I wrote recently about Germany’s super GDP growth. Germany’s exporters are making hay this summer, which may mean it’s a good time to invest in German companies.
By rights, this shouldn’t be happening.
If the Euro didn’t exist and German companies were trading under the Deutschmark, that German currency would be most beautiful in the Western world and rated sky high against the basket cases elsewhere. German companies would be laying of workers to try to retain their competitiveness – like US ones did – or simply losing sales like the Japanese.
So three hearty Germanic cheers for Greek fecklessness, Irish over-optimism, and the Spanish property implosion!
The sovereign debt crisis that caused currency traders to dump the Euro has helped the Germans, whose exporters now enjoy a very useful currency advantage. Weakness in the south of Europe means the ECB’s single interest rate is lower for the north than it should be, too.
No wonder unemployment is already falling in Germany and GDP growth came in at 2.2% in the second quarter.
How to invest in German companies
If you think this splendid combination of a weak currency, low interest rates, and a strongly recovering domestic economy will continue for Germany, then you may want to invest in German companies.
There are a few ways that UK investors can do this:
German index tracking ETFs
With their low costs, ease-of-trading, and diversified holdings, index tracking funds should be the first thing to consider. Sadly though, I’m not aware of any London-listed ETFs that track the DAX, the main index of Germany’s biggest 30 companies.
That said, your stockbroker should let you buy and hold Deutsche Bank’s German-listed DAX ETF (dig past the T&Cs on the DB site for details), which costs just 0.15% a year to run, can be held in an ISA, and has UK distributor status for tax purposes. Alternatively, if you like buying US shares look for the US-listed iShares MSCI Germany Index Fund. The annual cost is a steeper 0.55%.
Buy an iShares ETF with exposure to Germany
If you want a UK-listed ETF, iShares does offer some tangential options. I’d consider the iShares Euro Stoxx Total Market Growth Large ETF (Ticker: IDJG). It’s a mouthful, but it’s a mouthful with decent exposure to big German exporters like Siemens, Daimler and Bayer, as well as similar companies from France, Italy and elsewhere that should also benefit from Euro weakness.
Have a hunt around the iShares site for other European options, with a value or smallcap tilt.
Buy an investment trust
Again, I’m not aware of a German-only investment trust (ambivalent about the Germans? Us?) so you’d have to consider your general European investment trust options via Trustnet or similar.
Alas, the investment trusts I looked at only have 10-20% of their chips on the German table. Also beware of very German sounding investment trusts – they are virtually all property companies, which is a different proposition to investing in German exporters.
(Note: there may be German unit trusts available, but I almost never invest via those and don’t know of any off-hand. Tell us below if you do!)
Buy shares in German companies
If you’re a stock picker, then you could invest in German companies directly. By buying shares in Siemens, BMW, and so on, you’d get a fair proxy for the German export sector. I’d be very unlikely to buy German stocks, though, since as well as all the other hurdles of stock-picking I can’t read the language!
Don’t forget currency risk
Exchange rate fluctuations between the pound and the Euro will partly determine your returns if you decide to invest in Germany.
Remember though that currency risk also acts to diversify your portfolio, so it’s swings and roundabouts.
As you’d expect from the most liquid asset, currency moves are inherently unpredictable. Yet it’s hard not to look at the following graph and see a pound that’s likely to get stronger in time:
Click to enlarge
A stronger pound versus the Euro would reduce your returns if you invest now in German companies, since your Euro-denominated investment would be worth fewer pounds when you bring your money home in the future.
But as I say, nobody knows for sure when or if that could happen.
What about valuation? Going on the latest data from the FT, the German market doesn’t seem particularly expensive from a P/E perspective:
- Germany P/E 14.5
- UK P/E 13.9
- US P/E 15.6
- France P/E 14.7
Remember that each of those indexes boasts very different kinds of constituents – and the P/E takes no account of domestic tendencies towards debt or cash, say, which limits the usefulness of a comparison.
For my part, I’ve decided not to invest in Germany specifically for now (I permanently hold a range of overseas trackers, including a European one). I think the UK market looks just as affordable and geared to global growth, and I fear a £/€ currency shift would be more likely to hurt my returns if I invested in Germany now, rather than ‘surprise to the upside’, as the Cityboys say.
On the other hand, if the Euro weakened against other currencies as well as the pound, that would help German companies to compete even harder. So there’s a bit of an in-built hedge at play.
As ever, a long-term portfolio-based approach is best for most people, as opposed to speculating on the economic roundabouts of international trade.
But if you want to invest in German companies for the long-term, then the weaker Euro certainly provides a good justification to take the plunge.
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That currency risk as a result of the weak £ is nasty and limits the options for a UK investor. For my shares ISA I’d like to get some more international exposure from a diversity POV but the weak £ is causing me to favour the UK at the moment 🙁
.-= ermine on: The Pinch – David Willetts says it’s the Baby Boomers Who are Wrecking the Economy =-.
Hi TI
Interesting that you also think the pound is undervalued against the EUR. I also recently (http://retirementinvestingtoday.blogspot.com/2010/08/british-pound-is-undervalued.html) had a look at pound values using historic exchange rates as well as the Big Mac Index.
Against the EUR I saw an undervaluation of 24%, against the USD an undervaluation of 7 to 12% and against the AUD an under valuation of 10 to 18%.
.-= RetirementInvestingToday on: Readers Portfolios – Global Capitalists 1st Post =-.
ETF Securities have LSE-listed 2x long and 2x short DAX trackers, and I’d avoid them both like the plague 😉
I’ve considered spread betting to hedge currency exposure before – it’s probably the cheapest way to do it and so long as you get the maths right and don’t end up net short the currency, it shouldn’t be too risky. But I find spread betting so abhorrent I’ve never actually done it.
@Lemondy – Yes, I have to get on with a post on why leveraged ETFs are a bad news for almost everyone except day traders who want to get back to the day job even quicker!
@ermine – Well, for the past 18 months it’s been handy in that it’s made UK companies very competitive. About six months ago I did start dialing back a tad on the really $ exposed (e.g. Pearson) but on the whole as a UK investor without a desire to currently buy a second home in France it’s a ‘problem’ I don’t mind having. 😉
Agree it means you might like to be more patient than otherwise in adding international diversification, although who’s to say the pound won’t reverse if the austerity measures backfire or similar? Easy to write clever sounding articles about currencies. Much harder to consistently profit!
@RIT – Thanks, interesting figures. I’m basing it on a reasonably long memory and gut feel, plus trying to get a flavor of the political shifts.
It’s very tricky. With the £/$/Euro all looking a bit sickly, you have to wonder where the money is going… only so many Yen and Swiss francs out there. Some smart City folk of my acquaintance suspect it’s going to end up boosting the currencies of emerging markets, at least for a while, which could make that trend even more volatile in the medium term…
Don’t forget, if you opt for a direct holding in a Geman company, any dividend you receive is subject to German withholding tax (Abgeltungssteuer). This is normally 26.4% of the gross dividend for an international shareholder. There are ways to reclaim, but there seems very little information on the process!
Hedging the currency risks isn’t too much of a problem these days with interest rates in most of the developed world pretty equal; so costs of forwards are not that high.
Not hedging your currency risks changes the game completely: you’re not investing into the stock market, but mainly in the currency market… my personal opinion.
How about Baring German Growth Unit Trust – TER of 1.57% (get a 0.75% annual rebate and 0% initial fee if bought via Alliance Trust).
@JB – Thanks for sharing the info, that sounds a reasonable bet for Unit Trust fans.
Is your TER after the rebate or before?
@TheInvestor – TER is before the rebate. However, as discussed in The Telegraph recently who knows what the real TER will be after trading costs etc. Still, 1.57% – 0.75% = 0.82% which is reasonably competitive compared to an index tracker. Charting it against IDJG suggests it would have returned an extra 20%+ over 3 years.
@JB – Thanks, another interesting option for the Monevator board to consider. 😉
Does Britain not have depository receipts the way that US markets do for major foriegn stocks (ADR = American Deposit Receipt)? These simplify the foreign tax issues because they’re taken care of.