If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
02/11/2005 12:00 am EST
Nele Husmann is the US bureau chief for Germany's leading financial magazine, Boerse Online. Here, she offers an overview of the prospects for investing in the region and offers her top stock picks in both Germany and in other European countries.
Nele Husmann and Heiko Bohmer,
another expert on German stocks,
whose commentary will appear in Part Two of this report.
"Last year was a great year for European stocks. While the S&P 500 rose 9%, the EuroStoxx, an index of 50 large European stocks, was up 16%. And Germany was up 17%. But importantly, you have to look at this in dollar terms. In fact, most of the performance was due to the rise of the euro, and not due to the rise of the stocks. Stocks themselves rose about 7% and the rest of the gain was due to fall of the US dollar. Last year when I spoke to this audience, I said German stocks were cheap. I continue to believe that the trend toward a lower US dollar is still intact. And that’s why, despite their strong gains in 2004, they are still cheap.
"To maximize your gains, US investors might want to wait for weakness in the euro. But if you are investing for the long term, I think you can invest right now. I would also note that the euro’s strength is not due to the European countries doing so well economically, but rather because of the US dollar’s weakness due to the looming US trade deficit. For this trend in the dollar to change, the situation with the deficit has to dramatically change, which is why you can probably still count on the US dollar to remain weak.
"Meanwhile, the market price to earnings ratio on the S&P is 16. In Germany, the market p/e is only 9, which is well below its average of 12 to 15. We also look at the value of the whole economy relative to the market cap. In the US, this is even; the market cap of stocks as a percentage of GDP is about 100%. But in Germany, the market cap to GDP is only 40%, which is at its lowest point in a long time and makes this market very interesting.
"When you have such an undervalued situation, you need to look for the reasons. Why should you invest in Germany if it is really a bad situation? Business data is still lousy. There is low growth, low consumer demand, and low expectations for the future. However, I see this as an opportunity to buy low and sell high. When sentiment hits its low point, that is the best time for a smart investor to buy. And in my opinion, Germany is changing and reforms are coming, as the high euro is forcing companies to cut costs and restructure. Record earnings are expected in 2005. The country had steep tax cuts in 2004, and German investors are still sitting in money market accounts. However, at some time, when the markets are rising again, German investors will return to stocks. So if you are already there and the flood of German money comes back into stocks, you will be positioned to benefit.
"There are also several great German stocks that you can buy. BMW (BMWCF Other OTC) is the most dynamic of the German auto stocks, with the best-known brand. One of their great strengths is anticipating what the consumer market wants. They have just released four new models, which have been a tremendous success. The US is particularly strong; in fact, it is an even stronger market than Germany for the company. This is a solid and safe company, which I expect will do tremendously well in the next year.
"Hypovereinsbank (HVMGF Other OTC), a German bank, is my personal favorite. It hasn’t done well over the last year. The company was formed in the 1990s from the merger of two Bavarian banks. The stock has been driven down over the last year due to one-time charges. But I think it now offers good value. People also seem to ignore that it has good assets in Eastern Europe, and that is where we see the growth. Also given its low price, I think the bank could be a takeover candidate. It’s a gamble, but I think it’s very interesting.
"The German telecommunications giant, Deutsche Telecom (DT NYSE), has been a disappointment since it came to market in 1996. It is now 50% below the price at which it was first issued. But investors are finally beginning to see that cash flow and earnings are positive, and most importantly, it pays a great dividend of 3.9%. In the US, the company has T-Mobile, which we believe may eventually be a takeover candidate. Meanwhile, the stock has a very low p/e valuation.
"Outside of Germany, there are some other great European stocks to buy. Heineken (HINKY Other OTC) is the fourth-largest brewer worldwide and it’s the most profitable of the brewers. Its biggest brands are Heineken itself and Amstel. It is also the largest brewer in Asia. The company has suffered from the weak dollar, but I think the stock is oversold right now. Meanwhile, it has been really strong in Eastern Europe and Asia. It’s a very solid company with little debt on its balance sheet. I think it’s a great story.
"Tesco (TESOF NASDAQ), a British supermarket chain, is quite a growth story. It has 2,200 stores and much stronger growth than the overall sector, due to the success of its low-price policy. They are also beginning to sell more non-traditional items such as books, televisions, and apparel, which have higher margins than food items. Further, they are investing their earnings into expansion in Eastern Europe, and markets such as Poland and Hungary have been doing very well. So this is a great play on these regions.
"I’d note that several of the stocks mentioned above can be bought in the pink sheets in the US; however, if you can, I would suggest buying them directly on their European exchanges. All are large companies that can be easily bought through your broker. I'd also add that one of the best and easiest ways for US investors to invest in Germany and in large European stocks is through exchange-traded funds. These are baskets of stocks traded on a daily basis. I would suggest the iShares S&P Europe 350 Index (IEV ASE) or the iShares MSCI Germany Index (EWG ASE)."
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