Commentary: German Investors Show Pluck. Germany Inc. Doesn't

By Jack Ewing

Back in 1996, Germans were bombarded with TV commercials for a product few had ever purchased: stocks. Using marketing techniques that he polished as chief of Sony Corp.'s (SNE ) European operations, Deutsche Telekom (DT ) CEO Ron Sommer persuaded millions of Germans to buy equity in the national phone company. Over the next few years, DT's share price rose sevenfold, stoking a share-buying frenzy. Germans sank their savings into other blue chips and equity mutual funds. More adventurous souls bought into the global Internet-stock craze through the Neuer Markt, Germany's high-tech incubator. From 1997 to 2000, the number of Germans who owned stocks, directly or through mutual funds, more than doubled, to 12.3 million. Germany was heralded as the epicenter of a new equity culture in Europe.

It has been about 18 months since the Nasdaq started its descent to earth, bringing the rest of the world's markets with it. For the conservative German investor, the bear market has been a particularly rude shock. The twin pillars of the new shareholding culture have been knocked askew. The Neuer Markt has plunged and been kicked on its way down for its poor monitoring of its companies. Far worse, safe-as-bonds Deutsche Telekom shares peaked on Mar. 6, 2000, at $94 and are now worth just $15, perilously close to the 1996 initial public offering price of $13. Even the staid DAX, the index of 30 German blue chips, is down 19% this year.

All this has provoked great handwringing about the perils of buying stocks and the untimely death of the equity culture. That's mostly noise. Are Germans retreating to savings accounts and bonds? No. Stock ownership has remained far steadier than stock prices. The number of people who own shares grew in the first half of 2001, according to the German Share Institute, which tracks the stock-owning population. Some 13.4 million Germans own shares, a fifth of the population over 14. The main effect of the downturn has been to reinforce Germans' preference for mutual funds over direct ownership of shares. "Small shareholders are long-term oriented," says Reinhild Keitel, who bought Telekom shares in the 1996 IPO and is a member of the board of the Protective Association of Small Shareholders, an advocacy group.

So here's to Germany's plucky retail investors. They've shown remarkable nerve--so far. You can't say the same for Germany Inc., though. Witness the brouhaha between Deutsche Bank and Deutsche Telekom. Sommer lambasted the bank for dumping 44 million shares on Aug. 7, sending DT shares spiraling down. Sommer's tirade shows that he still hasn't accepted that the market sets his company's share price.

Deutsche Bank doesn't look so hot either. Its analysts reiterated a "buy" recommendation on Deutsche Telekom shares just before the sell-off. The bank says it gave clients the report, which lowered the target price for DT shares, well before the decision to sell. Still, such coincidences don't build market confidence.

How long can German shareholders endure this kind of punishment? DT stock plunged again after Finland's Sonera Corp. (SNRA ) said on Aug. 21 that it would sell its shares by year-end. Investors had already pulled $255 million out of stock funds in June, according to the Federal Association of Investment & Asset Management Companies. One year earlier, $3.9 billion flowed into stock funds. Their total assets have shrunk 10% since mid-2000 as prices have declined.

Yet there's no evidence of a panic exodus. Stock fund assets are still more than double what they were three years ago. But should investors bolt, the economic effect could be severe. There's anecdotal evidence that small and midsize companies are having trouble raising capital. Banks became more cautious lenders just as the collapse of the Neuer Markt choked off risk capital. "We're hearing more and more, especially from smaller and medium companies, that lines of credit are getting shorter," says Gernot Nerb, director of company surveys at Munich's Ifo Institute for Economic Research.

Yet no one expects Germany to revert to the old days. "The readiness to take risks has gone down, but it won't go back where it was," says Bernhard Keller, director of financial research at pollster TNS Emnid in Bielefeld. Younger Germans realize that they'll need to supplement their government pensions with savings. And long term, stocks offer a superior return. Novice German shareholders already understand a vital investing truth: keep a long-term perspective. But Germany Inc. should treat them with respect, or they'll vote with their portfolios.

Ewing covers German finance from Frankfurt.

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