Boom time for investors in Germany
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.