Across the pond

German stock marketI’m three months into hosting an exchange student from Germany for the 2013-14 school year. Philipp, an 11th grader at Champlain Valley Union High School here in Vermont, is a gregarious fellow and I’m enjoying our frequent discussions about how life in Germany compares to what he’s experienced so far in the US. Philipp loves America – everyone is “so friendly here”, he says often. Philipp’s only complaint: the time-consuming and complex process for obtaining his student visa, which included a long train ride to the US Embassy in Berlin for an interview with a State Department official. I explained how 9-11 brought about stricter visa guidelines.

Philipp, like most 16 year olds, is completely uninterested in the stock market; his passion is American football. But as a money manager who spans the globe in search of reasonable risk opportunities for clients, the German stock market is something that I pay close attention to. While I don’t run a dedicated trading strategy for German stocks, a European Funds Timing Model has had a place in my newsletter since the 1990s. Germany is a very important economy in that region. Although a relatively small country, Germany single-handedly kept the Euro afloat when Greece, Ireland, Spain and Portugal experienced their sovereign debt crises two years ago.

(click to enlarge)

(click to enlarge)

In the second quarter the Eurozone edged out of its worst recession on record – one much deeper and longer than experienced here in the US. The continent’s recovery is fragile, just like here in the US, and for that reason many European equity investors view Germany as the safe-haven country. The flight-to-safety has propelled Germany’s stock market sharply higher over the past two years. In October Germany’s primary stock market benchmark, the DAX, broke through the 9,000 mark for the first time in its 25 year history. [The DAX is a blue-chip index comprised of Germany’s 30 largest companies (e.g. Lufthansa, Adidas, Siemens and BMW).] But recently the German Central Bank, their equivalent of the US Federal Reserve, warned of a severe correction.

Applying my trading parameters to iShares MSCI Germany (EWG), a $5.5 billion ETF that serves as a reasonable proxy for the German stock market, German equities are currently on a buy signal. US investors looking for broad exposure to the Eurozone have several options, but the most popular in terms of asset base with $15.6 billion under management is Vanguard FTSE Europe (VGK). Germany has the fourth largest individual country presence (13.5%) in VGK. My European timing model is also in buy mode. As the case with any investment outside the US, be aware of country/region and currency fluctuation risks.

♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog. 

2 responses

  1. I am not familiar with market cycles in Europe. It seems the US recovery from the lows is a little long in the tooth. How would one read Germany’s current levels with regards to historical cycles?

  2. Interestingly, the DAX and S&P 500 have moved largely in tandem since the DAX’s inception in the late 1980s – Note how both benchmarks bottomed together in March 2009 and subsequently rallied sharply. By the law of averages these two bull markets are overextended. However, we are living in unusual times with massive monetary stimulus programs designed to keep a lid on long-term interest rates. Until Bernanke (soon Yellen) and the European Central Bank start to taper, the bias for the DAX and S&P 500 remains to the upside.

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