Last week, Germany’s political parties, the Christian Democrats, led by Chancellor Angela Merkel, and the Social Democrats politically thrashed out the structure of a coalition government. Talks had been on for two months and the resolution led to strength in German stocks. This coupled with the news that the country’s GfK consumer confidence indicator jumped to 7.4 points for December from 7.1 in November also encouraged investors. Germans can expect to benefit from expected largesse from the new government by way of higher minimum wages and pensions.
The German DAX benchmark index touched a record of 9424.62 on Friday and has rewarded investors by rising nearly 24% this year.
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Is there something still left on the table for those coming late to the party?
European valuation compared to historical averages
Interestingly, traditional valuations for Europe such as P.E. ratio and Price/Book Value currently rule around the long-term historical average. In fact, the Shiller PE ratio is prevailing well below the long-term trend, according to our article yesterday on the European valuations story as told in pictures (charts).
Germany: Country valuation projections by Morgan Stanley
Highly useful data on Europe valuations by country is available in the latest ‘Strategy Data Gallery’ for Europe by Morgan Stanley (NYSE:MS) analysts Graham Secker, Ronan Carr, Matthew Garman, Krupa Patel and Hanyi Lim.
In the chart above, forward valuations for Germany for 2014 are all projected to be at discounts to the European average represented by the MSCI Europe index. This could be due to margin growth in Germany being somewhat lower than that for MSCI Europe.
Germany economy looking up
This discount may vanish if investors rerate Germany due to improvement in domestic economic trends, such as spending, after the resolution of political governance.
“With a new minimum wage expected to come in as part of the coalition agreement, this should only fuel further spending from consumers, prompting further rises in these confidence figures and hopefully, more of a rebalancing in the region,” said Craig Erlam, market analyst at Alpari, quoted by the Washington Post.
The two coalition partners have pledged to spend billions on infrastructure, increased pensions and education.
On the other hand, other countries within Europe are showing signs of growing economic stability, and this also takes pressure off Germany as the leading nation there.
Germany: Margins and leverage
The table below shows that German earnings metrics such as ROE, net income margin%, EBITDA margin%, EBIT Margin% and FCF margin% are expected to improve between 2013 and 2015. At the same time debt/leverage levels are coming down.
From the above, it appears that Europe’s largest economy is available cheap relative to valuations for the zone as a whole and that German stocks may still have some steam left in them.
Investors looking for exposure to Germany could take the ETF route. Here is a list of the prominent German ETFs:
German stocks of note
The top ten German stocks held by iShares MSCI Germany Index Fund (ETF)(NYSEARCA:EWG) are as follows:
Bayer AG (ADR)(OTCMKTS:BAYRY) (ETR:BAYN) (FRA:BAYN): 8.83%
BASF SE (ADR)(OTCMKTS:BASFY) (ETR:BAS) (FRA:BAS): 8.56%
Siemens AG (ADR)(NYSE:SI): 8.22%
SAP AG (ADR) (NYSE:SAP): 6.81%
Allianz SE (ADR)(OTCMKTS:AZSEY) (ETR:ALV) (FRA:ALV): 6.45%
Daimler AG (OTCMKTS:DDAIF) (ETR:DAI): 5.56%
Deutsche Bank AG (NYSE:DB) (ETR:DBK): 4.54%
Linde AG (OTCMKTS:LNAGF) (ETR:LIN): 3.48%
Muenchener Rueckversicherungs-Ges.AG-ADR (OTCMKTS:MURGY) (ETR:MUV2): 3.33%
Deutsche Telekom AG (ADR) (OTCMKTS:DTEGY): 3.24%