Consumer Credit Growth Driving Stocks, Deutsche Bank Says

Growing U.S. consumer borrowing signals the economy is healing and will sustain a rally in global stocks, sending the benchmark Standard & Poor’s 500 Index to fresh records, according to the co-chief investment officer at Deutsche Bank AG’s asset-management unit.

Increasing consumer demand in the U.S., driven in part by greater access to credit, is helping to create a “self-sustained” advance in equities that will push the S&P 500 up about 8 percent by the end of 2013, Asoka Woehrmann, who helps oversee about 500 billion euros ($655 billion) at Deutsche Asset & Wealth Management, said in an interview in Frankfurt on May 7.

U.S. consumer credit climbed by $7.97 billion in March after an $18.6 billion jump in February that was the biggest gain since May 2012, Federal Reserve figures showed May 7. The nation’s rising home prices are enabling households to repair finances, putting them in a position to take advantage of low borrowing costs for purchases such as new cars.

“The consumer-credit momentum is going to go up after six years and it is very, very encouraging,” Woehrmann said. “Consumer-driven demand is going to kick in to the U.S. economy. This is the first time that I have this conviction.”

The S&P 500 will increase to 1,760 by the end of the year after climbing to a record of 1,625.96 on May 7, according to Woehrmann. He forecast that the Stoxx Europe 600 Index will rise to 330, an 8.7 percent advance from yesterday’s close, in the same period. Germany’s DAX Index will rise to 9,200, a 12 percent rally, he said.

Mortgage Rates

Residential real-estate prices increased 9.3 percent in February, the most since May 2006, according to the S&P/Case-Shiller index of property values in 20 U.S. cities. The average rate on a 30-year fixed mortgage dropped for a seventh straight week in the period ended May 3, falling to 3.59 percent.

Companies providing consumer financing and credit cards are “doing better and better,” according to Woehrmann. Deutsche Asset & Wealth is looking closely at small and mid-size financial companies in the U.S., he said, while declining to identify specific stocks he is buying.

In another bullish sign for equities, appetite among hedge funds to invest in asset-backed securities such as collateralized loan obligations, or CLOs, is also increasing, Woehrmann said.

“There is more and more demand for credit tranches that we thought people wouldn’t have an interest in again,” Woehrmann said. “I’m not recommending investors buy these things, but I am observing this.”

CLO Losses

The likelihood of senior tranches of European CLOs incurring principal losses is “remote,” according to a report this week from Moody’s Investors Service. Default events or principal losses have not happened to Moody’s-rated European CLOs since 1999, the rating company said.

“ABS’s, covered bonds, these are the backbone of the financial markets and lending, especially in the real estate market,” Woehrmann said. “These things are recovering. It is the power of zero-interest-rate policies. We are coming more and more out of the crisis.”

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