German equities market to remain bullish post-election, says DAWM’s Tim Albrecht
Tim Albrecht, head of German Equities at Deutsche Asset & Wealth Management, expects the bullish German equity markets to continue after the upcoming parliamentary elections.
Back in 2000 Germany was the country causing concern in Europe. Very low economic growth, unemployment, high wage costs and stalling reforms were the country’s greatest problems. But now Germany is one of the most favoured investment locations in Europe and the economy is growing more strongly than in neighboring countries. Thanks to Agenda 2010, instituted by former chancellor Gerhard Schröder in 2003, Germany has managed to get back on the road to economic success. Measures included promoting medium-sized companies, relaxing protection against dismissal, reducing non-wage labour costs, increasing investment in training as well as special training programs for young people.
German companies benefit from their position as international market leaders in many export sectors. Despite the ongoing crisis in the Eurozone, business is very good in North America as well as the up and coming emerging markets. Similarly, the domestic economy is in good shape. Unemployment in Germany continues to be far lower than the European average. Consumer sentiment brightens from month to month while the German real estate market is also performing positively. German companies are considered innovative, efficient, solidly financed and their products are highly regarded by their international customers. Exports now make up more than 50% of total German economic performance and should continue to show dynamic growth in the coming years.
These are sound reasons why German equities remain the first choice. The German DAX index is currently valued with a moderate PER of almost 12. This remains an unjustified discount in comparison to its history and indeed other global equity markets. In addition, the 30 largest German companies are generating dividend returns of a good 3% which is well above lower than 2% returns offered by 10-year German Federal bonds. German medium-sized companies are an important economic factor that is envied the world over. Many German second-tier stocks listed on the MDAX, TecDAX or SDAX are therefore worth considering as a long-term investment.
In the coming months the German equity market will probably be more volatile, though long-term orientated investors should not be deterred. Geo-political crises in countries like North Korea, Syria, Egypt or Iran will always make investors temporarily nervous. Currency weakness and increasing interest rates in some emerging markets hark back to the Asian crisis of 1997. Although in this case, investors seem to be forgetting that back then debt levels in these countries were considerably higher. In addition, these emerging countries were often compelled to repay debt at short notice in western foreign currencies, which naturally increased pressure.
Recently, the much-discussed interest rate turnaround has also unsettled investors. Undoubtedly central banks would be well-advised in the near future to start a gradual retreat from their extremely expansive monetary policy and to recall a portion of that extremely cheap money. However, this will happen only when the economy in the US gradually stabilises and then Europe follows suit. A whole range of early indicators and economic data clearly suggests that economic activity in the West is reviving. In turn, this ought to stimulate turnover and profits growth for listed companies. Many short-term oriented investors seem to be blanking out this positive effect.
We do not expect the German parliamentary elections to have any great influence on the positive trend in the German equity markets. Which parties will form the new parliamentary coalition? Latest polls suggest the existing CDU/CSU and FDP coalition will continue. Having said that, polls also indicate that there will be a very slim government majority. In all likelihood the most important aspect for the economy and the capital markets will be party intentions on taxation policy. The current government is planning only slight tax increases or even some tax reductions. A government led by Angela Merkel, regardless of whether in coalition with the FDP or SPD, would continue its pro-Europe stance and work on the basis that the ECB would ensure the necessary stability in Europe with its proposed sovereign bond buy-back program. Overall, the re-election of chancellor Merkel and a coalition with the FDP would be the best outcome for the stock markets. A major CDU/CSU and SPD coalition would be regarded as fairly neutral by the capital markets as the economic repercussions would probably be relatively limited. The worst and least likely combination would be a red-green coalition, as its anticipated tax policy would weigh heavily on economic prospects.
If the eurozone economy stabilizes, many foreign investors will regain their trust and increasingly turn to German equities. In addition, many institutional and private investors are suffering a genuine investment crisis as a consequence of low interest rates and high liquidity. As a result, it is possible funds will be increasingly restructured out of the money and bond markets into German quality stocks. As such, it is only a matter of time until the DAX reaches 9,000 points, even if short-term price corrections are possible at any time. This would be an opportune time to buy. In one year’s time we estimate that the DAX will have in fact reached the 9,400 point mark. The situation remains the same – investors need to own German equities.