While Germans debate their role rescuing Europe from its debt crisis, stocks in the DAX Index (DAX) have never had it so good.
Companies in Germany were the seven best performers in the Euro Stoxx 50 (SX5E) Index this year as of April 30, led by Bayerische Motoren Werke AG (BMW), the world’s largest luxury carmaker, SAP AG, the biggest producer of management software, and chemical supplier BASF SE. (BAS) That hasn’t happened in at least a decade, according to data compiled by Bloomberg. Optimism about exports and historically low valuations helped push the DAX to the highest level since 1990 compared with the rest of Europe, excluding dividends.
Advances in stocks and bunds underscore confidence in the world’s fourth-biggest economy and may help Chancellor Angela Merkel, who is fighting to preserve European unity after Spanish unemployment approached 25 percent, Italy struggled to sell bonds and Nicolas Sarkozy lost the French presidency. With an economy expanding twice as fast as the region and a balanced budget, equity valuations are 18 percent below the average level since 2006, data compiled by Bloomberg show.
“It seems to be your perfect market,” Dan Morris, a strategist at JPMorgan Asset Management in London, said in a phone interview May 4. His company oversees $1.3 trillion globally. “It’s your safe haven and your growth opportunity at the same time.”
The DAX fell 3.5 percent last week to 6,561.47, paring its gain in 2012 to 11 percent, compared with the CAC 40 Index of French stocks, which added less than 0.1 percent through last week. The German gauge rose 0.1 percent today, while the CAC 40 advanced 1.7 percent.
Sarkozy, the French president who partnered with Merkel to promote austerity, was defeated by Socialist Francois Hollande yesterday. At the same time, Merkel’s party had its worst result in more than half a century in the northern state of Schleswig- Holstein. In Greece, voters flocked to anti-bailout parties, throwing doubt on whether the two main parties, New Democracy and Pasok, can form a coalition to implement spending cuts.
Almost $200 billion has been restored to German shares this year. Profits rising faster than share prices have pushed the DAX to 10 times estimated earnings, compared with an average 12.2 since 2006, data compiled by Bloomberg show.
Five companies in the index have beaten analyst sales estimates for each that missed since quarterly reporting started on April 10, data compiled by Bloomberg show. That’s twice the rate for Europe as a whole and compares with a 2-to-1 margin in the Standard & Poor’s 500 Index. (SPX) BASF, Adidas AG (ADS) and Infineon Technologies AG (IFX), which get an average of 57 percent of revenue from outside Europe, posted the biggest positive surprises.
The DAX, buoyed by gains of 25 percent or more in truckmaker MAN SE and chemical company Henkel AG, is trouncing the Euro Stoxx 50, which has dropped 2.9 percent in 2012 as equities in Spain, Portugal, the Netherlands and Italy fell. Spain’s IBEX 35 Index slipped 3.8 percent last week as investors bet losses are worsening for lenders and builders. Italy’s FTSE MIB Index (FTSEMIB) ended last week within 10 percent of a record low as bank shares tumbled.
German shares are rebounding after they dropped along with Europe last year on concern widening budget deficits in Greece, Portugal and Ireland would spur a sovereign default. The DAX decreased 15 percent in 2011, the loss made worse as traders sold futures on the index while bans on short selling limited negative bets on gauges in France, Italy and Spain.
Italy’s government deficit in 2011 was equal to 3.9 percent of gross domestic product and Spain’s was 8.5 percent, according to official data compiled by Bloomberg. In Germany, where exports make up 50 percent of the economy, the deficit was 1 percent of GDP.
“If you buy Germany, you are thinking the euro zone stays intact” or little changed, Joost van Leenders, an Amsterdam- based strategist at BNP Paribas Investment Partners, said in a phone interview on May 3. His firm oversees $660 billion. “If the euro zone were to disintegrate, you don’t want to own stocks at all, and certainly not European ones.”
GDP in Germany, the world’s second-largest exporter after China, will expand 0.7 percent this year and 1.6 percent in 2013, according to the median prediction in Bloomberg surveys of economists. The 17-nation euro area will contract by 0.4 percent in 2012 and grow 1 percent the following year, the survey shows.
Factory Orders Gain
German factory orders increased more than economists forecast in March, driven by demand from outside the euro area, the Economy Ministry said today. Orders, adjusted for seasonal swings and inflation, jumped 2.2 percent from February. Economists surveyed by Bloomberg News forecast an increase of 0.5 percent.
Merkel’s Christian Democratic Union faces another election on May 13 in North Rhine-Westphalia after taking 30.9 percent of the vote in Schleswig-Holstein yesterday, its lowest share since 1950. Public anger over bailouts cost her regional ballots in Baden-Wuerttemberg and other districts last year.
The country’s best-selling Bild newspaper called on lawmakers in February to reject a Greek bailout, running a front-page headline reading “Stop!” and reporting that 62 percent of Germans wanted lawmakers to vote down the package. The measure was approved.
“The market and the economy, and Merkel’s position, go hand in hand,” Jean-Claude Wolferstaetter, a Munich-based manager at Versicherungskammer Bayern, said in a phone interview on May 3. His firm oversees 40 billion euros ($53 billion). “When the German economy and the parallel performance of the stock market are doing well, it plays into her hands. As soon as this outperformance changes, it will trigger her readiness for further negotiations.”
While the jobless rate stands at a two-decade low of 6.8 percent, unemployment unexpectedly rose in April. The number of people out of work increased a seasonally adjusted 19,000 to 2.87 million, the Nuremberg-based Federal Labor Agency said last week. Economists forecast a decline of 10,000.
Simon Denham, chief investment officer at London Capital Group Holdings Plc in London, said Germany won’t go unscathed by the crisis affecting its neighbors. Clients have been “consistently long” German equities while betting on losses in the U.S. and U.K., he said. The firm oversees trading accounts for about 70,000 customers.
‘Catch a Cold’
“I am personally not so confident because if the euro-zone worries persist, you would have thought that Germany would at least catch a bit of a cold,” Denham said in a phone interview on May 3. “If the weaker links pull out of the euro, the currency itself will come out stronger and hurt German companies. If they stay in, then the costs for Germany may prove a bit of a millstone.”
German automakers BMW, Volkswagen AG (VOW) and Daimler AG (DAI) occupied the top three ranks in the Euro Stoxx 50 by share gains this year through April 30, according to data compiled by Bloomberg. SAP, RWE AG, Munich Re and BASF followed. The seven companies’ gains averaged 23 percent.
BMW in Munich and Stuttgart-based Daimler overtook Lexus last year to become the top-selling luxury auto brands in America. BMW last week unexpectedly reported first-quarter profit rose, beating analyst expectations by 22 percent. Its stock has increased 33 percent in 2012.
SAP said April 25 a “very solid pipeline” of deals will help meet growth targets as demand picks up for mobile programs and software to process large amounts of data. The company reported an eighth consecutive quarter of revenue growth exceeding 10 percent. U.S. rival Oracle Corp. boosted sales by 3.1 percent in its latest quarter. SAP (SAP) climbed 18 percent this year.
German exporters are rallying even as the euro frustrates bears predicting a meltdown. The European currency has risen more than 1 percent against nine major peers from this year’s low on Jan. 16, as central banks from Australia to Sweden cut interest rates to safeguard growth. The euro closed last week at $1.3084, 9 percent above its $1.20 lifetime average.
“The market has positioned itself for euro weakness,” said Neil Dwane. The chief investment officer for Europe at Allianz Global Investors helps manage about 300 billion euros globally. “It’s been surprising to people and frustrating to politicians that the euro isn’t at $1.15 rather than $1.32,” he said in a phone interview on May 2.
Germans are benefiting disproportionately from monetary stimulus, said Mislav Matejka, the chief global equity strategist for JPMorgan Chase & Co. in London. The European Central Bank lowered interest rates to record lows and lent more than $1.3 trillion to stop credit markets from freezing.
“ECB monetary policy is clearly too loose for Germany, and it is likely to remain so,” he said in a phone interview May 3. “The DAX is a great play for global exposure but, in addition, you have a domestic environment that was historically weak but could be picking up because of low interest rates, relatively stronger economic activity and rising wages.”
House prices jumped 5.5 percent last year, the most since the country’s post-reunification boom of the early 1990s, the Bundesbank said. Public-service workers may get 6.3 percent higher pay by the end of next year, Ver.di labor union said March 31. Loans to non-financial companies rose in March to the highest since September 2009, central bank data show.
Dwane at Allianz said the proportion of German exports that go to Europe, about 33 percent, is too high and there’s a risk economic indicators will reverse. Still, he holds more German equities in his portfolios than are reflected in benchmarks, citing exports, the country’s industrial edge, and the relatively better outlook for the economy.
The country has “been seen as a growing economic environment rather than a disintegrating one,” he said. “When all is added up, Germany is perceived as a more resilient and attractive investment.”
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