Daily Brief: Europe Welcomes Its Biggest Merger This Year, Right Alongside A Boost In Business Morale

Daily Brief: Europe Welcomes Its Biggest Merger This Year, Right Alongside A Boost In Business Morale

almost 3 years ago3 mins

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Looks like all that alone time during lockdown was quite enough for Vonovia: the German real estate giant agreed to bring rival Deutsche Wohnen into the fold in a $22 billion acquisition.

What does this mean?

The residential real estate market is popping off across much of the world right now, and Germany is no exception. So it’s not surprising that Vonovia – the country’s biggest residential landlord – should be looking for a bigger slice of the strudel with its third attempted takeover of slightly smaller competitor Deutsche Wohnen.

Despite its size, Vonovia currently only controls less than 1% of Germany’s residential real estate market – or around 350,000 apartments. And considering half the country’s population rent rather than own, the opportunity for growth is massive. So is the deal, for that matter: it’s Europe’s biggest merger so far this year.

Financing Jumbo Purchases

Why should I care?

For markets: This is an expensive neighborhood.

Vonovia’s bid for Deutsche Wohnen valued the company 18% higher than it was worth last week, so it’s no wonder that the firm’s stock price jumped 16% on Tuesday. But Vonovia’s investors were less impressed, sending its shares down 6%. That’s not an uncommon reaction to this sort of big-ticket deal: investors often worry that the company’s either overpaid for the acquisition, is taking on too much debt, or will struggle to integrate the new firm successfully.

The bigger picture: Germany’s big summer blowout.

Vonovia’s announcement comes just as things are looking up for Europe’s biggest economy: a major monthly survey of 9,000 German companies on Tuesday showed business morale at its highest in two years. It’s the latest sign that economic activity is picking up across the continent.

German morale

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BlackRock Thinks You Might Be Missing Geopolitical Risks

Risk image

According to a new report from BlackRock, investors are so preoccupied with the newest talking point that they’re completely missing the geopolitical risks in the background.

What does this mean?

Investors have been worrying about inflation for a while now, and they’re right to be: rising prices might push central banks to raise interest rates, which would hurt stock prices. But BlackRock reckons all that talk is distracting them from something that could impact their investments even more – namely global tensions.

The firm’s key indicator of geopolitical risk, after all, has hit its lowest level since 2017. In other words, investors aren’t paying enough attention to three things in particular: the threat of major cyberattacks, the US-China technology rivalry, and the post-pandemic political crises in emerging markets.

Geopolitical risk framework
Source: BlackRock

Why should I care?

For markets: Change is good.

If tensions do flare up, BlackRock thinks investors will need to adjust their portfolios. The US-China tech stand-off could weaken the Chinese yuan, which might hurt investments in the currency. A cyberattack could push investors toward the safety of the US dollar, which would be good for foreign investors but bad for export-reliant American companies. And since Latin American consumer staples tend to do well no matter the state of their economies, they stand to benefit from the turmoil in emerging markets.

For you personally: How to bet on a hot mess.

When geopolitical risks rise, stock market volatility – i.e. swings in share prices – also tends to increase. So if you think BlackRock is onto something, you could invest in a key measure of stock market volatility – the Volatility Index (VIX) – by buying into an exchange-traded fund (ETF) that tracks VIX futures contracts. Just be aware of one major drawback: you have to pay fees whenever the ETF reinvests in new futures contracts, which it does whenever the old ones expire. So you won’t just not make money if the VIX stays flat or drops off: you’ll actually lose money.

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