The Euro Crisis as a Reason to Invest in Germany
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Eurozone is a big mess, everybody knows that. The fundamental problems in the region are not going away anytime soon and the situation seems to be getting more complicated each day. Budget cuts are producing a deepening recession and that reduces government income via tax revenues, which in turn generates bigger than expected fiscal deficits. After that, another round of budget cuts is usually announced, and the recession gets even deeper.
The political situation is starting to crack in countries like Greece, where there is no public support for the austerity measures, but there is no viable alternative plan to reignite growth and stabilize the financial situation either. It looks like things will keep getting worse before they get any better for most European countries.
But one notable exception has been surprising analysts and forecasters over the last months, and that is the resiliency of the German economy. The following chart from Dr. Ed Yardeni shows how industrial production in Germany has been thriving despite the steep decline observed in most other countries in the region and in the Eurozone in general.
In fact, the deep problems that countries in Southern Europe are having may have some important advantages for the German economy, at least on the industrial activity side. The Euro may be too expensive for countries like Greece, but it’s too cheap for Germany, which has a much higher productivity rate.
One of the biggest difficulties the region is facing is based on the fact that Greece or Spain cannot devaluate their currencies in the same way countries in South East Asia or Latin America have done when they faced similar situations of economic stagnation and high debt levels. The value of the Euro reflects some middle ground between what would be right for Spain and what the equilibrium level would be if it were the German currency alone.
If the Euro were solely Germany's currency, it would be at much higher levels, because strong exports and current account surplus would generate foreign currency inflows and in that way the local currency would get appreciated. So the common currency, which is hurting competiveness in most of the countries in the regions, is very convenient for economic activity in Germany at current levels.
The simplest and perhaps more popular way to achieve exposure to the German economy would be via the iShares MSCI Germany Index Fund (NYSEMKT: EWG) ETF. This is the biggest Germany ETF with more than $2.8 billion in assets under management, and it has a portfolio of more than 50 companies consisting mostly of well known big sized companies, so it provides a relatively safe way to invest in Germany.
Market Vectors Germany Small Cap (NYSEMKT: GERJ) is another interesting alternative to capitalize on the strength of the German economy. This ETF is much smaller than EWG with $3.1 million in assets, but it provides exposure to smaller companies, which may be a better alternative to bet on the local economy since smaller companies are more dependent on the local economy.
There are many interesting alternatives to play the trend via individual German companies with outstanding fundamental strengths, with Bayerische Motoren Werke (NASDAQOTH: BAMXY) – better known as BMW - being a very interesting opportunity.
BMW is recognized all over the planet as one of the most distinguished luxury brands in the auto industry and the company manufactures products that are outstanding in both design and general quality. When it comes to competitive advantages, it would not be easy to find any company in the industry with stronger competitive advantages than BMW.
Speaking about the quality of German engineering, shares of Siemens (NYSE: SI) are trading at a forward P/E below 9, and they yield 3.3% in dividends. Siemens has a strong degree of technological advancement, which provides a solid competitive advantage, and it, along with General Electric, are the two most renowned global engineering companies in the world. At current levels Siemens looks attractively valued for long-term investors looking for high-quality German companies.
The Eurozone is a big problem, both for the global economy and financial markets. In every crisis, however, there is an opportunity, and German stocks may be an interesting possibility for investors looking to position themselves in attractive businesses benefiting from macroeconomic trends like a depreciating Euro.
acardenal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.