Germany’s resilient stocks
“Germany is wilting,” says The Economist. Last year its economy shrank by 0.3%, the worst performance in the G7. Industrial output has contracted by around 9% since 2018. In boardrooms, “the talk... is of creeping de-industrialisation”. The “underpinnings of Germany’s industrial machine” have been falling “like dominoes”, says Bloomberg. China, once an “insatiable buyer” of German goods, is now a direct rival in areas from cars to solar panels. The US is drifting into protectionism.
The end of “huge volumes of cheap Russian natural gas” has spelled the “final blow” for energy-intensive industries such as chemicals. “Germany still has an enviable roster of small, agile manufacturers,” but their ability to grow is being hampered by “political paralysis” that prevents reforms. Chancellor Olaf Scholz’s “fractious coalition” of social democrats, greens and free-market liberals struggles to agree on very much.
Manufacturing still accounts for 20% of German GDP, compared with 9% in the UK, says Roger Bootle in The Telegraph. Germany has come through weak periods before. With a government debt-toGDP ratio of 64%, “extremely low” for a developed economy, Berlin has plenty of budgetary room to invest in badly needed upgrades to infrastructure, education and the digital economy. Yet “by law the German government is obliged to aim at something close to a balanced budget”. That keeps debt low, but it amounts to a huge “self-inflicted wound” for the future prospects of Deutschland Inc.
A play on global growth
Positive money news out of Germany has been rare of late, but the stockmarket is a notable exception, says Kristie Pladson for Deutsche Welle. The DAX, an index of the 40 biggest blue chips, has made successive record highs this year. It is up by 20% over the past 12 months and topped the symbolic 18,000 point level for the first time earlier this month. While smaller German firms are struggling, the big multinational companies that make up the Dax have been benefiting from strong global demand, especially in the US. “I actually think that the biggest bull case for Europe is an increasingly stagnant domestic economy,” says Ben Ritchie of abrdn. Germany’s woes have weakened the euro against the dollar, but a cheaper euro makes its exporters more competitive and market-boosting interestrate cuts more likely.
“The performance of the DAX depends more on global growth than on Germany’s”, say Deutsche Bank analysts in a note. DAX firms generate 80% of their revenues outside Germany. They make almost as much money in China as they do in Germany, and even more in the US. The DAX’s rally has been underpinned by robust earnings. Dividend payments should total €49bn this year for a decent 3.1% yield. While the German economy remains weak, “we expect the DAX to continue to perform” regardless.