In a recent analysis, Deutsche Bank analysts, including Henry Allen, are drawing parallels between current economic conditions and those during the 1970s oil crisis and subsequent stagflation. The analysts have pointed out the striking resemblance between the geopolitical instability of the 70s and today's situation, particularly in light of the escalating conflict between Hamas and Israel.
The rising tensions have sparked fears of a potential global economic crisis similar to the stagflation era of the 70s. During that time, global inflation averaged 11.3%, alongside a significant drop in GDP growth rates, a trend Allen fears might reoccur in this decade. The 70s also saw two major oil price shocks due to Middle East wars leading to worldwide inflation.
Today's indicators such as above-target inflation across all G7 countries, sharp energy price spikes, and escalating industrial unrest marked by a "summer of strikes" are adding to these concerns. The WTI crude oil futures recently hit a session high of $87.39 after Hamas' surprise attack on Israel, while the CL1:COM reached a yearly high of ~$95/bbl, adding to global inflationary worries.
Allen also warned about the potential effects of an El Niño event this year, which could raise food prices, echoing a similar situation in the 70s. This prediction is backed by the U.S. Climate Prediction Center forecasting a high likelihood for a "strong" El Niño event this year.
InvestingPro data shows that Deutsche Bank (DBKGn) has a market cap of 21262.91M USD and a P/E ratio of 4.26, which is considered low. This low P/E ratio, along with its low Price/Book multiple of 0.29, signifies that the bank's shares are undervalued, making it a potentially attractive investment. The bank's revenue growth has accelerated, with an increase of 8.7% in the last twelve months up until Q2 2023. Furthermore, the bank has seen a quarterly revenue growth of 9.23% for FY2023.Q2. Despite these promising figures, Deutsche Bank also suffers from weak gross profit margins, an area that the bank needs to improve upon, according to InvestingPro Tips.
Despite these similarities with the 70s crisis, Jonas Goltermann from Capital Economics doesn't anticipate the latest Middle East conflict to significantly affect oil prices as past wars did.
While pointing out signs of supply chain healing, as evidenced by the New York Fed’s Global Supply Chain Pressure Index falling back below its long-term average after hitting a record high in late-2021, Allen cautions against potential over-optimism about future consumer prices, noting the underestimation of inflation persistence.
Allen also highlights the decrease in U.S. energy intensity over the years, due to factors such as vehicle efficiency standards reducing the economy's reliance on energy. Data from the U.S. Energy Information Administration shows that primary energy consumption per real GDP dollar has fallen nearly 80% since 1950.
Despite the largest series of rate hikes by central banks in a generation, the resolution of post-pandemic supply chain issues, and falling commodity prices, Deutsche Bank warns that inflation is still high in all G7 countries and unexpected shocks could rapidly send it higher. This situation mirrors the 1970s recession in the Western world, where persistent wage increases contributed to inflation.
InvestingPro Tips suggests that Deutsche Bank, as a prominent player in the Capital Markets industry, is expected to be profitable this year. The bank has been consistently increasing its earnings per share and has been profitable over the last twelve months. However, net income is expected to drop this year. For more detailed insights and tips, consider checking out InvestingPro's premium offerings, which include a wealth of additional information to help investors make informed decisions.
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