By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
November 2019 is the thirtieth anniversary of the fall of the Berlin Wall that led to the collapse of the Soviet occupied, neo-Stalinist DDR and the eventual reunification of Germany forty-five years after the nightmarish end of the Third Reich. So it thrills me to report that the German stock market index (DAX) is near an all-time high or up almost 26% in Euros. My favourite German megacap share is, of course, software colossus SAP, up 15% since I last recommended it in August in the Gulf financial press.
It is ironic that the animal spirits have run amok on the Frankfurt bourse (Achtung baby!). But “Deutschland, Deutschland über alles” in Europe was inevitable once Trump flagged a phase one trade deal with China and the no deal Brexit scenario on October 31 was priced out of world financial markets. After three successive FOMC rate cut, the selection of Christine Lagard as Draghi’s successor at the ECB, the Peoples Bank of China’s $100 billion RRR cut, it was obvious that monetary and fiscal reflation would dominate the investment zeitgeist de jour – and there is no more better reflation proxy in Europe than the German stock market index DAX, the umbilical cord of an economic superpower that is one third of the eurozone economy and the world’s second largest exporter behind the Middle Kingdom/Dragon Empire.
Financial markets discount the future, not extrapolate the recent past like the human brain. So it is entirely logical that the DAX went ballistic in a parabolic melt up this autumn and outperformed more defensive European markets as the smart money positioned for a pro-cyclical trade. Not that I expect the German economy to remotely deliver the go-go GDP growth rates of the Wirtschaftswunder decades. The consensus is for 1% GDP growth in 2020. However, global investors should never forget George Soros’s advice – “the big money is made when things go from Godawful to just plain awful”, exactly what happened with the DAX since late summer 2019.
Chancellor Angela Merkel is in the twilight of her epic political career but the CDU led coalition in Berlin reached an agreement on pension, a cut in the payroll tax and a €10 billion investment fund to revive consumer spending. There is no doubt in my mind that Berlin has abandoned its reluctance to engage in a fiscal stimulus – a bullish omen for consumer spending, economic growth, corporate earnings and thus the DAX index. This is the time to buy German exporters and German domestic shares but not the zombie Deutsche Bank. Technical price action suggest the German stock market’s bull run will continue even as the ZEW survey indicates that investor sentiment has soared from a 2011 low, when the Old World grappled with the Greek/Cypriot banking crisis amid existential fears for the Euro, the linchpin of German financial geopolitics since the Maastricht Treaty of 1992.
Of course, the proof of the pudding (bull market?) will lie in German corporate earnings in 4Q 2019 and 2020. If EPS growth rises to 10% in 2020, amid extensive restructuring, I can easily envisage a 16,000 index on the DAX. However, if Trump’s China trade deal collapses, the UK general election leads to a hung parliament in Westminster and Brexit limbo, (strange how Nigel Farage and the Brexiteer Tories have inflicted more damage to the British economy than Reich Marshal Göring’s Luftwaffe during the Blitz), if the Hong Kong protests force Chinese Politburo into another Tiananmen scale massacre, if the global economy slips into recession, all bets are off for the DAX and Deutschland AG.
It is not too late to invest in Germany as long as the Queen is at Ascot, the Tories are in power and all’s well with the world. Exchange traded funds show dismal performance, with 4.1 billion Euros in outflows, the worst in the EU. No less than 700 million Euros exited Germany in October even as the DAX made new highs. I can understand the retail investor’s preference for the US, since its indices have made a mockery out of Europe, Japan and the emerging markets with 26% out-performance since the start of 2019 alone. I have been a consistent cheerleader for the Obama/Trump bull market that began in March 2009 in the Gulf financial press since 2012. In a world where Microsoft and Apple exist, why would any rational investor even risk money in zombie, high risk, rigged emerging markets – but masochism is a deep psychological need for investors who follow the hoof-beats of the herd.
The S&P 500 now trades at 19 times operating earnings, significant premium to the DAX’s 13.8 times valuation metrics. Despite its spectacular performance in 2019, the German stock market is cheap and unloved – wunderbar, danke!
Allianz, one of world’s best managed insurance and asset management firms (owns Pimco of Newport Beach) is a beauty below 180 Euros. I have no secret of my admiration for SAP, given its stellar serial acquisition based cloud positioning and valuation discount to its Silicon Valley software peers. If SAP falls to 112 Euros in Frankfurt, I would turn cartwheels to commit new money.
Siemens AG is the embodiment of German engineering excellence and a proxy for the rise in global capital goods orders in 2020. Siemens is not cheap at 15 times earnings, a premium to ABB and Schneider. My buy/sell price for Siemens is 105 – 130 Euros.