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German ‘Economic Juggernaut’ Sends Domestic Stocks Surging Above Exporters

Posted by hkarner - 3. September 2017

Date: 02-09-2017
Source: The Wall Street Journal

While a stronger euro weighs on Germany’s export champions, companies exposed to the domestic economy are having a stellar year

The German economy is famous as an export powerhouse–but this year, in the country’s stock markets, the companies closest to home are outperforming their internationally-focused peers by a mile.

The country’s flagship equity index, the DAX, is up by just 5% for 2017 so far. Meanwhile, the FTSE Local Germany has returned 23% since the year began.

The growing strength of the euro and the still-improving picture for the German domestic economy have both helped drive a wedge between the two indexes.Only stocks which receive 70% or more of their total revenue from their home countries are included in FTSE Local series, leaving out Germany’s major export champions.

The DAX itself is dominated by countries that make most of their money abroad, with over 75% of revenues coming from outside of Germany.

The outperformance of local stocks began most clearly in May, when the trade-weighted euro–a measure of the common currency’s value against the currencies of its main trading partners–began to pick up sharply in the wake of France’s presidential election.

That makes sense, since Germany’s major exporters see drawbacks from a stronger euro. A dollar in revenue translates into fewer euros, meaning lower profits. The stronger euro also makes German products more expensive for consumers outside the eurozone, which can weigh on demand.

But the different performances of the two indexes is not just down to the euro. In 2014 and 2015, when the euro fell by more than 10% against its main trading partners’ currencies, the FTSE Local Germany’s total return was practically identical to the DAX. In essence, Germany’s strong national economy in those years helped domestic firms match the gains reaped by exporters who were enjoying the benefits of a cheap local currency.

Now that the euro has taken an upward trajectory, the buoyant local economy is amplifying the differences between inward- and outward-focused businesses.

In the last four years, the recovery in domestic demand outstripped previous recoveries beginning in 1993, 1999, 2005 and 2009, according to UBS economist Felix Huefner. The German stocks UBS analysts favor have “high exposure to the German consumer or real estate.”

Household consumption rose by 2.2% in the second quarter of 2017, compared to the same three-month period in 2016, the strongest increase in over 10 years.

HSBC economists cited the rise in consumption for raising their growth forecasts. The bank now expects a 2.2% rise in GDP from “the German economic juggernaut” this year, up from the 1.8% expected previously.

There’s no guarantee that Germany’s home-focused stocks will keep outperforming, but many analysts are projecting further support for household spending, too.

Both the center-left Social Democrats and Chancellor Angela Merkel‘s center-right Christian Democrats have promised tax cuts in their platforms. The country goes to the polls in three weeks.


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