World Clock

Friday, 28 May 2010

Trade the weaker Euro with this ETF

Companies mentioned in this report:-

Fresenius Medical Care
Merk KGaA

This is my first piece of research carried out into to stock/etf for over a year. I will separate it into two sections; firstly I will lay out a brief overview of the current economic environment in Germany and also its stock market. Secondly I will present the argument that at present Germany represents a fantastic investment opportunity at this time.

Part 1.

Germany, the economic powerhouse of Europe with a population of around 80million, which combined with its first class infrastructure, is the world’s second largest exporter. However as the Sovereign debt crisis has escalated in recent weeks culminating in $1trn finance package for the Eurozone countries [specifically, Portugal, Ireland, Spain and Greece], German equity markets have suffered in my opinion unjustifiably.

Germany economy was hit hard by the recession as a consequence of Germany’s overreliance on exports. However Germany has come out of this recession continuing to be the driving force in Europe both politically and economically. The latest export figures for March show that Germanys export led economy is stronger than ever, when exports posted their biggest monthly increase in 18 years, substantially beating analyst estimates. German exports rose 10.7% month-on-month to 79bn Euros, the largest jump since 1992 according to the Bundesbank data. It is as a result of this that Germany’s economy accounts for roughly 20% of GDP of the whole of Europe’s GDP.

Consequently the main bourse in Germany the DAX, reflects the dominance of the export led German economy. The weightings are 15% in consumer goods; 18% in basic materials & 14% in utilities. The German stock market is the 7th largest in the world with the bond market been the 5th largest. In conjunction with this other reasons for investing in Germany are that it tops innovation and research in so far as billion of Euros spent. Additionally, German companies excel in registration for patents with Germany the number one in world. Also earlier this year the German union Verdi agreed a pay raise of just 1.2% for around 2m public sector workers this year compared to the 5% previously agreed, secondly the largest union in Germany agreed to pay freezes that help protect jobs. Both of these a major examples of how in times of crisis Germany can help protect stakeholder interests as well as maintain jobs.

Part 2.

As a result of the recent sell off in Germany equities as of consequence of rising Sovereign debt concerns, German stocks on a price-to-earnings ratio represent a buying great opportunity according to analyst at UBS and Credit Suisse. On this basis Germany is the third cheapest country in Europe and as the world second largest exporter should benefit greater the depreciating value of the Euro. According Karen Olney, analyst at UBS the amount of money involved in the bailout is not enough to disrupt the growth of the German economy going forward. This fact is proven in the export figures highlighted above.

UBS on that basis recommend investors look at German stocks that derive more than 25% of their sales from outside Europe. It is this factor that will greatly benefit future earnings of major German corporations when those sales from outside Europe are then converted into Euros. Among the stocks that should benefit from the decline in Euro are Siemens, with 47% of its sales outside of Europe as well as healthcare companies such as Merck KGaA and Fresenius Medical Care of which 51% and 78% of their sales come from outside Europe respectively. As on their list are insurance giant Allianz and tech company SAP, which have 31% and 50% of their sales outside of Europe respectively. Finally they also look at E.ON as a possible buy even though it growth prospects are more questionable. Disclosure: UBS has a buy rating on Merck KGaA and Fresenius Medical Care.

Based upon the following companies that match this sales criteria the Exchange Traded Fund provided by iShares is the best way the gain exposure to this with the all the companies mentioned above making up over 32% of the total portfolio of this fund. Finally with a healthy exposure to the dominant sectors in the German economy: 15% in Industrials; 13% in Materials; 13% in Utilities; 13% in Consumer Discretionary stocks and 10% in Healthcare, all of which make this etf an great buy, especially since it 15% decline from it 52 week high.
Special Note: Siemens recent earnings report showed a surge in profits of 54% and also said to investors that it was raising its outlook for the full year. Total sector profits were 2.14bn Euros with a profit margin of 12.3% both of which beat analyst estimates of 1.98bn Euros profit and a profit margin of 11.8%. I mentioned this because as the largest holding this etf at 10.34% it has a significant on the price movement of this etf.

Disclosure: No Position

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