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Before beginning any relationship, be it romantic or financial, everyone knows you should consider the pros and cons. Even though German exports reached $141.4 billion in March, the highest monthly value ever recorded, I recommend looking beyond the country’s luxury cars and track jackets before investing your hard-earned geld. Let’s see how Europe’s largest economy measures up.
Pro – Sovereign debt rating
Germany’s sovereign debt is rated AAA during a time when even the U.S. is facing a downgrade. According to a recent Deutsche Welle article, investments could flood into the country if the U.S. loses its own AAA rating, lowering interest rates on German bonds and reducing debt obligations. Who can say no to a short-term cash infusion?
Pro – Stock market
The DAX, Germany’s benchmark stock index, is up 24.65 percent over the past year compared with 18.31 percent for the Dow Jones Industrial Average. The export-dependent market rose recently on the Fed’s announcement that it will continue with its federal funds target rate of 0-.25 percent and complete its $600 billion Treasury-buying program by June. The DAX climbed 6.7 percent, its biggest monthly increase in over a year, in April, on strong corporate earnings and increased investor confidence in economic recovery.
Pro – Manufacturing industry
Companies like Siemens, with a focus on manufacturing, have kept Germany afloat and thriving. As Chancellor Merkel told Tony Blair when asked about the country’s success, “Mr. Blair, we still make things.”
Germany is the leading exporter of cars, machinery, chemicals and household equipment. What does the U.S. have to offer besides American Apparel and the Big Mac?
Con – Currency
A weak euro has been a welcome shot in the arm for Germany’s exports, but it doesn’t bode well for other areas of its economy. With inflation at 2.6 percent, the highest in more than two years, and commodity prices on a perpetual upswing, national and corporate debt could also rise. To make matters worse, the euro has been strengthening against the dollar, a potential threat to German exports.
Con – GDP
Last year and in future projections, Germany’s GDP proves to be more volatile than the U.S. and is expected to contract. This unenthusiastic outlook is a result of the country’s inextricable ties to debt crises across the flailing Eurozone. Even with the $157 billion bailout of Greece in May of last year and the $90 billion bailout of Ireland in November, many believe Europe’s sovereign debt crisis is far from over.
The verdict
Germany may have some black marks on its resume, but the pros win, making this relationship prospect eligible to meet the parents and perhaps gain access to your pocketbook.
If you are looking to invest, iShares MSCI Germany Index Fund (EWG) is one of the only ETFs with a wide array of holdings in Germany. With primary holdings including Siemens, Bayer, BASF and E.On, the fund last traded at $27.89 with a 52-week high of $29.05 and a low of $17.97.
Investment in this fund also capitalizes on growth in emerging markets, as many of its holdings are heavy exporters of machinery and technology related to infrastructure development. This national reliance on exports has led to consistent employment levels throughout Germany and healthy earnings growth for its corporations.
My advice
Don’t spend too much on the first investment, make sure you are seeing returns and don’t forget to protect your position!