Cautious on Germany and Europe

02/16/2009 12:01 am EST

Focus: GLOBAL

Heiko Bohmer

Editor, Privatfinanz-Letter and Stock Day Report (Germany)

Heiko Böhmer, editor of Privatfinanz-Letter, says it’s not yet time to return to the German stock markets.

Q. The German economy entered a recession in the third quarter of 2008. Recent projections estimate that it will shrink by 2.25% this year, its worst performance since World War II. With that in mind, which, if any, sectors do you see actually growing in 2009?

A. It's not easy to find growing sectors in this tough economic environment. But I think that utilities and basic goods will show some growth this year. On the other hand, it will be very tough for the most important German sectors—cars and car suppliers.

Q. Unemployment is expected to hit 8.4% in Germany this year, up from 7.8% in 2008. Do you see any improvement coming in any regions of the country?

A. Even though the unification is now almost 20 years active, the eastern states are having fairly higher unemployment rates than the west. I don't see a change in this development. Regarding the German unemployment rate, you have to know that almost anybody without a job is counted. So, if you are unemployed for two years or more you are still in the unemployment rate. And looking back two or three years, the rate has come down from a maximum of almost 10% in the whole country. Nevertheless, I expect the rate to rise till the end of this year.

Q. Germany's stock market declined about 40% in 2008. How do you think the market will do this year?

A. After the worst January ever, it only can go better throughout the year. The beginning of this month was a surprise, and the market climbed almost 10%. I expect another volatile year, with moves of 10% and more on a weekly basis. Although the valuations are historically low, they could go down further, because I expect the earnings to be lower this year for almost any sector.

Q. Are there any particular sectors in which investors may profit this year?

A. I prefer sectors with a stable business. Therefore, big German utility companies like RWE (Hamburg: RWE.HM) or E.On (Munich: EOA.MU) are really worth looking at. The people need energy every day, and with only four big players on the German power market, it's a really good business.

Out of Germany, I like big oil companies like Exxon (NYSE: XOM) or the French Total (NYSE: TOT). These companies are still earning money at these low oil prices. The stock prices have come down like for most sectors. But these companies will attract the investors with a high yield. So, the downside on these stocks is limited.

Q. Inflation rates in Germany are quite low, around 1.1%, with recent reports that inflation had fallen in four states. Do you expect that level to be sustained, or even dip lower, in 2009?

A. I expect this level to be sustained throughout the year, because in my opinion, energy prices will rise this year, so it is almost impossible that the inflation rate will sink furthermore.

Q. With Germany about 1/3 of Euro zone output, the actions of the European Central Bank (ECB) must be of prime importance to your economy. What other stimulus plans do you believe the ECB still has to offer to help get Europe back on its feet? And why do you think all of the money already in play has not helped?

A. The main leverage for the ECB is to lower [interest] rates. In contrast to the US, this is possible in the Euro Zone, and the ECB will do so later on this year.  [As for] why all the money has not helped already, I think that every time the politicians were a little bit confident that the money is helping, there has been a new emergency case on the way.

One example is Hypo Real Estate (Frankfurt: HRX.F).  This company was supported with at least 80 Billion EUR (from the German government and a consortium of banks—Editor). The market value of the company has shrunk to only 300 Million EUR.

Q. How did your recommended investments fare in 2008?

A. I would like to give you just one example. In the beginning of 2008, I recommended K+S (XETRA: SDF.DE), the potash company from Germany. In the first half, it was one of the best German stocks, with a return of more than 100%. But at the end of 2008, [all the gains were] gone like ice in the sunshine.

Q. In hindsight, what would you have done differently in 2008?

A. The simple answer: I should have sold them earlier. But to be honest, I haven't sold all of my stocks in 2008. Like most other investors, I was surprised about what happened last year. For me as an editor, it was a thrilling year—I think, the most interesting year I've ever experienced. But I don't need this kind of excitement every year. So, hopefully 2009 will be a little bit more relaxing.

Q. Are you buying any equities, and if so, what?

A. Now I'm not buying German stocks. I will wait a little bit longer, when all the numbers for 2008 are on the table and the outlooks for this year have been [set].

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