It was one of the hottest stock markets in 2015. In fact, this market gained more than 25% in the first four months alone, compared to the paltry 2.1% the S&P 500 returned over the same time frame.
But, in the last two months, it has done the opposite.
Instead of being a top-performing index, it is now one of the world’s worst-performing stock indexes, falling 11%.
The panic is not grounded, however, and this sudden correction is an instant buying opportunity that you need to be ready to jump on.
I’m referring to the German stock market. It was the place to put your money at the start of this year.
Earlier this year, the European Central Bank (ECB) embarked on its own version of quantitative easing, helping to send European economies into recovery mode — one that topped analyst expectations left and right. But worries over the financial stability of a tiny European nation have sparked a sell-off in the euro zone, causing the German stock market to suffer a correction.
Now is not the time to sell. It is an excellent opportunity to buy on the dip.
Even though I believe the German stock market rebound will be one that benefits all of its stocks, it’s prudent to target a few that will likely outperform the broader index.
To do that, I am looking at Munich Re (DB: MUV2) — the world’s biggest reinsurer.
Before I get into more about Munich Re, let me first explain why the German stock market is set for a bounce back in the coming weeks.
Future of the Euro Zone
The increasing risk of default in Greece is adding to Germany’s sell-off. But, as our Investment Director Jeff Opdyke has explained before, Greece and the rest of the euro zone will reach a compromise rather than allowing Greece to leave:
The Greeks cannot abandon the euro, and Greek polls show that Greeks in large — large — numbers know this. Doing so would be disastrous. The new Greek currency would plunge relative to Europe, China and the U.S. Payments on Greek debt would spiral beyond the government’s ability to pay, so Greece would collapse into default, crushing Greek citizens who would be unable to retrieve money from a banking system in chaos … and with the money they do have would be incapable of affording goods that are suddenly expensive beyond measure…
[The Germans] cannot afford for Greece to leave the euro zone. A Grexit — as a Greek exit is called — would raise questions about the legitimacy of the euro zone and the currency. And Germany must have the euro zone in place to maintain the fuel that drives the German economic miracle. Without the euro, countries all across Europe would not be able to afford German products because the currency disparities would make German goods too pricey in local dinero.
The reality is that each of these countries desperately needs to remain in the union, if only for economic reasons. The European Union allows for the free flow of goods between its members, as well as common currency — this makes a tiny nation such as Greece suddenly relevant on a global economic scale, allowing it to easily be a trade partner and send its goods all over the world.
Without the EU, Greece or any other nation must handle its own trade deal, currency swaps and other nagging paperwork that goes into international trade. In short, Greece likely won’t end up leaving the EU.
That’s why today is the ideal time to use the temporary correction in the German stock market, to add exposure and reap big gains in the second half of the year.
German stocks – Improving Yield
I, being an income-minded guy, always look to lock in higher yields in periods of temporary market corrections, especially when the correction is unfounded, and Munich Re offers just that.
The stock trades in the single digits at just nine times earnings and dishes out a 4.7% dividend yield. It’s the world’s largest listed reinsurance company. Munich Re’s revenue is tied closely to interest rates, which were nearing negative in Germany at the start of the year.
Those rates have since turned around, rising now 0.85% for the 10-year bund.
That means large insurance companies will be able to generate better returns for the cash they have to park in government debt. Nearly 90% of Munich Re’s investments are in bonds, loans or short-term fixed income. So the recent rise in bund yields is a positive for the company, even though this is over the same period of the broader stock-market correction going on in Germany.
At this point, the correction is overdone. Investors will soon turn the corner on Germany, realizing that not only is the country’s economy sound but that the euro zone will also remain intact. Munich Re is set to return more than 30% in the coming 12 months as it heads back north of highs set just two months ago.
Regards,
Chad Shoop
Editor, Pure Income
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