Jens Spudy, Chairman of Spudy & Co. Family Office wealth management
The differences within Euroland could not be greater. Unemployment in the troubled south has now risen above levels which prevailed during the economic nightmare of the 1930s. In stark contrast, some German regions are a veritable paradise, boasting almost full employment. German corporations have easy access to credit, while elsewhere companies are being hit hard by the credit crunch.
What’s more, German blue-chips are strongly positioned in emerging markets. Just take a look at the successes of the German auto industry while their French and Italian rivals remain stalled with domestic problems.
Needless to say this is not going unnoticed at capital markets. German stocks have been outperforming their European peers during the crisis by a solid margin. And this margin will not be waning any time soon. The unsolved Euro crisis has had at least two positive side-effects for Germany: it keeps both the ECB´s interest rate and the Euro much lower than the situation in Germany would actually warrant. Therefor negative real interest rates continue to fuel the German economy. This is in contrast to the sustained high real rates, for example in Italy and Spain, which guarantee that their journeys out of recession will be slow and arduous.
This outlook still leaves some upside for German stocks. Even though German stocks are slightly more expensive than Southern European equities and thus appear less attractive at first, this valuation premium could easily increase further if there is no rebound of earnings in the weaker European countries. Given this particular scenario, which appears increasingly likely, German companies still provide better place for investment.
But the relative strength of German stocks may not last forever. Watch out for fiscal integration in Euroland. Up until now, it was the ECB which predominantly fought to hold the currency together. If politicians press ahead with the introduction of Eurobonds, thereby putting the future existence of the Euro beyond doubt, the resulting rise in German interest rates could burden German stocks within a European equity portfolio. But this eventuality still seems some way off and until leaders agree to Eurobonds, German quality stocks will remain an indispensable part of any smart portfolio.
Jens Spudy is Chairman of Spudy & Co. Family Office wealth management; Dr. Ralf Zimmermann is Chief Investment Officer at asset manager Döttinger/Straubinger, Spudy’s Investment Office