German stocks are cheap, considering that the economy has recovered from worse calamities, says German newsletter publisher Christoph Scherbaum.
Q. The German economy is facing perhaps the steepest decline of any major country this year. What's the mood among Germans?
A. The Germans are a nation of workers. The current situation is certainly difficult but not hopeless. Traditional industries such as engineering, automobile, and pharmaceuticals will survive the crisis strengthened. We have a country with social protections and a safety net. The Germans rebuilt after World War II. They can get through this.
For example, at Daimler (Xetra: DAI.DE, NYSE: DAI), many people are working reduced hours, but they know their jobs are safe through 2012, so they're not worried. People are shopping; they're not afraid.
[But] German investors, we go in the market when we know it's safe. When you go on German web sites they always talk about a "bear rally"-not a bull market, a bear rally. Many Germans are currently over 80% in cash. It is a huge sum of money that is waiting to be invested. If the DAX got up to 6,000 points many people would be shocked. (It closed at 5051 Wednesday-Editor.)
Q. Where are you advising readers to put their money?
A. In defensive stocks, like Procter & Gamble (NYSE: PG), Wal-Mart (NYSE:WMT), and McDonald's (NYSE:MCD). The US market has great chances now. You're always ahead of European markets in a recovery. [In Europe,] the pharmaceutical and biotech sectors are attractive, starting with Bayer (Xetra: BAYG.DE) and BASF (Xetra: BASF.DE). In addition, energy stocks such as RWE (Xetra: RWE.DE, OTC: RWEOY.PK), E.ON (Xetra: EOAN.DE, OTC: EONGY.PK) and SolarWorld (Xetra: SWV.DE). Long-term investors should buy blue chips such as Daimler, Porsche (PAH3.DE, POAHY.PK), or Allianz (Xetra: ALV.DE, NYSE: AZ). But be wary of financials like Deutsche Bank (Xetra: DBK.DE, NYSE: DB) and Commerzbank (Xetra: CBK.DE, OTC: CRZBY.PK).
Q. What do you like about Daimler and Allianz?
A. For Daimler, GM is gone, Toyota Motor (NYSE: TM) has many problems. They have good management, good technology, and a good product portfolio. It's a good opportunity for long-term investors. Allianz had a problem with a private bank they bought. Now that they are out of that business, they can focus on insurance. They've really cleaned up their portfolio.
Q. How cheap is the German stock market?
A. Very cheap. The price/earnings ratio of DAX companies is very healthy-under 10x. The DAX could go to 6500 next year.
Q. Are the September national elections a big risk?
A. Chancellor [Angela] Merkel has done well with a tough job in a coalition government. For Germany, there is really no alternative. (Merkel's Christian Democratic Union won handily in the recent elections for the European parliament-Editor.) She could form a coalition with the liberals after the election, which would be good for the economy.
Q. Does the Eastern European credit crisis still pose a big risk to German and Austrian banks? Or is that last year's worry?
A. For German banks, not. But Austrian banks will continue to have problems. They are too closely involved in Eastern Europe.
Q. Overall, though, you sound pretty bullish.
A. I expect highly volatile sideways movement [in the near term]. So, wait for setbacks and then buy.
Q. Thank you.
