Wednesday 28th January 2015
NEWS TICKER, JANUARY 27TH: BNP Paribas’ 4th Quarter 2014 Results will be available on Thursday February 5th from 6:00 am (London time) on the bank’s website. A live webcast in English with synchronised slides of the analysts presentation hosted by Jean-Laurent Bonnafé (CEO) will be available on the website starting at 1:30 pm (GMT). - Kurdish forces say they have expelled the Islamic State fighters from the Syrian town of Kobani, near the Turkish border. However, this is the now the fourth time in as many months that this news has been disseminated - - Deutsche Börse will announce its preliminary results for the 2014 operating year on February 19th - S&P has lowered the Russian credit rating to junk with negative outlook as the sliding oil prices and tensions in Ukraine now look to be a serious threat to the country’s financial and political stability, says SwissQuote. The FX analytics firm notes that the USD/RUB is testing 70 offers. “Should the sell-off gains momentum above 70, we expect the CBR to intervene to temper the ruble depreciation. The CBR meets on January 30th and is expected to keep the bank rate unchanged at 17%. Given the selling pressures on the ruble, we do not expect any cut yet. Russia’s forex reserves eases toward 2009 lows, $379.4bn as of January 16th. With the free-floating RUB, the FX reserves will certainly keep fading, therefore should bring the CBR to find alternative ways to intervene to slowdown the debasing”. - Latvia’s prime minister’s office, has issued a statement about events in the Ukraine. "We express our concern about the deteriorating security and humanitarian situation in eastern Ukraine. We condemn the killing of civilians during the indiscriminate shelling of the Ukrainian city of Mariupol on 24 January 2015. We note evidence of continued and growing support given to the separatists by Russia, which underlines Russia's responsibility. We urge Russia to condemn the separatists' actions and to implement the Minsk agreements. We recall the European Council conclusions of 18 December 2014, where we said that "the EU will stay the course" and that we are "ready to take further steps if necessary." In view of the worsening situation the office asks “the upcoming Foreign Affairs Council to assess the situation and to consider any appropriate action, in particular on further restrictive measures, aiming at a swift and comprehensive implementation of Minsk agreements,” says the statement. Latvia has assumed the presidency of the EU for the six months to June. - Data from the IMF suggests that The Netherlands has raised its gold holdings, having bought 9.61 tonnes in December last year. Russia too continues to build its gold reserves and has increased stock for the ninth consecutive month, buying 20.73 tonnes last month. The purchases by the Dutch central bank follows its move in November to repatriate more than 120 tonnes of gold from vaults in the United States - UK GDP looks to be weaker than expected but remains good news for investors. “The first estimates of the Q4 GDP numbers came in slightly below expectations at 0.5% and markedly slower than the previous three quarters of 2014. The primary driver of the reduced growth rate was the construction sector, which saw output fall by 1.8%. However, the slowdown was not enough to prevent the fastest full year growth rate of 2.7% since the financial crisis,” says Helal Miah, investment research analyst at The Share Centre. “Despite numbers being slightly weaker than expected, we believe the UK economy remains relatively robust. After a fantastic few years in the construction sector it is quite natural to see a return to normal markets conditions. The services element of the UK economy remains healthy and the full benefits of the plunge in the price of oil are still to come. Low inflation will hold back interest rate rises and we therefore believe that for investors the equity market remains the asset class of choice.” - Societe Generale Securities Services (SGSS) has launched a new website, Sharinbox, for corporations and their registered shareholders and employees who benefit from free share plans, stock options plans and other incentive schemes. Operational since December 13th last year, the website, www.sharinbox.societegenerale.com, provides users with direct, multilingual access to an online resource with information regarding their share and employee ownership plans in order to manage their personal data and transactions – According to Michael Hewson, chief market analyst at CMC Markets, “Given the headwinds being felt by major oil companies around the world, the share price performance since the beginning of last year, while uninspiring, has still out performed the oil price which given the macro economic back drop is all the more surprising … We’ve already seen the effects that the slump in the oil price is having on the oilfield service providers in the US, with both Baker Hughes and Halliburton announcing job losses as the companies see rig counts drop, and margins decline. We’ve also seen WBH Energy, a Texas based shale producer file for bankruptcy. Despite all these concerns the shares have outperformed, though that probably has more to do with the buyback program the company has been doing than anything to do with outperformance relative to its peers. The company has been buying back shares on a fairly steady basis over the past 12 months and this undoubtedly will have accounted for the relative outperformance”.The FSCS has started paying compensation in respect of 13 firms, including seven investment advice firms and three life and pension advice firms that have gone into default. The financial advice firms which have entered default, according to the scheme are: Barry Norris & Associates, Premier Financial Advice, The Financial Consultancy (UK), True Financial Management (formerly HNL Financial Services), Unleash Advice Partnership, and AJ Buckley Financial Management formerly AJ Buckley Overseas, City Insurance Consultants. Last week, the FSCS published its plan and budget for the coming year, which revealed investment advisers would be paying £125m towards the FSCS annual levy for 2015/16. Life and pension intermediaries are paying a £57m levy, an increase of £24m compared to the £33m the FSCS levied against the funding sub-class for 2014/15. Since it was set up in 2001, the FSCS has paid out more than£975 million in compensation to customers of defaulted advice firms. In November 2014, the FSCS said it had dealt with the default of 2,391 independent advice firms since it was set up. - Retail Sales in the United Kingdom unexpectedly increased in December, as the drop in oil prices boosted the country’s spending power. The increase came from a 5.2% gain in computers, telecoms, toys, and sporting goods sales, while food sales alone contributed 1.3%. There was a decline in sales of some items, such as clothing and household goods, reflecting a boost from Black Friday discounts the previous month - The Source Goldman Sachs Equity Factor Index Europe UCITS ETF has been launched, the second Source ETF to be launched that provides access to Goldman Sachs’ multi-factor indices. “Smart beta funds have proven successful in certain markets, providing investors with the potential to generate better returns than the more common market-cap weighted benchmarks, particularly on a risk-adjusted basis,” says Michael John Lytle, chief development officer at Source. “The Goldman Sachs series of factor-based indices offer exposure to multiple factors, rather than just the one or two that are applied to many other funds on the market.” – Mixed news from the US over the weekend. Housing starts in the US surged, as builders broke ground in December on the most houses in almost seven years. Work began on 728,000 houses at an annual rate, a 7.2% increase from November and the most since March 2008. On the other hand, building permits, a representation for future construction declined 1.9% in December to a 1.03m pace, however more Americans filed applications for unemployment benefits last week, signaling that the holiday employment turnover is taking its toll on the jobs market. Jobless claims dropped by 10,000 to 307,000 in the week ending January 17th down from a revised rate of 317,000 in the prior week, a Labor department report shows. Applications for jobless benefits were expected to decline to 300,000, according to market surveys by economists - German ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, climbed for a third consecutive month in January to 48.4 from 34.9 in December. Economists forecast an increase to 40, according to the median of 37 estimates in a Bloomberg News survey. The sentiment index jumped to the highest level in 11 months - Singapore Exchange is partnering Clearbridge Accelerator to address financing gaps small and medium-sized enterprises (SMEs) and entrepreneurs face by providing the investing community with greater transparency. SGX said on Monday (Jan 26) it signed a Memorandum of Understanding (MoU) with CBA, a Singapore venture capital and incubation firm specialising in early-stage investments. Under the agreement, both parties will form a joint-venture (JV) company to develop the fund-raising platform, which aims to address financing gaps SMEs and entrepreneurs face by providing the investing community with greater transparency. The JV will identify and form a strategic equity partnership with an experienced platform operator and industry stakeholders such as financial institutions to operate the new capital-raising platform. It will also identify other partners and collaborators to create demand among investors for the offerings on the platform, according to the press release. The move to help smaller firms raise funding marks the entry of SGX into a new business area. Besides operating the stock market, which caters to the equity needs of more to established firms, SGX also offers a platform for bonds as well as derivatives and commodities. Enterprise development agency SPRING Singapore will play a supporting role in the formation of the JV, as part of its ongoing efforts to make the financing environment more conducive to SMEs and entrepreneurs, the statement added. - Hedge funds swung to betting on price falls in cotton, soybeans and wheat, amid ideas of easier supplies, as they cut bullish positioning in agricultural commodities to the weakest in three months Managed money, a proxy for speculators, cut its net long position in futures and options in the top 13 US-traded agricultural commodities, from coffee to cattle, by more than 43,000 contracts in the week to last Tuesday, according to data from the Commodity Futures Trading Commission regulator - Richard Bruton TD, Minister for Jobs, Enterprise and Innovation, today announced that the Viagogo Group, which operates www.viagogo.com, the ticket marketplace, intends to double its workforce in Ireland over the next three years, taking it from 100 to over 200 employees. The jobs are supported by the Department of Jobs, Enterprise and Innovation through IDA Ireland -

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The European Review

By Patrick Artus, chief economist at Natixis

The core reason for asymmetry between the German and French economies: corporate profitability

Friday, 25 May 2012 Written by 
The core reason for asymmetry between the German and French economies: corporate profitability The main explanation for asymmetry between the French and German economies is that in France, companies’ production capacity is unable to keep up with domestic demand, whereas in Germany it is growing faster than domestic demand. This difference is related to corporate profitability: high and rising in Germany, but low and falling in France, which is limiting French companies’ investment capacity. There are two plausible causes for the profitability gap between German and French companies: the higher level of product sophistication and diversification that gives more pricing power to German companies; and the nature of labour market negotiations, where the link between the labour market and the economy is much stronger in Germany than in France. Yet – if no new economic policies are introduced to improve the profitability of French companies – it is more than likely that the country’s economic situation will not improve. http://www.ftseglobalmarkets.com/

The main explanation for asymmetry between the French and German economies is that in France, companies’ production capacity is unable to keep up with domestic demand, whereas in Germany it is growing faster than domestic demand. This difference is related to corporate profitability: high and rising in Germany, but low and falling in France, which is limiting French companies’ investment capacity. There are two plausible causes for the profitability gap between German and French companies: the higher level of product sophistication and diversification that gives more pricing power to German companies; and the nature of labour market negotiations, where the link between the labour market and the economy is much stronger in Germany than in France. Yet – if no new economic policies are introduced to improve the profitability of French companies – it is more than likely that the country’s economic situation will not improve.

The economic asymmetry between France and Germany

The main reason for economic asymmetry between France and Germany, which also explains the differences between their current account balance situations, is the ability of companies to build up production capacity to meet domestic demand.



Indeed, domestic demand in France has increased much faster than GDP meaning that its inability to meet excess demand through domestic production has cost them potential economic growth. And its production capacity for industrial products in particular has been unable to keep up with domestic demand. This is in stark contrast to Germany, however, where domestic demand is actually weak relative to supply.

The role of corporate profitability

A key explanation for the differences between German and French companies’ investment capacity is corporate profitability, particularly in the manufacturing industry. Indeed, corporate profitability has been growing in Germany but declining in France since 2000. This is because, unlike in Germany, French companies are faced with cost increases that exceed price increases, particularly in the industrial sector. Furthermore, French companies have been unable to pass on increases in production costs to consumers, explaining the long-run decline in profitability since 2001.

Indeed, the low profitability of French companies is an obstacle to investment that German companies are not lumbered with. Furthermore, German firms’ self-financing rate (the ratio of savings to fixed capital) essentially exceeds 100%, explaining why there is a faster rate of productive investment in Germany. Meanwhile, the greater capacity for investment in Germany will be amplified if it becomes more difficult to obtain credit, which is likely to be the case in France due to the impact of new prudential rules for banks.

Causes of low corporate profitability in France

There are two major causes for French companies’ poorer profitability:

1. Less sophisticated industrial products

The fact that French industrial companies are unable to pass increases in production costs on to consumers shows their weak pricing power and the low level of product sophistication. Demand for French products is therefore price sensitive, which is not the case for German products, and explains why France’s export market share fell when the euro appreciated between 2002 and 2008 yet Germany’s did not. Meanwhile, it could also be said that France is stuck in a vicious circle: the low product sophistication of French companies reduces their profitability, which reduces their ability to invest and enhance the quality of their products.

2. The nature of labour market negotiations

The rise in unemployment and the weakness of activity has caused a significant slowdown in wage growth in Germany. However, this has not occurred in France, where wages have been less sensitive to the performance of the economy. Since wage costs remain high, it is more difficult for French companies to enhance corporate profitability after periods of weak growth.

Indeed, profitability remained low in France from 2003 to 2007 and from 2010 to 2012, yet improved in Germany. So labour market negotiations in France seem to favour "insiders" (employees who have kept their jobs) instead of encouraging firms to hire new staff. But in Germany it is easier to negotiate the wages of existing employees and therefore to recruit new staff.

Which economic policy approaches should be used in France in order to address these issues?

Government policy should seek to boost corporate profitability by:

  • Lowering labour costs to restore profit margins for French companies and to boost investment. This can be achieved through tax reforms that reduce the weight of welfare contributions;
  • Helping French companies to invest more despite their low self-financing rate. This could include government intervention such as public-sector funding or loans via state-owned banks, as well as through the development of a large corporate bond market;
  • Helping companies to improve product sophistication through government research grants, government contracts for technological products, and offering support for new industries: digital, energy, etc.;
  • And finally, by changing the nature of negotiations between unions and employers in France to ensure the employment component is taken into account in negotiations.
Patrick Artus

A graduate of Ecole Polytechnique, of Ecole Nationale de la Statistique et de l'Adminstration Economique and of Institut d'Etudes Politiques de Paris, Patrick Artus is today the Chief Economist at Natixis. He began his career in 1975 where his work included economic forecasting and modelisation. He then worked at the Economics Department of the OECD (1980), before becoming Head of Research at the ENSAE. Thereafter, Patrick taught seminars on research at Paris Dauphine (1982) and was Professor at a number of Universities (including Dauphine, ENSAE, Centre des Hautes Etudes de l'Armement, Ecole Nationale des Ponts et Chaussées and HEC Lausanne).

Patrick is now Professor of Economics at University Paris I Panthéon-Sorbonne. He combines these responsibilities with his research work at Natixis. Patrick was awarded "Best Economist of the year 1996" by the "Nouvel Economiste", and today is a member of the council of economic advisors to the French Prime Minister. He is also a board member at Total and Ipsos.

Website: cib.natixis.com/research/economic.aspx

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