POSITION: Long Germany via the etf EWG
Despite GDP projections of negative 4-5% growth for Germany this year, we're bullish on the stimulus measures Chancellor Merkel and Co. have passed and believe Germany plays well as a long versus our short position on the financially levered and poorly managed countries of Switzerland (via EWL) and the UK (via EWU); the latter we just covered today.
Look for Germany to benefit from an uptick in export demand from China, especially if the Euro can stay below $1.32, and from Eurozone and US demand as the global recession moves out on the recovery curve. In addition, the stimulus package may lead to economic growth that exceeds these dire expectations.
German investor confidence unexpectedly rose this month and the DAX is up 9.8% month-to-date, signaling that the pace of contraction is easing and the worst may be over, yet buyer beware.
The ZEW Center for European Economic Research said its index of investor and analyst expectations for economic activity within six months rose to +13 from -3.5 in March, the highest reading since June 2007. Yet ZEW's gauge of current conditions fell to -91.6, the lowest since September 2003, from -89.4 in March.
Certainly the German economy looks to be improving, yet is not out of the darkness. German industrial production fell 3.2% M/M in February, compared with a decline of 2.3% in Euro area, and improved sequentially over January's contraction of -5.9% M/M, according to Eurostat. The country's trade balance stood at +7.2 Billion EUR in January; exports declined 23% and imports fell 15% on an annual basis.
Although Germany's trade surplus is severely depressed from the previous year's surplus of 17.1 Billion EUR, the positive take-away is that despite declines in exports globally, Germany posted a positive balance. In contrast, the UK posted a trade deficit of -8.9 Billion EUR in January and the majority of the EU came in with negative balances.
German PPI yields a slightly unclear picture when examined on a monthly versus annual basis. The Federal Statistics Office said today that PPI declined 0.7% in March M/M and fell 0.5% Y/Y, after gaining 0.9% in February Y/Y. The numbers do help to confirm that inflation is slowing (as is the case across the EU) and that companies are either able to extend reduced energy costs to consumers or are forced to cut prices in response to waning demand. As PPI (and CPI) fall they'll put upward pressure on unemployment, which has risen sequentially on a monthly basis, currently at 8.6% These fundamentals, especially from the Eurozone's largest economy, may help prompt the ECB to cut its interest rate from 1.25% when it meets next month.
Today Merkel met with finance and economic ministers to discuss a German "Bad" bank plan, which may be especially geared to its state banks (*Landesbanken). Proposals to clear some $1.1 Trillion of toxic assets from banks will be discussed in the next few days, which on the balance is positive. As is often the norm, the Germans will take a "slow and steady" approach to a decision, with a government spokesman stating a decision could come shortly before parliament's July 3rd summer recess.