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Christoph Scherbaum, editor of the German edition of Personal Finance, says German investors are cautious, but optimistic about their market.

Q. Christoph, some experts predict the beginning of a prolonged slowdown that will push consumer price inflation in Germany to as low as 2% next June. What do you think?

A. Consumer prices are not really a problem. August inflation was less than 4% and is estimated at 3% until year-end. The delayed effects of rising commodity prices will have a steeper decline. In addition, second-round effects through higher wage developments are now more visible. Therefore, the European Central Bank-despite poor economic data-will wait for a reassessment of its inflation target for 2010 until the second half of 2009

Q. To what extent do you think the US's financial worries are extending to German financial institutions?

A. It's a difficult question, but we have no big problem with our banks. German Finance Minister Peer Steinbrueck recently stated: "Although this financial crisis undoubtedly is the biggest economic risk for the German economy, I think the potential impact on us-after inquiries and interviews with the Bundesbank president-to be limited". He also reaffirmed the intent of a balanced federal budget in 2011.

Q. With Germany's economy amounting to approximately one-quarter of the Eurozone's gross domestic product, how likely is it that a slowdown in Germany will vastly affect the rest of Europe?

A. Europe goes its way; Germany has no crisis.

Q. Germany has a substantial financial industry. Would you give us a brief summary of that sector?

A. Since the early 1990s, the number of German banks has fallen by half and there were 2,300 banks at the end of 2006. The big financial companies like Deutsche Bank (NYSE: DB), Commerzbank (Stuttgart: CBK.SG), Postbank (Frankfurt: DPB.F), and Allianz (NYSE: AZ) are in the DAX and are global businesses. More than half of the foreign branches of American banks are located in member countries of the European Union.

Q. Will the recent slide in the euro hurt or help German companies?

A. Only one direct answer: it helps! That's because a better dollar is good for our companies who do business in the US, like our car makers Daimler (NYSE: DAI), BMW (Frankfurt: BMW3.F), and Volkswagen (Frankfurt: VOW.F).

Q. The DAX has fallen from more than 8,000 at the beginning of this year to less than 6,000. Currently, there are two German ETFs, (iShares MSCI Germany Index (NYSEArca: EWG) and Nets Dax Index (Amex: DAX)). With the recent decline in the indexes, do you think these issues are now undervalued and if so, which would you recommend buying at this time?

A. I expect that the phase of nervousness still persists, and thus for conservative investors, there is still no strategic entry point. For less risk-averse investors, a possible entry would be on extremely negative sentiment with high volume. Overall, market participants now have a greater risk aversion. Keep cash ready.

German savers are still risk averse, with ? 2.8 trillion in savings and insurance. That's over 60% of financial wealth. Just 9% are invested in equities. Nevertheless, despite the strong price setbacks in the first half of 2008, German shares have increased significantly in the past 20 years.

Q. Are there any sectors in Germany that you believe are currently undervalued? And do you have any recommendations in those sectors?
 
A. I like the chemical sector with blue-chip BASF (Frankfurt: BAS.F), which recently announced a takeover bid for Swiss company Ciba Specialty Chemicals (LSE: CBM.L). That is expected to result in a valuation of approximately one times sales in 2007 and 11x 2007 earnings before interest and taxes (EBIT), significantly higher than that of BASF itself.

Additionally, in the solar sector, Solarworld (Frankfurt: SWV.F) is attractive. It recently reported results were significantly better than expected, with improved operating and gross margins, and a solid balance sheet with a net cash position of EUR ?164 million.

The analysts at Societe Generale estimate earnings for 2008 and 2009 of ?1.40 and ? 1.77 per share, with a resulting P/E of 20.4x and 16.2x. The price target remains at ?36.00. Overall, the outlook for the market and Solarworld at recent corporate conferences has been very positive.

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Tickers Mentioned: Tickers: DAI, BMW3.F, VOW.F, EWG, DAX

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