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Position: Long Germany (EWG); Short Euro (FXE)

 

We got a bullish export report (though lagging) from Germany today, with exports up +5.1% in February month-over-month. The chart below shows an improving trend in exports, up +9.4% in February Y/Y, with favorable comparisons for the months ahead as global demand continues to melt higher.  We bought Germany via the etf EWG in our model portfolio on 4/7/10 to take advantage of the strength we see ahead.

As we’ve highlighted in our recent work, Germany fits one of our investment themes of owning High Grade versus High Debt.  And recent fundamental data helps confirm our bullish bias on Europe’s largest economy:

  • German Factory Orders, released earlier in the week, came in at +24.5% in Feb. Y/Y; while certainly a moonshot of a number, we noted the comparison was off the trough a year earlier, yet orders are confirming an intermediate positive trend.
  • The trend has improved in German Manufacturing and Services PMI surveys over recent months.
  • The country’s inflationary environment continues to favor consumers and producers, with CPI at +1.1% in Mar. Y/Y and PPI at -2.9% in Feb. Y/Y.

To take advantage of present weakness in the Euro due to the sovereign debt issues associated with the PIIGS, we remain short the EUR versus the USD via FXE. The anchor of our bullish case for Germany remains the fiscal conservatism of German Chancellor Angela Merkel and her government. You’ll remember that she initially supported a unilateral IMF-led campaign to bailout Greece to prevent paying for Greece’s debt out of German coffers, and at her command the government has maintained budget deficit and federal debt at a level far lower than her European peers (see our portal for more information). As countries (globally) further extend their debt obligations, Germany will be our lower beta play on safety, underpinned by improving fundaments.

Matthew Hedrick

Analyst

Germany’s Export Push - Deutschland