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:

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.

My weekly musing, followed by an extra long list of links (blame alcohol induced insomnia!)

A cute post on The Motley Fool this week frames rip-roaring German second quarter GDP growth in the context of The Matrix:

The two sequels to The Matrix were disappointing; the directors couldn’t pull the wool from our eyes twice. But if the Wachowski brothers fancy returning to the theme of parallel realities, they could do worse then cover investing in Europe in 2010.

It seems investors have been living two lives. In one life, they panic about a double dip recession. They worry about European sovereign debt and austerity measures choking off growth, and they park their money in low-yielding government bonds.

The other life is the real world, where the major economies have returned to growth and companies are reporting booming profits.

It’s true that Germany posting GDP of 2.2% has surprised almost everyone, including all 34 economists that Reuters polled ahead of the news.

It didn’t particularly surprise me to see solid growth, though I was taken aback by the extent to which Germany shrugged off the bad news agenda on Europe. I’ve noted before on Stock Tickle that the so-called sovereign debt crisis bothers pundits much more than the markets. I even looked into buying German manufacturers a couple of months ago, but was scared off by the £/ € exchange rate.

So far, so normal – as usual I’m out of kilter with the punditerati. While I’ve been trying to shuffle a bit of money into safer (yet still equity-like) securities such as preference shares, I’m still overwhelmingly positioned for growth and inflation.

From a long-term perspective, I am very comfortable with this; shares have underperformed for decades, and are due a bounce back against government bonds.

I also see little mileage in all the long complicated stories about the end of the Western World that have been gripping investors for years now.

Firstly, I don’t believe they’re accurate predictions. Secondly, if I did it’s not obvious how to prepare for it.

Even my brother was in touch this week, forwarding some rant he’d copy-and-pasted about the US being about to go bust and asking whether he should put his money into a silver ETF.

My brother! He has a lot of fine qualities, but the closest he’s ever come to a contrarian view on investing is overturning the board in a game of Monopoly. I can’t help thinking an email from him is the bearish equivalent of Joseph P. Kennedy’s stock tipping shoeshine boy in the roaring ’20s.

I told him as much, and also pointed out in the world he was preparing for – society breaks down in the US and all that – he shouldn’t count on being able to log into his online broking account to sell a few silver ETF shares to pay for the baked beans and shotgun cartridges.

I agree if you want to be scared, there’s plenty to be scared about; this Bloomberg interview with Boston University professor Laurence Kotlikoff is the latest dire warning to give everyone the willies.

But I’ve got doom and gloom fatigue.

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I seem to have spent half the week explaining free trade and the concept of comparative advantage to people who are fearful of the rise of China and India.

When you see a country doing far better than it was two decades ago in industries your own country once dominated, it’s easy to be spooked.

Yet the lesson of the past couple of hundred years is that those who have traded have prospered, while those with closed borders have languished. (Free free to send me a postcard from North Korea with evidence to the contrary).

Even the rise of China can be put down to it joining the WTO.

It’s true that both it and India – and many emerging countries – seem to do best when they protect certain domestic industries rather than relaxing all their trade restrictions, but that’s a long way from saying free trade is bad.

But what about the US? Hasn’t it run up a huge deficit partly by buying cheap Chinese goods instead of American made products?

Well, no. Leaving aside whether the US is half as indebted as its critics suggest (they tend to ignore assets) the fact is that American consumers have enjoyed a decade of cheaper trainers, jeans, computers, and iPhones on the back of free trade. Their bucks went further.

You might argue those things weren’t worth exchanging some of the future wealth of US citizens for, but it’s wrong to deny they have no economic value.

International free trade makes us all richer

The empirical evidence in favour of free trade is very strong, but there’s also a solid theory behind it.

What’s more, the theory supporting free trade is 200 years old!

It was the British economist David Ricardo who first realised that free trade between two countries would make the citizens of both better off – even when one country is much better at doing everything than the other!

Ricardo used the example of England and its oldest ally Portugal to illustrate.

Assume England and Portugal make and trade just two products – cloth and wine. Imagine that England is worse at making cloth than Portugal. Yet thanks to the bad British weather, it’s even worse at making wine!

In other words, Portugal is more productive than England in both wine and cloth.

In these circumstances, you might think Portugal would be better off making everything it needs for itself, since it can make both wine and cloth more efficiently than England.

But in fact, it’s best for everyone if Portugal trades its wine for cloth made in England. This is because the total output of the two countries will rise.

Seems wrong, doesn’t it? Let’s look at some example figures (inspired by David Smith’s Free Lunch economics primer).

First for wine:

• Sunny Portugal finds it easy to make wine. 25 workers can produce a barrel of wine a day.

• In rainy England, it’s hard. 200 workers are needed to make a barrel a day.

Now for cloth:

• In Portugal, 25 workers are also needed to make a roll of cloth.

• Back in England, 50 workers are needed to make a roll of cloth.

Clearly Portugal is best off making wine. But Portugal also has an absolute advantage in making cloth.

Is there anything England can do?

Ricardo explained that in this circumstance, it’s best for Portugal to switch production from cloth to wine, and for England to switch the other way.

Let’s say both countries have a population of 1,000 workers. These workers happen to be divvied up between the two industries such that:

• Efficient Portugal produces 1,000 units of wine and 1,000 of cloth a day.

• Less efficient England turns out just 125 units of wine and 500 units of cloth.

Remember from the numbers above that England needs four times as many workers to produce wine (200) than cloth (50).

• If England switches all its inefficient wine production to making cloth, it will now make 1,000 units of cloth a day.

That’s a big boost in output – but now the English have no wine?

In these circumstances, free trade will see Portugal switch some workers from cloth production to its equally efficient wine production, in order to satisfy the English demand for wine.

Because Portugal is equally efficient at producing both products, it still produces 2,000 units of goods a day.

But English productivity has soared!

It’s 1,000 workers now produce 1,000 units of goods a day, instead of the 625 units they were producing before they switched to cloth and instead imported wine from Portugal.

• Total output (GDP) has therefore risen from 2,625 to 3,000 units a day.

This example shows it is comparative advantage that matters in trade, not absolute advantage.

What’s in free trade for Portugal?

You might wonder why Portugal should bother doing the switch. Why buy less efficiently produced English cloth?

As Smith explains in his take on Ricardo’s example:

“The answer is that the price of English cloth will be determined by ‘world’ levels. English cloth workers, because they are half as efficient, will tend to be paid half as much as Portuguese workers. The Portuguese will thus be able to afford to buy a significant proportion of the increase in world output.

“There is still a gain for England and its workers, though, from moving from appallingly inefficient wine production to cloth. It’s a win-win.”

Think about trade with China to see this happening right now. Our own factories are far more efficient than Chinese labour-dependent ones. But we readily buy stuff made in China, because the cost of most goods produced there is so much lower.

If you’re interested in the minutia of free trade and Ricardo’s law of comparative advantage, there’s plenty to be debated. What about transportation costs? What about the cost of switching production?

The main point though is that it’s good for everyone for countries to do what they’re best at. We will all be better off from free trade, albeit at the cost of allowing poorer countries to close the gap with richer ones.