Position: Long Germany (EWG); Short Italy (EWI) and Euro (FXE)
The question is set: is German data as good as it gets? While we like Germany and are currently long the country in the Hedgeye Virtual Portfolio via the etf EWG, we think there is an increasing probability that the data could roll (mean revert) over the next months, especially as Europe remains mired in its sovereign debt crisis. We’re starting to get a preview of this from the DAX and German PMI and confidence surveys.
Germany PMI Services crawled higher to 60.0 in January versus 59.2 in December, while Manufacturing declined to 60.2 in January versus 60.7 in December, according to Reuters’ preliminary reading. Importantly, the 60 line (see chart below) is a heavy resistance level on a historical basis that is worth calling out; equally, we see a similar “topping” trend from recent German confidence surveys, including the Ifo Business Climate Index (see chart), which rose to 110.3 in January versus 109.8 in December.
Certainly German fundamentals have remained strong and benefitted from the Sovereign Debt Dichotomy in Europe last year and the early part of this year. Despite a heavy move in imports in November, Germany’s trade surplus stood at a healthy €12.9 Billion; unemployment is outperforming the region at a consistent 7.5% rate; and industrial production figures were positive at 11.1% in November Y/Y.
However, we caution that we’re seeing inflation rise globally, and Germany is not immune to this trend, which could erode capital market performance. German CPI rose to 1.9% in December Y/Y versus 1.7% in November and PPI came in at 5.3% in December Y/Y versus 4.4%.
All in, we like Germany’s growth outlook. Our GDP forecast for 2011 is ~2.5-3%, versus the Eurozone at ~1%.
From a quantitative perspective on the equity side we caution that Germany is flirting with our overbought immediate term TRADE line of 7,163 on the DAX; we’d buy our position back closer to its intermediate term TREND support line of 6761.
European markets have seen short term gains this month on assurance from China and Japan that they’ll buy European bonds, and speculation that European ministers (including the Germans) will increase the European Financial Stability Facility (EFSF) pot. However, long term we continue to expect underperformance for Europe’s fiscally strained nations, as we view the “band-aid” bailouts for Greece and Ireland (perhaps Portugal next) as short term fixes to longer term fiscal imbalances. Political instability in such countries as Ireland, Italy, Hungary (to name a few) will continue to stoke these imbalances.
We remain short Italy via EWI and the Euro via FXE in the Hedgeye Virtual Portfolio.
Matthew Hedrick
Analyst
