For a man who has one of the most challenging jobs in the German financial services industry, Franz-Josef Leven is remarkably good humoured. He is a director of the Frankfurt-based Deutsche Aktieninstitut (German Share Institute), meaning that he has the unenviable task of persuading German savers that, contrary to everything they have seen and heard since March 2000, investing in equities may not be such a catastrophic idea after all.
He can even afford a spot of gallows humour, grimly pointing out that it is now mathematically impossible for the Dax-30 index to fall further, in absolute terms, than it has done since it reached its peak of more than 8,000 about 30 months ago.
Leven says that in truth his job has never been easy. For the 10 year period between 1989 and 1999, he tirelessly preached that equities were a solid long term investment capable of returning an average of 10% per annum. "Quatsch(rubbish)," said those retail investors brought up to believe that equities belonged in casinos. Then, for a brief spell between 1999 and 2000, he warned that three-monthly returns of 70% or 80% were hopelessly unsustainable. Quatsch, said those retail investors brainwashed by the Neuer Markt into believing that a new and irreversible paradigm had arrived. Now he is back where he started, trying once again to spread the word about average annual returns of 10%.
If that is a thankless task, Leven has one or two statistics to console him. "We've lost 25% of retail investors since the peak of the market," he says, "but we still have twice as many as we did before Deutsche Telekom was privatised in 1996, which is not too bad."
The truth of the matter is that Leven's office looks like a sad shrine to the equity culture that Germany created so painstakingly between 1996 and 1999, only to bludgeon it to smithereens thereafter. Books on his shelves such as Die Neue Ära fur Aktionäre (The New Era for Shareholders) and Aktienskultur (Equity Culture) would probably be viewed by most Germans as tragi-comic relics from a bygone era. Germany's popular equity culture is well and truly dead.
Mark Pohlmann, managing director of equity capital markets at UBS Warburg in London, questions whether Germany ever did create a genuine shareholder culture. "Just because a few million people apply for shares does not mean you have created an equity culture," he says. "An equity culture emerges when people genuinely understand why they're buying shares. In Germany investors bought shares out of enthusiasm, not as a result of understanding how the market works."
Pohlmann believes that it will take a long time and a significant market rebound before German retail investors consider stepping back into equities, which has important ramifications for the German market and, indirectly, for its economy in three ways.
First, unlike a market such as the UK, Germany still had a long way to go with its privatisation programme when the equity music stopped so abruptly. After all, the government continues to hold substantial stakes in companies such as Deutsche Telekom and Deutsche Post, and still harbours the ambition of privatising Deutsche Bahn. Soliciting retail support for any of these sales while maximising receipts from them would be close to impossible in today's environment.
A second reason why long term disillusionment with equities among retail investors has alarming implications for the German economy is that it deals something of a blow to the government's aspirations as far as addressing its demographic problems is concerned. The hope, as the privatisation programme and the Neuer Markt jamboree gathered momentum, was that more and more Germans would be encouraged to use equities as a means of setting up private pensions, hence alleviating the pressures on the public purse.
That hope has been more or less extinguished. As Pohlmann says, quite a few individuals had expected to supplement their state pension with funds invested in equities and now have to make do with a much smaller monthly amount as a direct result of the equity market meltdown - hardly a glowing advertisement for the long term benefits of equity investment.
A third side-effect of the brutal bursting of the German equity bubble is that it adds more ammunition to the argument of those who say that Germany now resembles the European equivalent of Japan in the early 1990s. Widespread reluctance among traumatised investors to do anything more productive with their savings than put them on deposit or buy Pfandbriefe could contribute to a paralysing deflationary cycle.
Nevertheless, some equity capital market practitioners continue to put a brave face on the outlook for their business. "My view is that the equity culture will revive in Germany, but probably in a different form," says Sven Peter, head of equity capital markets at Dresdner Kleinwort Wasserstein in Frankfurt. "That means that fewer German investors will have direct investments in single stocks and more will migrate to fund-based investments. In other words, Germany will become more of an institutional market which will favour large, liquid, high quality stocks."
In terms of potential supply into the primary equity market, Peter says that a key imponderable for the moment is whether or not Germany will reintroduce the capital gains tax on cross-holdings. Although this is not officially on the agenda, there are mounting concerns that Germany's tax revenues will fall well short of projections, forcing the coalition to cast around for alternative sources of funding.
The long awaited abolition of this tax in 2002 sparked excitement that it would lead to a flurry of new issue activity as companies used a more favourable tax regime to off-load non-core assets as part of their much-heralded and thoroughgoing restructuring. Now, with the public purse under immense pressure, it seems possible that this tax will be reinstated as early as January 2004.
If the tax is to return, says Peter, it will present those corporates that are committed to restructuring with an intriguing and potentially very difficult choice. Should they take advantage of a tax window that will only be open for another 14 months or so to off-load unwanted assets at depressed prices? Or should they hold fire, hoping that markets will recover to such an extent that the increased prices at which they can eventually sell will more than compensate for the associated tax?
Against a backdrop of intolerable volatility in equity markets, nobody is likely to have a decisive answer to this question, although Peter is confident that some corporates will elect to bite the bullet and use the present window to push ahead with restructuring while it remains tax efficient to do so. "It is difficult to see equity markets entering into a sustainable bull run in the short term," he says, "but from DrKW's perspective it is evident that equity issuance will have an important role to play in the longer term unwinding of Deutschland AG." *