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Peter Navarro's Currency War?

|Includes: DAX, DXGE, iShares MSCI Germany ETF (EWG), EWGS, HEWG

Global Investment Strategy - Navarro's Currency War?


Investment opportunity in German equity market from pricing-in Trumpnomics

Recently, Trump's new head of National Trade Council Peter Navarro, asserted that the Deutsche Mark was "grossly undervalued" and accused Germany of currency manipulation, highlighting concerns over Germany's trade balance and manufacturing competitiveness. We believe, however, that a currency war is unlikely to occur between the US and Germany and that Germany will be the top beneficiary from the global inflation. We expect a robust German equity market as the global economy recovery, especially Europe's, coincides with the inflation recovery and rising global ROE trend.


Understanding Peter Navarro: "The Euro is an implicit Deutsche Mark"


Peter Navarro, the newly appointed NTC is also the author of the book "Death by China". In this book he vigorously criticizes China on a variety of topics such as food safety, environment, and currency, and how it damages the US' security, jobs, and foreign affairs. Navarro's, who is well-known for this sort of finger-pointing, has recently accused Germany for being an unfair beneficiary to the undervalued Euro. He asserted that Germany unfairly gave low valuations on the Deutsche mark, which was their currency before the euro, to gain export competitiveness over their trading partners in the EU. If we look at a breakdown of Germany's GDP, net exports take up a sizable 7.8%. Plus, seeing how Germany is the third largest beneficiary to US trade deficit taking up 7.2% of the trade imbalance, Narvarro's assertion may be true. However, we believe his comment is hard to be realistic when it comes to implementing it into foreign policies.


The end of the euro means a global financial crisis


Whether you believe Germany's influence over the Euro and Central Bank (ECB) as Navarro states, if the US begins a currency war with Germany, we expect the Euro currency and EU will collapse all together. It is difficult to disprove Navarro's argument that the Deutsche mark within the euro is undervalued and other EU currencies overvalued. However, if the provocations from the US leads to Germany giving up its strong support for the euro, this will lead to the breaking of the EU and the start of another global financial crisis. Although Peter Navarro's does have influence over US' foreign economic policies, his opinion does not represent US government itself. We have seen such proof when Trump is trying to eliminate "Dodd-Frank rule" after his augmentation (against Navarro's view). Therefore, we expect the US to eventually reduce provocations against Germany.


Stronger Euro will drive the European equity market forward


Clear facts are 1) Germany's MCI(Manufacturing Cost Index) is higher than US', and 2) Germany's net exports reached 7.8% of its GDP. Also, overall, the current USD/EUR rate is 30% lower than during the European debt crisis in 2011~2012. If the euro collapses, the value of euro will plummet even more, and this will not benefit the US. If we assume that right now the European banks are at a stage of increasing their capital, and European economic slowdown is bottoming, it is highly likely that the EUR/USD rate will steadily grow stronger, at the very least. Eventually, we expect this will cause the European equity market, particularly the German market to rise significantly over the next 12~18 months.


How Trump's policies affect Germany


Worries of Peter Navarro's statements to Germany


1. Trumpnomics might have a negative effect on German economy.

2. The Trump administration thinks that Germany is unfairly taking advantage from euro's undervaluation.

3. 40% of Germany's GDP had been exports, and the accumulated YTD trade balance in November 2016 against the US is at a large surplus(equivalent to 7.2% of US's trade deficit - 38.8% of China's and 7.6% of Japan's)

4. The US is requesting more German automobiles to be made in the US, with potential a 35% customs tax in case of overseas imports.

5. Increasing the number of jobs in the US will strengthen the US, but Germany can suffer during this process.


The end of the euro means another global financial crisis. Therefore, we have read between the lines of current Trumpnomics.

Summary: Germany's economy and stock market under Trumpnomics


1. Trumpnomics will trigger global inflation. The we expect Germany will be the largest beneficiary from Trumpnomics among the major manufacturing countries. Germany's trade deficit against the emerging economies is larger than the trade surplus against the US. Henceforth, when the emerging market economies (inc. China, Brazil and Russia) recovers and inflation occurs, we expect large jumps to German companies' ROEs.

2. If the Trump administration attacks Germany, the Eurozone could collapse, leading to a global financial crisis. It is a weak logic that Germany is suffering when they have relative FX advantages while Spain, Italy and Portugal lack in export competitiveness. According to BCG's report, Germany's manufacturing costs are significantly higher than in US and China. At this point, to think that Germany is causing the currency war lacks firm logical ground.

3. The problem with Germany is not that they are weakening the exchange rate in order to increase their export competitiveness, but that similar to China and Japan, its own consumptions are not expanding enough. If we price in Germany's recent real estate market's recovery, however, it is correct to assume that consumption expansion will gradually rise in the future.

4. The exchange rate looks to remain at the 100pt dollar index level without major fluctuations. We expect therefore that the euro will also find stability. Rather, it is possible that the euro might appreciate under Trumpnomics.

5. The collapsing of the euro will do more damage on other Eurozone countries than Germany (to those with high sovereign debts), which will put the global economy in crisis. In the end, attacking Germany actually does not do any good for the US.

6. We picture an positive economic triangle between the US, Germany and Russia, in which all three countries benefits. If Germany is left out in this triangle, EU's fundamentals will be damaged, resulting in rapid devaluations of the euro, leading to a global financial crisis. This is definitely not what the US wants.

7. US' strategy is to use extreme statements like Navarro's to make Germany increase its investments and consumption, which benefits the US. In Germany's point of view, if they believe increasing production in the US has a cost-saving effect, they will increase investments to the US.

8. It is likely that Germany to choose expansionary fiscal policies and expansionary monetary policy in response to US' threats. This will likely boost Germany's economic growth including consumption. So with all the concerns of Peter Navarro's currency war, we recommend to add European equities, particularly German equities into the weakness.


As we can see, global equity market is likely to show significant rise in ROE over the next 2 years. This alone will allow global equity market to rise continuously over the next couple of years.

1. US equity market will remain strong: Any needed or wanted correction will be very short-lived. 5. Now is the time to look at transportation industry including airline, shipping. Post-consolidation sector that has greatest upside potential over the next 12 months.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.