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Wednesday, July 17, 2013

German Stocks…Time to catch up….Again?

The WSJ writes here 

of the prospects for German corporations to replace the decline in exports to China with sales into the US market.
 Last year German stocks as measured by EWG outperformed the US market. A strong rally in the second half of 2012 spurred the outperformance (Germany in blue) By the end of the year EWG outperformed VTI by 32.5 vs. 16%.

Here is a one year chart note the US outperformance during the worst (so far) of the European crisis last year and then the German outperformance as concerns were lowered. There hasn't been a big change in the European situation since then so perhaps the Chinese slowdown is the explanation for the recent performance. Given the latest trend in German exports(see below) one may ask if it is justified.

And here is a 10 year chart note the German outperformance during the US financial crisis and the US outperformance during the peak of the european crisis.

Prospects for Improved Exports

As noted in the WSJ article prospects for German exports out of Germany seem up beat as seen in this table

The weaker Euro is likely to continue as the European Central Bank has indicated a continued policy of low interest rates, while the US interest rates trend higher. This makes German exports more competitive. With the stock market higher, housing on a comeback particularly in higher end markets and a weaker dollar it isn’t surprising for this outlook from Daimler Benz:,
U.S. sales ofDaimler AG's DAI.XE -1.19% Mercedes-Benz luxury automobiles rose sharply in the first half of 2013 from the previous year, putting them on track to exceed 300,000 cars this year.
U.S. demand has been "great," Daimler Chief Executive Dieter Zetsche told reporters last week in Canada, "and it seems the momentum will sustain." In contrast, Mercedes' China sales were flat, though they improved in the second quarter after a soft start to the year.
In the past year both Germany and the US have had p/e expansion . However thelarge P/E expansion for the US has been far grearer(rather than growth in earnings) and has been behind the US market rally... The S+P 500 P/E has increased 25% over the last 12 months while the total return is a bit over other words virtually all the increase in the S+P 500 over the last 12 months comes from P/E expansion and is over 25% over its long term average.

 The DAX (German) P/E has expanded quite a bit recently but is still well below its long term average .Germany trades at a P/E discount of over 35% vs. the US

The price/book for the DAX top ten holdings is 1.45 vs. 2.1 for the sp 500 and price to cash flow ratios are...67 and 1.39 respectively.

Looking at all of this it seems a strong case can be made for at least a partial repeat of last year’s pattern of a strong performance for German stocks in the second half of the year, particularly if the export numbers give a rationale for rethinking the impact  of the Chinese slowdown on German companies. And it doesn’t require German stock returns even equal to those of the US for the year to mean significant gains for ETFEWG for the rest of the year.

If price eventually reverts to value or close to it we may see a repeat of last year’s strong performance by German stocks in the second half of his year.

Here are some more interesting charts

S+P 500 P/E

DAX P/E And Dow P/E

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