Traders Eyeing Cheap German Stocks Bet on Carmakers’ Revival

Germany, one of Europe’s cheapest stock markets, is starting to see a resurgence in investor interest.

Months of withdrawals from exchange-traded funds tracking German stocks are beginning to reverse amid a stabilizing euro and improving prospects for the country’s exporters. The biggest ETF following the shares just had three consecutive weeks of inflows for the first time since January.

The reason for the optimism may lie in the companies’ earnings potential, particularly for carmakers, according to MPPM EK’s head of trading, Guillermo Hernandez Sampere. Vehicle sales to China accelerated in the first half of the year, after concern about the country’s slowdown sent the DAX Index tumbling at the beginning of 2016. Daimler AG, which gets two-thirds of its sales from outside of Europe, said last week that preliminary second-quarter results are “significantly” better.

“The carmakers were on the brink because of China, and January-February made a lot of people leave the market,” Hernandez Sampere said from Eppstein, Germany. His firm manages about 250 million euros ($275 million). “The fear of a cool down or a recession was still hanging over the next quarter, but it hasn’t been justified. If you look at the companies, Germany equities are screaming ‘Buy me, buy me!’”

The DAX has rebounded 15 percent since its February low, more than the Stoxx Europe 600 Index. Volkswagen AG has climbed 24 percent and BMW AG has advanced 10 percent in the period, while other exporters such as steel company Thyssenkrupp AG and sportswear maker Adidas AG have jumped more than 50 percent. And yet, the German stock measure now trades at 12 times estimated profits, near a record low relative to the regional gauge, as analysts expect better earnings.

That’s helped drive investors back to Germany, whose economy is forecast to expand 1.5 percent this year. In the past three weeks, the iShares Core DAX UCITS ETF gathered about 375 million euros after posting outflows almost every week since mid-April.

While analysts estimate profits at DAX members will drop 1 percent this year, that’s better than the 4.3 percent slide expected for Stoxx 600 firms, data compiled by Bloomberg show. And for Germany’s auto-related companies, they project a 3.9 percent rise in net income. Software maker SAP SE kicked off the DAX reporting season on Wednesday, posting results that topped analysts’ estimates.

For Benno Galliker, a trader at Switzerland’s Luzerner Kantonalbank AG, it’s too soon to invest in German stocks. Strategists expect the DAX to end the year at 10,093 on average, which would mean a 6.1 percent annual decline.

“It’s all about how much you want to pay for future growth,” Galliker said. “Earnings aren’t growing, they’re more going sideways. I think it may be too early.”

Still, the cost of options hedging against swings in German shares is near its lowest level since January 2015 relative to contracts for European shares.

One thing favoring the DAX is that financial firms -- the biggest losers this year -- have a much smaller weighting than in the Stoxx 600, where they make up about a fifth of the gauge. For the DAX, it’s chemical companies and automakers that are the biggest components, together accounting for 34 percent of the index, according to its fact sheet.

“We are slightly positive for the DAX,” said Michael Bissinger, an analyst at DZ Bank AG in Frankfurt. His firm expects the index will rise 3.2 percent from Tuesday’s close to 10,300 by the end of the year. “We can see that the valuation looks attractive at the moment. In contrast to Europe, the advantage is that the DAX is less reliant on banks.” 

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