In these volatile yet exciting times in the capital market, there is room to be optimistic.
According to Dirk Notheis, Head of Germany and Austria and chairman of the board at Morgan Stanley Bank AG, “the importance of the capital market will significantly increase. The financial crisis has accelerated this trend. The role of investment banks is to introduce financial entrepreneurs into the new world, which applies to both new instruments of finance as well as new groups of investors.”
Of utmost importance is today’s diversity in the field of investors. There is no choice but for investors to leave traditional rating instruments behind and take on companies with certain risk factors. At the end of the day, those companies usually aren’t such bad companies to support and can be expected to return nice profits.
Spending Policies of National Economies
Following the bursting of the financial bubble that the world has been experiencing, the next financial risk may very well be the “national” bubble.
Dirk Notheis states, “Worldwide, many countries have been living beyond their means. The crisis that we are experiencing in Greece is a phenomenon that reaches far beyond the Mediterranean.”
As the head of Morgan Stanley AG, Dirk Notheis is fearful of the upward trend of new debt in many countries of the world. This debt and deficit has been gradually increasing in many European countries during recent years, but most notably in Greece. It is important for Greece to get its budget in focus, as other problematic economies, such as Portugal, Spain and Italy, have done.
The fiscal situation in Japan, Britain, and the United States has also been hit, making it more important than ever to reduce spending and get national budgets under control.
Investors won’t be so quick to step up to the plate as far as baling out failing national economies, as was seen in the recent case of Portugal. It is just too expensive for a country to borrow money on high capital. The government bond that was created was decreased to a lesser volume of 300 million Euros rather than the sum of 500 million Euros. It is possible to say that there will be international scenarios of failing economies that will receive no money from today’s market. Even if those countries do receive funds, it is an expensive solution that often times exacerbates the problem.
Dirk Notheis warns, “The air is very thin for many, practically zero, and the scope for active policy making is shrinking due to the expenditure of the past.” However, the consolidation of national budgets will breathe life into the world economy.
Returning Trust to the World Financial Markets
The world’s economy will gain new life through fiscal consolidation. In order to avoid a massive crisis in confidence, which could snowball into consequences that are totally unpredictable, it is mandatory that we get our budgets under control in a timely fashion. It would be wise to concentrate on the vital issue of fiscal consolidation in the next G20 summit. As far as the Euro goes, it is strong enough to survive this current crisis.
The German market is wide open now, especially to the large number of family businesses and to investors, both local and global, seeking optimum returns. This is a welcome change and, along with that, the market seems to have reached a psychological turning point where there is a new and refreshing willingness to open up to the capital market in an external and transparent way.
Morgan Stanley AG has responded to the requirements of the many medium-size businesses in Germany by creating a special team specifically geared to the needs of that clientele. Although this is only one step towards supporting that sector, we are keeping the ball moving for investors and businesses.
The Role of Regional Banks
In order to generate a steady flow of income and provide a more profitable work environment, leading to bigger and better business opportunities, it is vital that companies maintain a position of being cash positive.
More than 20 percent of the loans come from regional banks, which have been going through an especially difficult period. While they are concerned primarily for themselves, their market share will shrink. In short, each bank must find its own way. Naturally, this will restrict the overall supply of credit, forcing companies to seek alternative avenues of funding. This is where the capital market will fit in nicely.
The Financial Market Stabilization Fund, which is due to expire in January, is as important now as ever before and the duration of the fund should be amended and extended. The opportunity for organized and systematic reduction of securities deemed toxic and businesses that fall into the non-strategic category should not only be aimed towards regional and private banks.
New Investment Opportunities
Germany has been very active in the mergers and acquisitions market as well as in equity transactions in the past year. This put us in a position of being able to weather the changes and adjust to the new environment quite well. It appears that in the coming year Germany should see around twelve initial public offerings, and secure a volume in the 200 million Euro range from the highest quality segment of the commercial market, the Prime Standard.
Private equity firms and strategists will see opportunities present themselves as holding companies start selling off portions of their portfolio companies. These are companies that did well during the 2005 to 2007 heyday, but now need to recoup their capital.
China continues to exert a strong demand for raw materials, and this only continues the trends we noticed in previous commodity prices. Raw materials will continue to be sought after, but that does not necessarily translate as a financial crisis commodity.
Financial Market Bubble
In short, there are many countries that are tittering on the brink of financial collapse. With the situation where interest and principal have taken on outstanding proportions, it is more important than ever that we push forward the importance of fiscal consolidation. This is true for every country on the face of the earth, Germany included. For the sake of a healthy world economy, initiating a system of financial discipline must be of vital concern to everyone.