GERMANY: Private Investment, Gov't Spending Seen Picking Up In Coming Quarters

Goldman Sachs note that “the USD has depreciated over 7% this year, falling against nearly all major currencies. This reflects a shift in investor sentiment after years of U.S. asset outperformance. The steep drawdown has kept FX volatility elevated”.

• While they expect “further USD weakness, investors now perceive more two-way risks. Some argue the depreciation may be overdone, especially given resilient U.S. asset returns. Still, FX dynamics are increasingly influencing risk-adjusted return assessments”.
• They go on to note that “FX risk has become a major driver of multi-asset portfolio performance, especially for non-U.S. investors. Rising USD volatility and large U.S. asset weights have pushed FX to contribute 20-30% of portfolio risk for EUR-based investors”.
• They flag that “non-U.S. investors can respond either by increasing USD hedging or reducing USD asset exposure. However, shifting away from U.S. assets is difficult due to their market size and liquidity, which includes alternatives”. Ultimately, they think “FX hedging remains the most practical near-term tool to manage USD-related risks”.

Rabobank highlight recent announcements from some smaller Dutch pension funds re: delaying their previously declared transition date of July 1 2025, leaving only one fund (with ~EUR3bn in assets) to transition on that date

• Rabobank note that two funds announced a deferral earlier this week despite having “approval from the regulators to transition and already informing their participants, they were recently told by their administration provider that they would not be able to meet the deadline”.
• Both names had adjusted rates and equity risk exposure on their balance sheet ahead of the previously agreed transition date, which may need to be, at least partially, reversed. Rabobank suggest that January 1 ’26 now provides the most likely transition date for the names that announced a delay.
• Rabobank have been flagging the risk of such delays for some time, owing to expectations surrounding difficulties for administration providers and the regulatory approval process. Ultimately, they believe that “the current January 1 ’28 deadline for all funds to transition will likely be extended to January 1 ‘29 sometime next year”.
• They note that as of the end of Q125, ~EUR 625bn of assets are due to transition from 01/01/2026, with Rabo estimating that this corresponds to a DV01 reduction of ~EUR 170mn. Of this EUR EUR625bn, ~EUR420bn relates to just three funds (PFZW, PMT & Bouwnijverheid).
• They note that a real gamechanger would be if one of the larger funds with a high hedge ratio (PMT & Bouwnijverheid) was required to postpone their transition.

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