror picture of widespread insolvency in connection with exploding housing and living costs on the wall. Although this is unlikely to happen, the purchasing power of the population at large is dwindling dramatically, making a recession more than likely.
As in other European countries, German policymakers are urgently called upon to introduce a state cap on energy and heating prices, and the market-induced excess profits of suppliers should also be skimmed off to the benefit of taxpayers. For German SMEs, exploding costs are turning into an operational disaster. Rising producer prices are facing collapsing demand, and the economic institutes will have to make significant adjustments to their current forecasts. But one knows the hesitant approach when the going gets tough; no one wants to be the first in the round of downward corrections.
However, the extremely dangerous mixed situation leads to imbalances and mass insolvencies. So far, this movement is only just beginning, but the collapse of Hakle and Görtz already indicates where the journey is headed. For the banking sector, the year, which had gotten off to a good start, will take another turn because, in addition to individual value adjustments, general loan loss provisions will weigh on balance sheets. With falling mortgage demand and slackness in investment banking and asset management, the times of growth are probably over.
What is interesting, however, is the chart situation, which is clearly pointing upwards for Deutsche Bank and Commerzbank. While DBK shareholders are still sitting on losses of just under 20%, CBK owners are already celebrating the 50% plus mark in the 12-month review. It is exciting to see how the stock market seems to be at least temporarily diverging from the real economy.
For the German economy, the outlook is oppressive. However, the impact on sectors will vary. Portfolios should therefore be structured in a balanced and risk-conscious manner. Globex Mining is an interesting representative of the mining sector; the German banks will have to show how the realignments of recent years will now lead to sustainable earnings stability.
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