Outlook for the current financial year/forecast
Future macroeconomic situation
Following significantly lessening downward momentum in the economic downturn in Germany – MLP’s core market - during the second quarter of 2009, experts are now anticipating a stabilization in economic development during the second half of the year. There has been a global improvement in important sentiment indicators. With respect to the German economy, the ifo business climate index, tracking the expectations for economic development during the next 6 months, recovered from its lowest point of 77.0 points in December 2008 and rose to 90.4 points at the end of June 2009. However, this does not alter the macroeconomic development perspectives for the overall year and the federal government continues to expect a 6% decline in German economic output. Expectations for 2010 also remain unchanged at an anticipated low growth rate of 0.5%.
Anticipated economic growth in Germany
The income-supporting measures of the economic stimulus packages – such as income tax reductions and additional social welfare expenditure – will increase levels of disposable income in Germany and provide further stimulus to private consumption in the coming months. The German government continues to anticipate stable consumer prices. During the first half of the year prices for, above all, energy and food products were less expensive than in the previous year.
However, the worsening situation within the labor market will gradually be felt and signifi cantly affect consumption. Despite the so-far comparatively moderate effect on the employment situation, the basic trend towards rising unemployment and a fall in employment prospects in view of the weak economy remains unbroken. In this respect, the OECD is forecasting a rise in the rate of unemployment in Germany to almost 12% by the end of 2010.
For MLP the macroeconomic situation remains difficult. On the one hand price development and the measures contained in the economic stimulus packages should increase clients’ disposable income. However, it remains to be seen whether these positive factors are, in fact, counteracted after the German parliamentary elections in September through rises in taxes or deductions to finance the budget deficit. In addition, concerns about job security and the level of income are unsettling clients and leading to continued restraint with respect to their long-term provision and wealth management decisions.
Future situation within the industry
In the short and medium term the financial and economic crisis will remain the determining factor for the further development of the old-age pension provision and wealth management markets. Due to the effects of the recession, the entire financial brokerage industry is suffering from reluctance on the part of clients to invest long-term in old-age pension provision or wealth management concepts. We do not expect this situation to change until there is a sustainable economic recovery.
In view of the upcoming parliamentary elections in Germany at the end of September 2009, we do not foresee any further regulatory changes affecting our core markets of oldage pension provision, health insurance and wealth management. However, we do anticipate that, very soon after the parliamentary elections, further changes to the healthcare system will be proposed. Additional reforms in this area are urgently required since the demographic development and advances in medical technology will further increase costs, which, in turn, will lead to a situation in which the financial viability of the current system is no longer assured. The outcome of the election will determine the specific path that is adopted, as the solutions proposed by the various political parties are very different.
General public expects further restrictions and rising costs in the German healthcare system
The current discussion regarding the quality of financial consulting in Germany that was triggered by the financial crisis is set to remain on the political agenda after the parliamentary elections and will, in our view, lead to further regulatory changes. For many years MLP has been supporting the introduction of a higher and universal qualification in the German financial consulting market. We pursue an independent and holistic consulting approach that focuses on clients’ individual requirements. Many of the improvement proposals currently being put forward within the framework of the discussion are already practiced by MLP. We are therefore fundamentally favourably disposed towards a further initiative aimed at an improvement in client consulting in the overall market. However, it remains to be seen which specific measures the new government intends to implement in order to achieve better client consulting in financial matters.
During the course of the remainder of the year and beyond we expect a further increase in concentration within the German financial brokerage market. The tightening of the legal framework conditions during recent years and the effects of the recession make it increasingly difficult for small and medium-sized market participants to operate profitably.
Anticipated business development
For the foreseeable future the effects of the financial and economic crisis will remain the determining factors for our business development. Although the economic situation stabilized during the course of the second quarter following the rapid decline in the first quarter, an economic recovery is not yet in sight. Experts continue to anticipate that economic output in Germany will decline by 6% in the current financial year. As a fall of such magnitude is without precedent in the last 80 years, it is currently still not possible, even after the end of the second quarter, to issue a respectable prediction of the effects of the crisis on the demand and investment behavior of clients. We therefore continue to refrain from giving a specific revenue and earnings forecast for the current financial year. We have initiated a cost reduction program in order to protect the profitability of the company. In doing so, we have introduced measures designed to reduce our fixed cost base by € 34 million (without acquisition-related cost increases) by the end of 2010. The cost base should fall by € 12 million in the financial year 2009; additional savings of € 10 million are planned for the financial year 2010. Furthermore, previous one-off expenses amounting to € 12 million will not be incurred in 2009. In the second quarter of 2009 we already managed to reduce the fixed costs by 14% to € 65.8 million. Accordingly, our cost reduction program is very well on schedule.
Planned reduction of the fixed cost basis by € 34 million by the end of 2010
A decisive factor concerning our ability to emerge from the continuing economic crisis in a stronger position is our financial strength. Both our excellent equity capital situation as well as our very good liquidity strengthen our competitive position.
During the coming months there will be great consulting and information requirements on the part of clients, above all due to the introduction of the Citizen Relief Act, which, from January 2010, will significantly increase the liquidity of individuals with private or state-scheme health insurance. We anticipate a gradual improvement in business development during the course of the year. As is usual with our business model, we expect to see a significant pick-up in our business development, particularly in the fourth quarter, coupled with a further reduction in costs.
Overall the framework conditions remain very difficult on account of the economic and financial crisis. In this environment MLP seeks to continue to develop better than the market.