Germany is not what it’s cracked up to be
It is Europe’s powerhouse economy. It is driven by brilliant technology. It invests for the long term, creating world-beating, perfectly designed products that are exported right around the world. We hear a lot about how the German economy is one of the strongest in the world, and one the rest of us should try to learn from.
But there is, oddly, one place you won’t see any evidence of that. The benchmark DAX index, the German equivalent of the FTSE 100 or Dow. It is a dog of a market, and it is getting steadily worse. Sure, as any investor learns quickly, the stock market is not always a reflection of a national economy. But its performance is also pointing to some cracks in the German powerhouse – and telling us that it is not as great as it is made out to be.
If you asked most people what the worst-performing major developed market was so far this year, they would probably suggest Italy, with its spiking bond yields and rows with Brussels. Or Britain, about to potentially crash chaotically out of the European Union. Or a Japan stuck in permanent recession. But in fact, it is Germany. Its market is down by 11pc this year, measured in dollar terms, slightly more than Hong Kong, Spain and Italy, and significantly worse than Britain and France, down 6pc and 3pc respectively. Over a longer time period, the performance is hardly any better. At 11,500, the index is more than 800 points down on the level it reached back in 2015. The FTSE 100, by contrast, is still up on its 2015 level, although only just after the hammering of the last couple of weeks. Meanwhile, almost half the index is made up of companies in some form of crisis. Such as? The oncemighty Deutsche Bank is in deep decline and may not survive the next few years. What was once Europe’s leading financial institution is no longer even in the top 15 banks measured by market value.
Volkswagen is still caught up in the aftermath of the “diesel gate” scandal, while other major manufacturers are grappling with the arrival of electric and self-driving cars. Many of the industrial giants are struggling. Thyssenkrupp, for example, which once dominated the Ruhr industrial powerhouse, has been forced to split as it struggles to reinvent itself, while Siemens is rebuilding its reputation after a bribery scandal. The utilities sector has been hit by the country’s sudden decision to abandon nuclear power. Eon last year reported record losses of €16bn (£14bn). The FTSE 100 or France’s CAC 40 have their share of companies facing challenges as markets change. But half? An alarming number of the giants of Germany Inc are in some sort of trouble.
No one would judge the US solely by the performance of the Dow (although Donald Trump might try) or Japan by the Nikkei, which would paint far too gloomy a picture. Even so, the woeful performance of the Dax cannot be dismissed as coincidence. Germany’s economy has lots of residual strengths, but it also has a strangely oldfashioned look to it. Indeed, you can see that in the sectors that dominate the index. Almost a third of the DAX is made up of car companies. Chemicals and industrials account for about 20pc each. Software and consumer goods are way down the list, although they have far better growth prospects.
Berlin has a few whizzy start-ups, but there are no internet companies anyone has ever heard off; shockingly, a country that was a leader in the first and second industrial revolutions is nowhere in the third (its best-known contender, Rocket, saw its shares tank in 2015, and has been slow to recover). It has done well selling manufactured goods and machine tools to the world, but China is catching up fast, and may soon muscle it out of many markets. And industrial exports are the one sector that is uniquely vulnerable to a breakdown in the global trading system – indeed, president Trump has already threatened to impose tariffs on German goods.
Only four new companies have joined the DAX since 2012, and one of those was a spin-off from Bayer. Germany is stuck with a gridlocked coalition government that seems incapable of bold decisions. The German economy is not everything it is cracked up to be. Sooner or later that will become apparent – the DAX has simply reached that conclusion a bit quicker than everyone else.
‘The Dax’s performance is pointing to some cracks in the German powerhouse’