Boom time for in­vestors in Ger­many

The Pak Banker - - Editorial5 - Chiara Cavaglieri

From dullard to su­per­star in one fi­nan­cial cri­sis: that's the re­cent story of the Ger­man econ­omy. The woes of the banks and the gar­gan­tuan deficits of the so-called Pigs (Por­tu­gal, Ire­land Greece and Spain) na­tions has fo­cused the minds of in­vestors on the eco­nomic fun­da­men­tals of ex­ports, fis­cal strength and work­force skills. And by these mea­sures, Ger­many is truly the pow­er­house of the Euro­pean econ­omy.

It would be easy enough to fo­cus on eu­ro­zone weak­ness with bailouts for Ire­land and Greece, and the loom­ing threat of Spain and Por­tu­gal fol­low­ing suit, but ex­perts say it's not all bad news. Many Euro­pean fund man­agers are now turn­ing their at­ten­tions to the west and hail­ing Ger­many as the one of the best in­vest­ment op­por­tu­ni­ties go­ing.

"This con­cept of how you can have a boom and a bust co­ex­ist­ing is quite a dif­fi­cult one for in­vestors to un­der­stand, but Ger­many is boom­ing," says Barry Nor­ris, the man­ager of the Ig­nis Arg­onaut Euro­pean Al­pha Fund, which has upped its ex­po­sure to Ger­many hold­ing 35 per cent of its as­sets in the coun­try.

With flail­ing economies else­where in Europe, in­vestors could be for­given for steer­ing well clear. But Mr Nor­ris ar­gues that this shouldn't serve as a dis­trac­tion from the in­vest­ment story go­ing on right in the mid­dle of the de­vel­oped world. "Over the past five years, the un­em­ploy­ment rate in Ger­many has come down ev­ery year, which is a good sign of its com­pet­i­tive­ness. Ex­ports are back up to a record level and it is now neck and neck with China as the world's biggest ex­porter," he says.

As cur­rency traders dump the euro amid the sov­er­eign debt cri­sis, Ger­man ex­porters are mak­ing the most of their cur­rency ad­van­tage. With a strong euro, Ger­man prod­ucts be­come ex­pen­sive and dif­fi­cult to shift, but with a weak­ened euro, Ger­man com­pa­nies that rely on ex­ports are able to sell more of their goods abroad. Com­pa­nies such as BMW, for ex­am­ple, are ben­e­fit­ing from high de­mand in emerg­ing mar­kets, and be­cause China pegs its cur­rency to the US dol­lar, the weak­ened euro has boosted prof­its for Ger­man man­u­fac­tur­ers. From an in­vestor point of view, any cur­rency risk as­so­ci­ated with Ger­man ex­port com­pa­nies should be off­set by in­creased prof­its.

As well as healthy ex­port fig­ures, fall­ing un­em­ploy­ment lev­els seem fi­nally to have stirred Ger­man con­sumers into spend­ing more too. "Re­cently, there have been in­di­ca­tions that Ger­man con­sumers are start­ing to spend a bit more, and so there­fore could lead to a well-bal­anced Ger­man econ­omy," says Simon James, a found­ing part­ner at Gore Browne In­vest­ment Man­age­ment.

All of these fac­tors have led to such a strong re­cov­ery in Ger­many that econ­o­mists are now re­think­ing their fore­casts of only 1.5 per cent growth at the start of 2010 and de­bat­ing whether it will be closer to 4 or 5 per cent this year. Mr Nor­ris likens this level of growth to that of an emerg­ing mar­ket, but adds that Ger­many has sev­eral im­por­tant ad­van­tages over de­vel­op­ing economies.

Firstly, in­vestors can en­joy cheaper stock prices be­cause the boom is still rel­a­tively undis­cov­ered. In con­trast to China, for ex­am­ple, in­vestors are not yet ex­pect­ing mas­sive growth which is re­flected in val­u­a­tions of stocks. Se­condly, whereas au­thor­i­ties in emerg­ing-mar­ket economies are rais­ing in­ter­est rates and in­tro­duc­ing cap­i­tal con­trols to fight in­fla­tion, as a euro mem­ber, Ger­many is con­tin­u­ing with low in­ter­est rates de­spite its strong econ­omy. As the econ­omy goes from strength to strength, Ger­man as­set prices will also rise. When it comes to get­ting a slice of all this Ger­man suc­cess, stock pick­ers look­ing for di­rect ex­po­sure can in­vest in com­pa­nies such as Siemens, BMW and chem­i­cal com­pany BASF, but ex­perts warn to choose care­fully.

"I would rec­om­mend in­vest­ing away from the bank­ing sec­tor, mainly as I ex­pect that banks across Europe, in­clud­ing Ger­many, will have to raise more eq­uity cap­i­tal over the next two years," says Mr James.

Many of the big­ger Ger­man com­pa­nies will also have lots of in­ter­na­tional ex­po­sure so in­vestors may pre­fer to in­vest in smaller, more do­mes­ti­cated stocks. An­other op­tion for in­vestors is an ex­change traded fund (ETF) which tracks the Ger­man stock mar­ket such as db x-track­ers DAX Re­tail ETF. This does, how­ever, bring with it a de­gree of con­cen­tra­tion risk be­cause this in­dex con­sists of only 30 Ger­man com­pa­nies which, in com­par­i­son with the UK's FTSE 100 or the S&P 500 in the US, could leave in­vestors with­out much in the way of di­ver­si­fi­ca­tion.

Ex­perts also point to trou­ble in the rest of the eu­ro­zone as an­other po­ten­tial pit­fall with a pas­sive in­vest­ment ap­proach to Euro­pean eq­ui­ties and say that an ac­tively man­aged fund is a safer bet as many of these will be closely cor­re­lated to the sec­tor as a whole. Martin Bam­ford of in­de­pen­dent fi­nan­cial ad­viser In­formed Choices also rec­om­mends Cazen­ove Euro­pean which holds 14.6 per cent of its as­sets in Ger­many and levies an ini­tial charge of 5 per cent plus an on­go­ing 1.5 per cent an­nual man­age­ment charge.

While an ex­cit­ing prospect for in­vestors, in­vest­ing heav­ily in Ger­many also car­ries con­sid­er­able cur­rency risk and any Euro­pean as­sets could plum­met if Greece, Ire­land and Por­tu­gal can­not re­pay their debts.

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