In USD terms, Germany has returned more than the MSCI Europe in the last 3 months and year to date (as of August 2, 2013). Germany improved by 5.2 percent and 1.3 percent in the last 3 months and year to date, respectively, while MSCI Europe rose by 2.2 percent and 8.2 percent over the same periods. Still Germany is trading at a discount relative to MSCI Europe at a 12.1 price/earnings (P/E) multiple and a 6.6 price/cash earnings (P/CE) multiple. MSCI Europe is trading at 15.6 P/E and 8.3 P/CE. In terms of forward multiples, Germany is trading at an 8 percent discount on a P/E basis and at a 15 percent discount on a P/CE basis.
Source: Morgan Stanley Research
Why Is Germany Trading At A Discount Relative To The Rest Of Europe?
Germany’s employment has grown faster than Europe’s periphery and GDP is expected to grow faster relative to the rest of the Eurozone during this year and 2014. Deutsche bank analysts expect German GDP to grow by 0.1 percent in 2013 and by 1.5 percent in 2014, while Eurozone GDP will decrease by 0.6 percent in 2013 and will improve by 1.0 percent in 2014. Given this backdrop, why is Germany trading at a discount relative to the rest of Europe?
Germany Is Worried About Its Domestic Budget Pressures
One reason could be that the markets are concerned about Germany’s ability to grow domestically as opposed to relying on exports outside the Eurozone. Germany is worried about its domestic budget pressures and it is unlikely to promote domestic led economic growth through funding with fiscal policy, according to PIMCO analysts. The upcoming September 2013 elections are a non-event according to Deutsche bank analysts, as Angela Merkel is expected to win. She counts with personal approval and the majority of
Germans still approve being part of the European Union and supporting the euro. The majority governing coalition counts with a 4-5 percent advantage relative to the opposition and could manage to get a majority in the next parliament. However, given the polls’ margin of error, a governing coalition is still a possibility. Regarding German policy covering the European Union and the euro, continuation of piecemeal reform is still likely as public sentiment and constitutional constraints will probably prevent sizable structural changes, in Deutsche bank analysts’ view. In turn, austerity going on in the European periphery could continue to slow down the Eurozone’s economic growth.
Regarding the stock market, out of 27 prime all share stocks that have reported second quarter 2013 so far, 67 percent managed to beat consensus expectations in terms of sales and only 38 percent surprised on the upside regarding earnings per share (EPS). The earnings surprise percentage is below the 52 percent long term average. Even though the sample is small, Deutsche bank analysts think that the gap between positive sales and positive EPS surprises will continue and that the outlook will improve for 2014 guidance. Sales upside surprises have been higher in Germany at 67 percent versus 58 percent for the Stoxx 600 index, which measures European equity performance. However, on the EPS front, Germany had a lower upside surprise percentage at 38 percent versus the 49 percent registered by the Stoxx 600 index.
In summary, macro uncertainty and disappointing earnings could explain why German stocks appear cheap.