While the United States, China and Japan duke it out for the top three economic slots in the global economy , Germany has settled in as number four. And from where investment pros sit in Bonn, that's a pretty nice place to be. While China wrestles with possible bubbles, Japan tackles deflation and the United States frets about its government spending, Germany has spent much of the last few years away from the headlines. But behind the scenes, the country is undergoing a powerful export-led transformation that should catch the attention of investors here in the United States as well.
According to just-released data from Germany's Federal Statistics Bureau, German exports are currently rising at a +25% to +30% clip compared to a year ago. That's a remarkable feat when considering that most of its major trading partners appear too sickly to absorb all that trade. The export surge is due to a bit of methodical planning and a bit of serendipity. To be sure, German policy planners have always made sure that business conditions remain favorable by providing a very strong economic and trade infrastructure.
And labor, which is well-compensated, shows a great deal of flexibility. That's why Germany's the world's second-largest exporting nation behind China, even though it lags the U.S. and Japan in terms of total GDP . All told, Germany exported 86.5 billion euros ($113 billion) worth of goods and services while importing 72.5 billion euros ($95 billion).
Normally, trade surpluses should force a currency to strengthen (except in China, which buys back massive amounts of foreign currencies and bonds to offset that impact), but Germany has the good fortune of sharing a common currency with its distressed neighbors to the south. As the euro has weakened, the country has benefited from improved pricing power and an expansion in profit margins. Of equal importance, the good times should last for a while as European countries vow to stand by the euro. Since the lagging states are unlikely to see a rapid change in fortunes, the euro should stay weak for a while to come.
As an added benefit, Germany appears to be making major headway in reining in its budget deficit . In early July, the government in Berlin announced that the deficit will be around 65 billion euros ($81 billion), which is roughly -20% less than previously thought. Government economists expected the deficit to shrink another -10% to -15% next year as well. As a percentage of GDP, that deficit is far smaller than countries like the United States, the United Kingdom and Japan.
A healthy economy gets attention
Investors are starting to put Germany on their radar. The country's DAX Index has risen nearly +15% in the past six months, compared to a +6% gain for the S&P 500, yet shares remain below levels seen in the summer of 2008 when global markets started to swoon. Many key German stocks are bargain-priced.
Ways to Play
Germany's SAP ( SAP ) is the equivalent of Oracle (Nasdaq: ORCL) here in the U.S. The company makes a wide range of software productivity programs that can be deployed throughout a large enterprise. A recent acquisition of U.S. software firm Sybase is expected to help SAP make further inroads in the U.S. while expanding its suite of software services in various European markets. The deal, which just closed, should have only a modest impact on this year's results but should help fuel double-digit sales growth in 2011 with profit growth in the +15% to +20% range. To the extent that U.S. tech spending finally gets going in 2011, then those growth forecasts could be nudged up a bit. Shares trade for a reasonable 14 times projected 2011 profits.
Action to Take --> From this distance, it's hard to pick Germany's winners and losers. Why not buy the whole stock market? The iShares MSCI Germany ( EWG ) exchange-traded fund gives nice broad-based exposure with minimal fees. Deutsche Bank also sponsors the New Germany Fund ( GF ) , a closed-end fund that focuses on small and mid-cap companies in a range of industries.
Even as you focus your investments here in the U.S., or in high-growth markets in Asia and Latin America, don't forget about Germany. The country's steady and stable economy has never before been able to benefit from such a weak currency. If current trends are any indication, export-fueled growth should be the investment theme for a while to come. Whether it's a blue-chip or a closed-end fund, make sure your portfolio has some exposure to this dynamic market.
-- David Sterman
David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
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