There’s a ton of stuff to love about Germany; beer, cars, football, and some seriously smooth public transportation are just the beginning of the list. The stock market, however, isn’t on too many investors’ Top-10-Things-I-Love-About-Germany files at the moment. The MSCI Germany index had a return of -10% last year, while the S&P 500 delivered over 13.7%; over a longer span of 5 years, Germany has returned 6.5% annually compared to the 15.5% return for the US MSCI index. With this significant underperformance, in my opinion, it may be time to place some money to work here, given the following reasons:
– Currency Depreciation: The Euro is projected to continue downward with quantitative easing, and Wall Street’s bullish dollar-projecting camp is growing by the day. Goldman Sachs even predicts a 1:1 Euro-Dollar parity by 2017. Companies focusing on exports benefit when the local currency depreciates, as the same goods sold internationally provide more local accounting revenues. Over half of Germany’s GDP is from exports, and while imports become more expensive, I believe the continued depreciation will bode well for Germany’s largest companies (Bayer, Allianz, Siemens, etc – all of whom have massive international revenue streams).
– US Capital Expenditure: In JP Morgan Private Bank’s 2015 Outlook, Michael Cembalest outlines a very telling graph – where the US durable goods and fixed investment as % of GDP is well below the 28% peak (last seen in 2007), suggesting the economy is far from saturated investment levels and only mid-way through the expansion phase. The US stock market has been heavily propped up by financial engineering via dividends and buybacks over the past two years, and capital expenditure remains the next stepping stone for the reviving economy (when this occurs, of course, is up for discussion – but with wages not budging, low inflation, and cheap debt available, companies have a lot of cash on hand to deploy into capital investment – so it’ll happen – stay patient). The US is the 2nd largest export market (by country) for Germany, and considering the leadership role the US economy plays worldwide, a continued expansion will help international markets heal, along with propping German industrial exports.
– An Already-Battered Market: With European stocks getting hammered over the recent past, several hidden multinational gems within Germany have been dragged down with the herd and are trading at bargain prices compared to their peers. The benchmark MSCI Germany index itself is at a discount, trading at 12.7x forward P/E compared to the MSCI Europe index’s 13.9x forward P/E (as of Dec 31st).
– Germany’s Engineering Prowess: There’s a reason why a country with only 80 million people has not had to deal with the outsourcing of engineering to countries such as India and China, where the technical expertise arguably exists, along with far cheaper labor. The differentiation factor for Germany is quality – something that cannot be easily outsourced and will remain a major strength, according to local sources and industry sentiment.
– East Germany’s Integration: In 2012, Morgan Stanley’s Ruchir Sharma had laid out an extremely positive scenario for eastern European growth – and in my opinion, eastern Germany should be placed in the same bracket. Note this – per CNBC, the GDP per capita in the East – even today – remains only two-thirds of the West after 25 years since the Berlin Wall fell, and unemployment is over 10% compared to the West’s 6% rate. At the same time, this is massive improvement from the past, and with population integration and government-aided investment occurring, the trend will continue, helped by proximity with the surrounding eastern countries that themselves are continuing their immersion into democratic, market-driven domestic growth engines.
– Negative Government Real Bond Yields – Germans are literally paying banks to hold their money. Sooner or later, the local population (traditionally known to be weary of stocks) will move towards the stock market in search of actual yield, benefiting the investors already there.
What it means for you: A smart way to invest and monitor is through HEWG – a currency-hedged Germany ETF that allows you to benefit from Germany’s growth while not worrying about the currency depreciation. Allocating some money to international markets is a smart approach at a time when everyone is talking about investing in the US because it’s the only developed economy showing resilience. And yes, oil-based capital expenditure cuts, a possible Eurozone-recession and deflation is looming; with the ECB set to make some unprecedented policy decisions on buying bonds in a few days, we’re looking at some pretty unchartered territory in European financial markets. However, a small investment here looks enticingly positioned compared to the risk, as Germany provides an interestingly unique diversification benefit compared to its developed Eurozone peers for the reasons above, as long as you keep an eye on the trade.
