Don't worry, Greece, Portugal, and Ireland: The euro crisis has been good news for these European exporters

05/03/2011 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The sovereign debt crisis in Greece, Ireland, Portugal, and maybe Spain depresses the euro every time it moves back into the headlines. The European currency has been on a bit of a tear lately against the U.S. dollar finishing last week at $1.4822, the highest level since December 2009, now that the European Central Bank has started to raise interest rates ahead of the U.S. Federal Reserve. But not so long ago, on January 11, the euro traded for just $1.2904. That’s almost 13% below price back in December 2009.

Yep, the European debt crisis has dealt the European currency its share of whacks.

But the troubles of the euro—because of the continuing budget crises in Greece, Portugal, Ireland, worries over restructuring or default in any of those countries, and fears that the crisis could spread to a bigger economy such as Spain or Italy—are only half of the story, the negative half.

The other side of the story is how the troubles of the euro have given a huge edge to the exports of the fiscally sounder euro economies of Northern Europe such as Germany, Finland, and the Netherlands. Because these countries use the euro instead of, say, the old Deutsche Mark, their exporting companies have escaped being savaged by a rapidly appreciating currency the way that, say, Brazil’s exporters have been.

The troubles of the euro, which have kept the export currency cheaper than the strength of these economies would otherwise require, has been a boon to German makers of automotive controls, network communications gear, and medical equipment, Dutch makers of semiconductor manufacturing equipment, and Finnish makers of elevators and escalators.

And this other side of the euro crisis means that your portfolio should have more exposure to these European export stocks than it would if all you did was pay attention to the problems of the euro.

Let me explain how this other side of the euro “problem” works to the benefit of Northern Europe euro exporters. And then I’ll give you a few stocks to add to your portfolio to take advantage of this weak euro edge.

Think of where the euro might be today if it weren’t for the sovereign debt crisis. The euro is up against the dollar over the last six months—by 6.1% from November 3, 2010 to April 29. But just about every currency in the world is up over that period versus the U.S. dollar. The Brazilian real, for example, is up 8.7% during that same period. That works out to 42% greater appreciation for the real than for the euro.

And think of where a Deutsche Mark might be. Compare that now imaginary currency with the real (the Brazilian real, that is.)

Brazil’s economy is fighting off inflation that threatens to end the year at 6% to 6.5%. The financial markets don’t totally trust the promises of the government of President Dilma Rousseff to cut spending. The Brazilian economy is slowing, probably to something like 4.5% GDP growth from 7.5% in 2010. The central bank seems to be getting cold feet about fighting inflation with big interest rate increases.

By contrast in Germany companies are hiring as they increase production to meet a boom in exports. The German economy is forecast to grow by 2.6% in 2011 after growing by 3.6%, a record, in 2010. German unemployment fell to 6.3% in February, well below the average of 9.9% for the 17 countries that use the euro common currency. German inflation did indeed accelerate to 2.6% in April from 2.3% in March, but that was still one of the lowest inflation rates in the world. Nonetheless, the European Central Bank raised interest rates this month with another interest rate increase on the way in June or July.

It’s hard to say what kind of appreciation the Deutsche Mark would have seen under the circumstances: tough central bank, rising interest rates, near record growth, low inflation (by global standards), and a nearly balanced government budget. Certainly, such a Deutsche Mark would have equaled the appreciation of the Australian dollar, up 16.4% in the year that ended on April 28.

That would have meant that the communications gear sold by a Siemens (SI) or the semiconductor equipment maker such as Aixtron (AIXG) would have been 16.4% more expensive this year than last. That’s a tough price increase to pass onto customers when so many companies are looking to make a deal—and when all of your toughest competitors from China have the advantage of a controlled currency that China’s government is keeping artificially cheap.

If you want, you can think of the euro debt crisis as a huge currency subsidy to German exporters.

Not just German exporters, of course. The same currency subsidy works to the advantage of exporters in any country that’s using a cheap euro instead of what would be a much more expensive national currency. I think this description fits Finland, Belgium, and the Netherlands pretty well at the moment. (If you haven’t been paying attention to Belgium, you should. The country’s economy is chugging along even though the country is effectively without a government. Makes me wonder….)

Finding stocks that will let you profit along with the currency mismatch created by weakness in the euro while northern European economies flourish isn’t as easy as I’d like it to be. In Germany many of the best exporters belong to what’s called the Mittelstand, those small and mid-sized companies that still form the backbone of the German economy. Many of these are still either private or family-controlled. Others have never seen a need to raise capital outside of Germany and don’t trade in the United States. A good example is Kuka, a designer and builder of factories—especially automobile factories—that can provide everything from welding systems to robots. The stock trades in Germany as KU2 (and very well too since the shares are up 62% in a year,) but not in the United States.

I do have two German exporters to recommend Siemens (SI) and Aixtron (AIXG). And I’m looking for more. (Aixtron is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ I added it to the portfolio on November 16, 2010; the shares are up 33% since then.)

I’ve also got a Dutch exporter that trades in New York that I’d recommend in the Picks portfolio, ASML Holdings  (ASML). This exporter of semiconductor-making equipment has been in the portfolio since April 20, 2010. The shares are up 16.4% in that time.

I’ve got one Finnish stock to recommend to you too, Kone OYJ. This exporter (and servicer) of elevators, escalators, and automatic building doors has built solid revenues from selling into China’s building boom and looks like it is making a successful transition from selling just to developers in China’s biggest cities to adding developers in China’s smaller and more interior cities. That’s important since those cities are the next stage in China’s building boom. The stock, unfortunately, doesn’t trade in the United States. On the Helsinki market the ticker is KNEBV.FH.

One thing to remember in your search for more plays like these—and it does make the search harder—is that you need to rule out companies that export things, such as fertilizers or natural gas, that are priced in dollars. That removes a good part of the currency advantage from the euro crisis.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Aixtron, ASML Holdings, and Kuka as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

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