Insights from Germany – The Matrix

By David Higgins | The Matrix | 2020-10-21

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Insights from Germany – The Matrix

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On September 29th, Carraighill launched “The Matrix”, a suite of new products covering European countries. This post explains how the Carraighill approach is being applied to this new product allowing us to cover many European countries at scale in a digestible way. We also outline some of the key insights for Germany.

The Carraighill Approach

Carraighill seeks to distil complex financial systems into 8-10 actionable ideas each year through an exhaustive insight driven research process. A key part is to understand the ecosystem within which a company operates.

What is The Matrix?

The Matrix provides a full reconciliation of the total economy across key areas. It offers a clear view on a country’s longer term structural and shorter-term cyclical investment themes. This should help us to identify actionable ideas whilst also having a greater appreciation for sector specific earnings risk in each security.

It includes tables and charts on an individual country across various aspects of its ecosystem. It now allows us to produce rapid updates and track a country’s evolution.

How will country coverage develop?

Germany (the largest country in the EU) is the first country in The Matrix. It will soon be followed by Sweden. We anticipate publishing this as a bi-annual publication for several European countries (coinciding with the European Commission forecast semester in May and November). In the medium term we hope to make this report interactive online. We are currently developing a platform to enable this.

Where does the data come from?

The data is primarily from Eurostat and the ECB. These institutions hold billions of data points on European countries. This initial Matrix product will allow us to quickly replicate the same analysis for many countries. We have spent many years reconciling this data into both Insight and comprehensible tables which illustrate the key insights relevant for investing across the entire financial sector (banks, asset management, insurance, payments, PE and gold).

Insights from Germany

The full Matrix report for Germany contains nearly 200 pages of insights on the German economy. Some key insights include:

  • Falling bank NII return on debt issued: Debt has been rising across the private sector (households and corporates) for the past decade. Despite this, interest paid to the banking system has fallen every year since 2003. This structural trend has shown no signs of reversing and remains a headwind to bank returns.
  • Household savings (cash flow) has accelerated this year: While the pandemic has reduced household incomes, the government has supported this income through subsidies and transfers. At the same time, households have cut discretionary expenditure, leading to a record level of savings (cash flow). This supports continued flow into asset management and saving products. 
  • The additional Government debt is unproductive: Germany has lowered its level of debt (as a % of GDP) over the past decade. The current surge in debt due to the pandemic is not forecast to surpass the 2010-2012 peaks. Indeed, debt (as a share of GDP) is currently forecast to fall in 2021 due to recovering GDP. This may or may not occur. What is important is that the majority of this additional debt appears unproductive and sponsored by the banks through state guarantees, at the behest of the state. This generally occurs in emerging markets, not developed economies. The implications for the value of money will be known in time. 
  • The drop in GDP has been driven by falling consumption but online penetration continues to rise: Germany saw a record decline in quarterly GDP in Q2 2020. Over half of this drop is accounted for by falling consumption. However, the mix of consumption towards on-line is accelerating an already structural trend. Our data work suggests this could still have a long way to run. 

If you would like to access the reports mentioned in this article, Carraighill Research Access enables you to access these and other thematic and sectoral research reports through our secure online portal. If you would like to speak to a partner or analyst on the topics raised in this piece, you can contact us here.