Posted on 03/22/2015 10:40:42 AM PDT by Kaslin
It was just over a month ago that I appeared on the Fox Business Network and recommended that U.S. investors put their money to work in Europe.
To say that my recommendation was greeted with skepticism would be an understatement.
After all, as the host pointed out, Europe was on the verge of bailing out a Marxist government in the form of Greece.
And my closing recommendation to invest in Germany was greeted with a roll of the eyes and a barely stifled yawn.
Fast forward one month, and Germany is the hottest market on the planet. The German DAX closed above 12,000 for the first time and is up a whopping 24.1% in 2015.
That compares with a U.S. S&P 500 Index that is up a mere 1.48%.
Once you hedge out the currency risk, Germany is the single-best-performing stock market this year among the 46 I track on a daily basis at my firm Global Guru Capital, a Securities and Exchange Commission-registered investment adviser that is not affiliated with Eagle Financial Publications.
No wonder U.S. investors are descending upon the city of London trawling for European money managers as they shift assets out of the U.S. markets.
And they are moving money in a big way.
Some $35.6 billion has flowed into European equity funds so far in 2015, even as $33.6 billion has flowed out of U.S. equity funds over the same period, according to data provider EPFR.
Europe’s QE: The ‘Draghi Effect’
So why are German and European shares so hot?
Most notably, there’s the launch of the European Central Bank’s (ECB) program of quantitative easing (QE) by its President Mario Draghi.
Draghi has committed to buying €60 billion per month of various forms of debt, thereby expanding the bank’s balance sheet by €1.1 trillion between now and September 2016.
Knowing what happened with QE in the United States and Japan over the past few years, investors know which direction shares tend to go.
And flooding European financial markets with liquidity stands in sharp contrast to the Fed, which is expected to raise interest rates this year.
No wonder the German DAX made a monster breakout on Jan. 22 from its one-year trading range, the day after the ECB announced its version of QE.
Germany: The King of the Euro Zone
Considering it boasts the largest economy of Europe and the fourth-largest economy in the world, Germany has a remarkably low profile among U.S. investors.
Given its size and efficiency, Germany has been long considered the European Union’s growth engine. This wasn’t always so. The collapse of East Germany in 1990 and German reunification led to more than a decade of chronically high unemployment rates as more than 3 million former East Germans entered the labor force.
By 2005, German unemployment hit a peak of 11.208%. (Note that economic statistics in Germany are calculated to three decimal points!)
Market-oriented economic reforms introduced by then-Chancellor Gerhard Schroeder helped the German economy find its feet.
Following a rapid recovery from the 2008-09 recession, with gross domestic product (GDP) growth rates of 4.02% and 3.01% in 2010 and 2011, respectively, German economic growth slowed significantly in 2012.
Today, boosted by both the slide in oil prices and the tumbling euro, the German economy once again has a spring in its step.
German officials have suggested that they may raise their current forecasts for 1.5% GDP growth. Employment stands at record highs and real wages and consumption are growing at a healthy clip. The unemployment rate is expected to drop further, to 6.6%, in 2015, down from 6.7% last year. German consumer confidence just hit a 13-year high. Finally, higher-than-expected tax revenues helped the government to balance its federal budget last year, one year earlier than planned.
And lest we forget, Germany is also the global export champion. Eighty million Germans generate about as much value in exports as 1.36 billion Chinese.
Even before the collapse of the euro, Germany’s current account surplus hit €215.3 billion ($244 billion) last year from €189.2 billion in 2013.
That’s the largest current account surplus by any economy in history!
Hedging Your Currency Risk
The combination of quantitative easing and Germany’s export orientation make Germany one of my top recommendations for 2015.
But as a U.S.-based investor in Europe, you have an additional worry.
While the year-to-date performance data for the German DAX index is close to 25%, those returns are less than half that in U.S. dollar terms due to the tumbling euro.
Fortunately, iShares Currency Hedged MSCI Germany ETF (HEWG) offers a solution to this dilemma.
This exchange-traded fund (ETF) tracks the same MSCI Germany Index tracked by the mainstream iShares MSCI Germany ETF (EWG), providing exposure to German stocks while hedging out the euro’s decline.
The comparison of the performance of the hedged versus unhedged bets on Germany year to date is revealing.
Since both ETFs track the same underlying index, the difference in performance is due solely to the decline of the euro against the U.S. dollar.
Too early. Let the Euro sink until it is between 80-90 cents on the dollar. Yes the DAX is going up, but only because the currency is going down and Europeans want assets for their Euros, not that the European economy is doing great.
Germany’s DAX benefitted greatly from the strong dollar. Its U.S. competitors saw the cost of their goods soar. That makes DAX stocks attractive. I wouldn’t ascribe the author’s stock picking success to finding the right company, but to the dollar’s marked rise and oil’s tumble.
Has anyone seen the youth unemployment in EU economies? These are the future consumers and workers.
So they’re printing a shed-load of money, time to invest... No thanx
“...And lest we forget, Germany is also the global export champion. Eighty million Germans generate about as much value in exports as 1.36 billion Chinese....”
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In my experience, the Germans export things that are built to last whereas quite a bit (most, but not all) of the Chinese exports are tricky-tacky. For example, the “Made in China” microwave safe bowls we bought that cracked after about the 3rd trip into a microwave oven-—versus our German made Bosch dishwasher which is quite as a mouse, does the job perfectly and keeps going and going.
Better to invest in wheelbarrows - the better to carry your money to the (empty) bakery with...
Regards,
Germany is NOT the same as Europe in general
I’ve given up trying to understand the market. I did very good in the 80s and 90s, where I cashed out just before the dot com crash and made a bundle, but I don’t understand the market post 9/11. How can the govt continue to churn out buckets of fake money (’quantitative easing’) for years and years and not suffer 1970s-style inflation or worse?
Maybe I’m just old fashioned, but it just doesn’t make any sense to me.
I share your view. It’s a mystery to me also.
Within the past few days, the HSCB implied that the USD should fall and reiterated that after the rate is increased here, it will fall more.
The banking regs are such that the QE money can't be lent out. Banks everywhere are sitting on piles of cash that they can't move.
If the democrats don't win in November '16, watch for the regs to be revised and that money to be let loose in Q1 '17.
Then you'll have your inflation.
“but I don’t understand the market post 9/11. How can the govt continue to churn out buckets of fake money (’quantitative easing’) for years and years and not suffer 1970s-style inflation or worse?”
Because the pressure isn’t inflationary, it is Deflationary. Increases in productivity, tied with an aging Western population, are leading to declines in consumption, as well.
At least in US Markets, and now in Euro markets, there is no longer this vital economic tool called “Price Discovery”, where value is set by the markets. Pricing is now COMPLETELY dependent on either government intervention, government assurances, or cheap government cash.
Should the flow of cheap money and direct government purchases of private securities ever stop, pricing will return to “Real value”, most likely in the form of a MASSIVE crash.
I’m far from knowing anything about economics , but it appears to me that a big factor in QE without massive inflation (so far) is that the MEDIA keeps lying to us about the state of the economy, assuring the low-info morons that Hussein has wrought an economic miracle.
Now, if a Republican is elected in 2016 the media will then start to tell the truth so as to blame them for the inevitable crash which is to come.
Who wouldn't expect the price of stocks to increase when the currency is being depreciated?
My expectation is that the ultimate loser in all this will be the continent of Africa. I believe large holders of US (and EU) currency will, faced with devaluation, purchase natural resource holdings in undeveloped countries (such as those in Africa). Hence, China will own a big part of the world and a bunch of dumb warlords in Africa will be sitting on mountains of increasingly-worthless US dollars.
Of course anyone who will be dependent on a fixed income in the US will be in a world of hurt as well.
I hear Tulips are doing well under Mr. Draghi’s actions.
Buy soon, buy high.
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