Germany Beats Europe Emerging Markets, Emulating '60s Earnings
By Andreas Hippin and Alexis Xydias
June 4 (Bloomberg) -- The best emerging market in Europe is Germany, and the country's publicly traded companies are getting cheaper by the day.
Not since the 1960s has industrial Germany looked so appealing to equity investors in search of earnings growth, acquisitions and rising consumer spending. Compared with Poland, where stocks are priced at 17.8 times profit, Germany is still the bargain, says Herbert Perus, who helps oversee about $58 billion as the head of equities at Raiffeisen Capital Management in Vienna.
The benchmark DAX Index has surged 21 percent in 2007, outperforming every major developed market in the world. German corporate profits are climbing faster than in the rest of the continent, led by exports of Volkswagen AG cars, MAN AG trucks and Siemens AG turbines. The boom marks a turnaround from the 1990s, when the nation struggled to integrate East Germany, and the recession of 2003.
``The sick man of Europe has become its muscle man,'' says Robert Halver, a Frankfurt-based strategist at Vontobel Investment Banking, a unit of Vontobel Holding AG. ``German companies are positioned better than ever.'' Zurich-based Vontobel oversees the equivalent of $58 billion.
The 30-stock DAX rose 3.2 percent to 7987.85 last week, leaving it less than 78 points short of a record reached on March 7, 2000. The index is beating the 13 percent rise in the Morgan Stanley Capital International Emerging Markets Index, a benchmark for 25 developing markets, this year for the first time since 2000.
`Still a Bargain'
It also returned more than 11 of the 12 countries that joined the European Union since 2004, including Poland, Hungary, Romania, Bulgaria, Slovakia, and the Czech Republic. Only Slovenia's stocks are doing better, with the Slovene Stock Exchange Index up 48 percent this year.
German shares are still cheaper relative to earnings than those in the U.S., Japan, France and Italy, with the DAX valued at 14.6 times its members' average profit. The benchmark was the cheapest this decade last month when weighed against the MSCI developing-markets gauge, which trades at 15.5 times earnings.
``Compared to emerging markets like Poland, Germany is still a bargain,'' said Raiffeisen's Perus. He expects the DAX to reach a record this year.
Labor laws that made it almost impossible to fire workers and the integration of East Germany after the fall of communism in 1989 were a drag on the world's third-largest economy at the start of the decade. The DAX slid 58 percent from 2000 through 2002 as the Internet bubble deflated, economic growth slowed and unemployment increased. The index did worse than the FTSE 100 Index in the U.K., which lost 43 percent, and France's CAC 40 Index, which plunged 49 percent.
Export Gains
German companies took advantage of the slowdown to reduce worker costs by moving jobs to other countries at the same time that global demand for exports increased.
Unit labor costs, a measure of employee compensation, dropped 0.7 percent between 2000 and 2006 as prices for goods rose, according to the Cologne-based IW research institute. Costs for Poland's non-government employers climbed 18 percent in the four years to 2004, according to the latest government data.
Sales abroad jumped 14 percent in 2006, almost double the pace of 2005, according to government figures. Revenue from exports is equivalent to 45 percent of Germany's gross domestic product, compared with 11 percent for the U.S. and 16 percent in Japan, the world's two largest economies, according to data from the EU's Eurostat agency.
`Things are Working'
Retail sales in April increased by the most since December, indicating German consumer spending is recovering from the government's value-added tax increase in January. The Organization for Economic Cooperation and Development last month raised its 2007 forecast for German economic expansion to 2.8 percent from 1.8 percent in November. That would match last year's pace, the fastest since 2000.
``Things are working in Germany now,'' said David Joy, who helps oversee $156 billion as chief market strategist in Minneapolis at RiverSource Investments LLC, a unit of Ameriprise Financial Inc. ``They're kind of a heavy equipment manufacturing base, and that's what the emerging world needs right now.''
Takeovers are also boosting German stocks. The pace of acquisitions this year involving listed German companies more than doubled to about $215 billion from the same time in 2006, according to data compiled by Bloomberg.
HeidelbergCement AG, Germany's largest cement maker, last month agreed to buy London-based Hanson Plc for 7.85 billion pounds ($15.6 billion) in the global building-materials industry's biggest-ever takeover. Shares of Heidelberg-based HeidelbergCement have gained 7.5 percent this quarter.
1960s Exports
Automobile, industrial, and chemical manufacturers are six of the 10 best performers in the DAX this year, the same type of companies that were driving the economy 40 years ago.
Exports from West Germany increased an average 11 percent annually during the 1960s and the economy grew as fast as 7.5 percent by the end of the decade, according to the Federal Statistical Office.
Siemens, Europe's biggest engineering company, Ludwigshafen-based BASF AG, the world's largest chemical maker, and steelmakers Thyssen and Krupp, which merged to form Dusseldorf-based ThyssenKrupp AG in 1999, became world leaders because of their engineering skill and exports to Western Europe and the U.S.
`Getting Skeptical'
The rally this year marks the best start since 1998, when the DAX climbed 31 percent in the first five months amid a global jump in technology and Internet shares. It may be ready to peter out, said Gerhard Grebe, head of German strategy for Zurich-based Julius Baer Holding AG, which oversees the equivalent of about $293 billion.
``I'm getting skeptical on the current level,'' Grebe said in an interview from Frankfurt. ``We've already seen the biggest gains this year.''
The DAX's 14-day relative strength index, a measure that calculates the degree by which gains outpace losses in a given time period, rose to 80.6 last week, Bloomberg data show. The RSI has been over 70 every day in the past two weeks, a level that suggests an index may be poised to fall. The 14-day RSI for the U.K.'s FTSE 100 Index ended last week at 66.3, while France's CAC 40 Index had a reading of 67.7.
Increasing earnings are making analysts even more bullish on Germany.
Analysts' average 2007 earnings growth estimates for German companies in Europe's Dow Jones Stoxx 600 Index have climbed to 9.3 percent from 5.5 percent in April, according to data compiled by FactSet Research Systems Inc. in London. The forecast for non-German companies in the European benchmark dropped to 5.9 percent from 6.3 percent.
MAN, Volkswagen
MAN, Europe's third-largest truckmaker behind Stuttgart- based DaimlerChrysler AG and Volvo AB in Gothenburg, Sweden, has surged 60 percent for the biggest advance in the DAX this year. The Munich-based company raised its 2007 sales and earnings forecasts last month after first-quarter profit beat analysts' estimates on orders for commercial vehicles in Eastern Europe.
The truckmaker is adding to production in Poland, where it estimates wages are less than a fifth of those in Germany.
Volkswagen, Europe's largest automaker, is seeking a three- way combination of MAN, Soedertaelje, Sweden-based Scania AB and its own commercial-vehicles unit. Volkswagen shares were also boosted as Stuttgart-based Porsche AG increased its stake in the company.
`Fantastic' Earnings
Wolfsburg, Germany-based Volkswagen rose 33 percent this year, the sixth-best in the DAX. The company said in April that first-quarter profit more than doubled, boosted by sales at Skoda Auto AS, the Czech unit purchased in 1990 that now accounts for 16 percent of operating profit.
Shares of Siemens added 31 percent in 2007. The Munich- based company posted a 36 percent rise in second-quarter profit, beating analysts' estimates, helped by Chief Executive Officer Klaus Kleinfeld's 7,000 job cuts and $12 billion of acquisitions since 2005.
Siemens last month named Peter Loescher, president of Whitehouse Station, New Jersey-based Merck & Co.'s global human health unit, as its CEO to succeed Kleinfeld, who resigned after less than three years because of a bribery investigation.
``The first-quarter news flow on these companies has been fantastic,'' said Michael Barakos, who helps oversee $75 billion at JPMorgan Asset Management in London. ``It's all about the rate of change we are seeing in the country.''
Brian Barish, who oversees $10 billion at Cambiar Investors LLC in Denver, is still finding German stocks attractive. His Cambiar Opportunity Fund, which has outperformed the Standard & Poor's 500 Index for eight straight years, had a 5.8 percent weighting in German stocks at the end of March.
``Germany is one gigantic restructuring story,'' said Barish, who holds shares of Munich-based Munich Re, the world's second-biggest reinsurer, and Siemens. ``We just kept finding good values there consistently.''
By Andreas Hippin and Alexis Xydias
June 4 (Bloomberg) -- The best emerging market in Europe is Germany, and the country's publicly traded companies are getting cheaper by the day.
Not since the 1960s has industrial Germany looked so appealing to equity investors in search of earnings growth, acquisitions and rising consumer spending. Compared with Poland, where stocks are priced at 17.8 times profit, Germany is still the bargain, says Herbert Perus, who helps oversee about $58 billion as the head of equities at Raiffeisen Capital Management in Vienna.
The benchmark DAX Index has surged 21 percent in 2007, outperforming every major developed market in the world. German corporate profits are climbing faster than in the rest of the continent, led by exports of Volkswagen AG cars, MAN AG trucks and Siemens AG turbines. The boom marks a turnaround from the 1990s, when the nation struggled to integrate East Germany, and the recession of 2003.
``The sick man of Europe has become its muscle man,'' says Robert Halver, a Frankfurt-based strategist at Vontobel Investment Banking, a unit of Vontobel Holding AG. ``German companies are positioned better than ever.'' Zurich-based Vontobel oversees the equivalent of $58 billion.
The 30-stock DAX rose 3.2 percent to 7987.85 last week, leaving it less than 78 points short of a record reached on March 7, 2000. The index is beating the 13 percent rise in the Morgan Stanley Capital International Emerging Markets Index, a benchmark for 25 developing markets, this year for the first time since 2000.
`Still a Bargain'
It also returned more than 11 of the 12 countries that joined the European Union since 2004, including Poland, Hungary, Romania, Bulgaria, Slovakia, and the Czech Republic. Only Slovenia's stocks are doing better, with the Slovene Stock Exchange Index up 48 percent this year.
German shares are still cheaper relative to earnings than those in the U.S., Japan, France and Italy, with the DAX valued at 14.6 times its members' average profit. The benchmark was the cheapest this decade last month when weighed against the MSCI developing-markets gauge, which trades at 15.5 times earnings.
``Compared to emerging markets like Poland, Germany is still a bargain,'' said Raiffeisen's Perus. He expects the DAX to reach a record this year.
Labor laws that made it almost impossible to fire workers and the integration of East Germany after the fall of communism in 1989 were a drag on the world's third-largest economy at the start of the decade. The DAX slid 58 percent from 2000 through 2002 as the Internet bubble deflated, economic growth slowed and unemployment increased. The index did worse than the FTSE 100 Index in the U.K., which lost 43 percent, and France's CAC 40 Index, which plunged 49 percent.
Export Gains
German companies took advantage of the slowdown to reduce worker costs by moving jobs to other countries at the same time that global demand for exports increased.
Unit labor costs, a measure of employee compensation, dropped 0.7 percent between 2000 and 2006 as prices for goods rose, according to the Cologne-based IW research institute. Costs for Poland's non-government employers climbed 18 percent in the four years to 2004, according to the latest government data.
Sales abroad jumped 14 percent in 2006, almost double the pace of 2005, according to government figures. Revenue from exports is equivalent to 45 percent of Germany's gross domestic product, compared with 11 percent for the U.S. and 16 percent in Japan, the world's two largest economies, according to data from the EU's Eurostat agency.
`Things are Working'
Retail sales in April increased by the most since December, indicating German consumer spending is recovering from the government's value-added tax increase in January. The Organization for Economic Cooperation and Development last month raised its 2007 forecast for German economic expansion to 2.8 percent from 1.8 percent in November. That would match last year's pace, the fastest since 2000.
``Things are working in Germany now,'' said David Joy, who helps oversee $156 billion as chief market strategist in Minneapolis at RiverSource Investments LLC, a unit of Ameriprise Financial Inc. ``They're kind of a heavy equipment manufacturing base, and that's what the emerging world needs right now.''
Takeovers are also boosting German stocks. The pace of acquisitions this year involving listed German companies more than doubled to about $215 billion from the same time in 2006, according to data compiled by Bloomberg.
HeidelbergCement AG, Germany's largest cement maker, last month agreed to buy London-based Hanson Plc for 7.85 billion pounds ($15.6 billion) in the global building-materials industry's biggest-ever takeover. Shares of Heidelberg-based HeidelbergCement have gained 7.5 percent this quarter.
1960s Exports
Automobile, industrial, and chemical manufacturers are six of the 10 best performers in the DAX this year, the same type of companies that were driving the economy 40 years ago.
Exports from West Germany increased an average 11 percent annually during the 1960s and the economy grew as fast as 7.5 percent by the end of the decade, according to the Federal Statistical Office.
Siemens, Europe's biggest engineering company, Ludwigshafen-based BASF AG, the world's largest chemical maker, and steelmakers Thyssen and Krupp, which merged to form Dusseldorf-based ThyssenKrupp AG in 1999, became world leaders because of their engineering skill and exports to Western Europe and the U.S.
`Getting Skeptical'
The rally this year marks the best start since 1998, when the DAX climbed 31 percent in the first five months amid a global jump in technology and Internet shares. It may be ready to peter out, said Gerhard Grebe, head of German strategy for Zurich-based Julius Baer Holding AG, which oversees the equivalent of about $293 billion.
``I'm getting skeptical on the current level,'' Grebe said in an interview from Frankfurt. ``We've already seen the biggest gains this year.''
The DAX's 14-day relative strength index, a measure that calculates the degree by which gains outpace losses in a given time period, rose to 80.6 last week, Bloomberg data show. The RSI has been over 70 every day in the past two weeks, a level that suggests an index may be poised to fall. The 14-day RSI for the U.K.'s FTSE 100 Index ended last week at 66.3, while France's CAC 40 Index had a reading of 67.7.
Increasing earnings are making analysts even more bullish on Germany.
Analysts' average 2007 earnings growth estimates for German companies in Europe's Dow Jones Stoxx 600 Index have climbed to 9.3 percent from 5.5 percent in April, according to data compiled by FactSet Research Systems Inc. in London. The forecast for non-German companies in the European benchmark dropped to 5.9 percent from 6.3 percent.
MAN, Volkswagen
MAN, Europe's third-largest truckmaker behind Stuttgart- based DaimlerChrysler AG and Volvo AB in Gothenburg, Sweden, has surged 60 percent for the biggest advance in the DAX this year. The Munich-based company raised its 2007 sales and earnings forecasts last month after first-quarter profit beat analysts' estimates on orders for commercial vehicles in Eastern Europe.
The truckmaker is adding to production in Poland, where it estimates wages are less than a fifth of those in Germany.
Volkswagen, Europe's largest automaker, is seeking a three- way combination of MAN, Soedertaelje, Sweden-based Scania AB and its own commercial-vehicles unit. Volkswagen shares were also boosted as Stuttgart-based Porsche AG increased its stake in the company.
`Fantastic' Earnings
Wolfsburg, Germany-based Volkswagen rose 33 percent this year, the sixth-best in the DAX. The company said in April that first-quarter profit more than doubled, boosted by sales at Skoda Auto AS, the Czech unit purchased in 1990 that now accounts for 16 percent of operating profit.
Shares of Siemens added 31 percent in 2007. The Munich- based company posted a 36 percent rise in second-quarter profit, beating analysts' estimates, helped by Chief Executive Officer Klaus Kleinfeld's 7,000 job cuts and $12 billion of acquisitions since 2005.
Siemens last month named Peter Loescher, president of Whitehouse Station, New Jersey-based Merck & Co.'s global human health unit, as its CEO to succeed Kleinfeld, who resigned after less than three years because of a bribery investigation.
``The first-quarter news flow on these companies has been fantastic,'' said Michael Barakos, who helps oversee $75 billion at JPMorgan Asset Management in London. ``It's all about the rate of change we are seeing in the country.''
Brian Barish, who oversees $10 billion at Cambiar Investors LLC in Denver, is still finding German stocks attractive. His Cambiar Opportunity Fund, which has outperformed the Standard & Poor's 500 Index for eight straight years, had a 5.8 percent weighting in German stocks at the end of March.
``Germany is one gigantic restructuring story,'' said Barish, who holds shares of Munich-based Munich Re, the world's second-biggest reinsurer, and Siemens. ``We just kept finding good values there consistently.''
**Orignal Source = Bloomberg.com**
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