Yet again, Euro zone is struggling with slower growth and the danger of slipping into another recession. Germany, the powerful engine and the heart of the Euro zone, has suddenly taken a reverse turn thanks to a slew of disappointing economic data that has pushed down German stocks terribly in recent weeks.
This is especially true as industrial production dropped 4% in August, much higher than the market expectation of 1.5%, while factory orders and exports fell 5.7% and 5.8%, respectively. The trio represents the biggest monthly drop in five years. Additionally, the recent business and investor sentiments survey have been extremely negative.
German business confidence, as depicted by the leading indicator Ifo, slipped to the 17-month low of 104.7 in September from 106.3 in August while investor confidence, as depicted by ZEW, plunged to a 21-month low of 6.9 from 8.6. October investor confidence reading is even worse, plunging below the zero level for the first time in nearly two years to minus 3.6, suggesting that the German economy is badly hitting from the Russia-Ukraine crisis and other geopolitical tensions as well as dwindling broad Euro zone and global economy growth.
All these weak data raised worries on the recovery of the Europe’s largest economy in the coming months. Since Germany is the export powerhouse, sluggish demand for German goods from the rest of Europe and China has also taken a toll on overall economic growth.
In light of the depressed fundamentals, the International Monetary Fund (IMF) and the country's leading economic research institutes last week slashed their growth forecast for the country. The IMF expects German economy to grow 1.4% this year and 1.5% in the next while the institutes project 1.3% and 1.2% growth for this year and the next, respectively. Further, the German government today cut the growth expectation to 1.2% from 1.8% for this year and to 1.3% from 2% for the next year.
Glimmer of Hopes
Though near-term trends are unfavorable, the mid and long-term outlook appears bright. This is because a late summer holiday, which contributed to more than half of the drop in industrial production and fall in exports in August, has now ended indicating that production might have rebounded in September.
Additionally, solid domestic demand, robust labor market, moderate inflation, low interest rates, and rising incomes will continue to support economic growth. Further, Germany has become the largest trade-surplus country in the world overtaking China. With the record surplus, the German government is in a position to increase spending when required to boost domestic growth and avoid recession.
While the recent rates cut and stimulus measures by the European Central Bank have not borne any fruit until now, these are expected to spur growth once the broad Euro zone shows signs of healing. Moreover, a fundamentally sound German economy is expected to recover soon as the uncertainty over the Russia and Ukraine crisis fades.
As a result, several market experts still expect the German economy to grow in the third quarter after a 0.2% contraction in the second quarter. To make the case stronger, the country’s well-equipped infrastructure, lower business costs, relative political stability, efficient transport system, central location, and large market size make it a safe bet for investors seeking exposure to the Euro zone without too many risks.
Given this, long-term investors should tap the currently beaten down prices by investing in the following German ETFs. Any of these products could be excellent picks given their top Zacks Ranks of ‘1’ or ‘2’, suggesting that these will outperform the broad market over the one-year period.
First Trust Germany AlphaDEX Fund (NYSE:FGM)
This fund tracks the Defined Germany Index and employs an AlphaDEX methodology. It ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks. This approach results in a basket of 40 stocks that are spread out across each security with each holding less than 5% of assets. The product is also widely distributed across various market spectrums with 40% going to mid caps, 35% to small caps and 26% to large caps.
In terms of industrial exposure, consumer discretionary takes the top spot at 29.4%, followed by materials (16.9%) and industrials (14%). The fund has amassed $46.9 million in its asset base and trades in paltry volume. It charges 80 bps in annual fees and lost 12.8% over the past one month. FGM has a Zacks ETF Rank of 2 or ‘Buy’ with Medium risk outlook.
iShares MSCI Germany Small-Cap ETF (NYSE:EWGS)
This product targets the small cap corner of the broad German stock market by tracking the MSCI Germany Small Cap Index. In total, it holds 110 securities in its basket and has AUM of $28 million. The fund is slightly skewed toward the top firm – Symrise AG – at 6.34% while other firms do not account for more than 4.3% of assets.
The fund is heavily weighted toward industrials making up for 29% share while financials and information technology round off to the top three with at least 15% share each. The ETF sees paltry volume and charges 59 bps in fees per year from investors. It is down 10.9% over the past month and has a Zacks ETF Rank of 2 with Medium risk outlook.
Deutsche X-Trackers MSCI Germany Hedged Equity ETF (NYSE:DBGR)
This ETF offers exposure to German stocks while at the same time provides hedge against any fall in the euro. This could be easily done by tracking the MSCI Germany US Dollar Hedged Index. Holding 55 stocks in its basket, the fund is heavily concentrated on the top 10 firms with more than 59% of assets.
Further, materials occupy the top position from a sector look with 24.3% share followed by double-digit exposure to consumer discretionary, financials and industrials. The fund managed assets worth $403 million and sees paltry volume. Expense ratio came in at 0.45%. DBGR lost 9.6% in the past one month and has a Zacks ETF Rank of 1 or ‘Strong Buy’ with Medium risk outlook.