Germany: Better Days Ahead

02/17/2006 12:00 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

"In recent polls, 61% of Germans feel their country's economic situation will be worse four years from now," notes Carlton Delfeld, editor of The Chartwell Advisor. Ironically, it is these low expectations that lead to his recommendation for a German ETF. Here’s his review.

"Germans know that they need to make some significant changes but are resistant to dismantle the expensive social net and inflexible labor regulations that hamper German growth. The key issue is the former East Germany. Germany has poured $1.5 trillion into the region and unemployment is still about 19%. Instead of taking advantage of its lower wage structure, German unions rushed to unionize East German workers that did not have the training, skills, or mindset commensurate with their jump in wages.

"Despite this rather bleak picture, I continue to recommend a modest allocation to the iShares MSCI Germany Fund (EWG ASE). Why? The first reason is very low expectations. Any improvements, even marginal, will have a positive effect on markets. Secondly, the overall market is not expensive at about 14 times earnings. Thirdly, the German companies that dominate the holdings of the Germany iShare are world-class multinationals and are more tied to booming Asia than to the slow growth German economy.

"Further, with the euro down 12 % this year and at a two-year low against the US dollar, the world's largest exporter is picking up some steam. The top line numbers from leading German industrial companies are rolling in with impressive numbers for an almost zero growth economy. Overall, German exports are up for the third straight month and sales to countries outside of the European Union rose 18% annually from a year earlier. Overall, the iShares MSCI Germany fund is loaded with that country's top exporters and is an excellent proxy for overall German export growth.

"Clearly the Germans are good at making stuff and selling it to the world and the weaker euro is helping spur growth. The German economy is a huge restructuring play that will take many years to bear fruit so investors should go with large German multinationals. These firms are shedding high cost and inflexible German workers. Siemens, Deutsche Telecom, Allianz, Deutsche Bank, DaimlerChrysler, Bayer, and BASF account for 50% of the holdings of the EWG fund."

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