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By Martin Hutchinson
Costumes with wide, padded shoulders, mindless soap operas about rich people and such [in retrospect] laughable musical acts as Culture Club and Boy George are 1980s routines that you likely abandoned a long time ago. But one routine from that decade – profiting from investments in Germany – is rediscovering its "glory days." And, unlike 80s-era pop music, the allure of investing in Germany is both rational and justifiable.
Germany has always had a strong economy, although investors there tended to lose out badly because of its regrettable tendency of invad ing neighboring countries. But after World War II, Germany was actually blessed with one of the better leaders of the 20th Century, a man who even 20 years ago had already been largely forgotten and whose name is today almost wholly unknown among younger Germans. The leader I'm referring to is Konrad Adenauer.
It's both sad and unfair. Following, as he did, Germany's most infamous leader, Adenauer has somehow been forgotten despite his many concrete achievements.
Indeed, Adenauer remained in power for 14 years [1949-63], and during that tenure slashed taxes, shredded the morass of often-pointless controls that [like many nations in Europe] had dragged down Germany's post-war economy, and then presided over the "wirtschaftswunder" economic miracle that transformed the nation he led into the richest country in Europe – a position it had actually occupied before losing World War I.
B y the 1980s, everybody knew to invest in Germany.
Those "glory days" of the 1980s didn't last as long as they could have or should have. Key leaders made some crucial mistakes, but the country's real problems didn't take hold until the 1990s. It started with the German reunification, which German leader Helmut Kohl foolishly carried out by equalizing the currencies of West and East Germany, making East German labor hopelessly uncompetitive. The result was 15 years of huge subsidies from West to East and a series of real estate disasters as Western construction companies overbuilt in the East.
Thus for several decades now, German growth has been pretty unimpressive. But there are signs that the country is returning to its former glories, with modest labor market reforms and tax cuts producing a more competitive nation. The costs of reunification have begun to decline – they were always likely to be a finite problem, as the Eastern education system was reformed and produced new, more productive workers – and the German growth rate has begun to increase. Notably, since the introduction of the euro in 1999, German labor competitiveness has increased by about 20% against rival European Union members, an outstanding showing. German companies have a healthy position in Eastern Europe, too, where economic growth has been rapid while wage growth remains far lower than in the West.
In a recent report, the IFO index of German business confidence rose to 104.2, a sign that the current 2.8% Gross Domestic Product (GDP) growth rate [equivalent on a per capita basis to a US rate of 3.8%, since Germany has zero population growth] is likely to continue. Only inflation, which has ticked up to 3%, is a problem, but the strong e uro should help that – while not doing much damage to Germany's healthy balance of payments surplus.
So, what to buy? For a start, avoid the banks. There are too many banks in Germany, most of them propped up by their local governments. The banking system's lack of good ideas for making money has recently been shown by two banks – IKB Deutsche Industriebank AG and Sachsen LB – that got in trouble by investing in U.S. subprime mortgages. Goodness knows what other U.S. problems are buried in German bank balance sheets, a product of enthusiastic U.S. salesmen and unimaginative German bank buyers. B est not to find out.
Instead, look to Germany's great engineering companies. The largest, Siemens AG (SI), is still recovering from losses a couple of years ago and its stock price has been run up too high. However you might look at the electronics company Epcos AG (EPC). This was a spin-off from Siemens two decades ago, and now manufactures electronic components for the cell phone and tech industries worldwide, with factories in Europe, Asia and the Americas [so it is only moderately impacted by the strong e uro]. Its Price/Earnings ratio based on trailing earnings exceeds 14, but based on projected earnings is a very reasonable 10. You're getting exposure to rapid growth – and at a very cheap price.
A second possibility is Fresenius Medical Care AG & Co. (FMS), the world's largest manufacturer of kidney-dialysis machines, again a global company. This firm has a rather higher P/E ratio – about 23 times this year's earnings – but its technological capability and strong market position create some attractive growth potential.
Finally, you can go to the telecommunications sector and try Deutsche Telekom AG (DT), which owns the U.S. wireless provider T- Mobile, which has enjoyed rapid growth in the American market. DT has had trouble recently because of declining landline revenue, but its mobile and Internet businesses are growing rapidly. I t currently sells at 20 times projected 2007 earnings, with earnings growth of around 12% forecast for 2008.
Investing in Germany might be coming back into fashion; it looks like a trend to follow.
News and Related Story Links:
- Money Morning:
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- Money Morning:
Uncertainty Continues to Plague U.S. Financial Markets.
History of Germany.