This is good news for cyclical Germany given past experience in the US, UK and even Japan showed that Cyclicals outperformed 6m after QE was announced. 4) Plus our economists believe Europe may not be able to absorb the new found QE liquidity – which would push the euro lower and support Europe’s biggest exporter.
The DAX bottomed at 8,572 on 15th October but is already back at 9,851. This is only 3% ahead of where it started the year. Plus, MSCI country data shows Germany lagging Europe by 4% YTD. Lastly, cyclicals have lagged defensives since 2010 and as a whole are relatively cheap (figure 12). With our house view that Eurozone GDP doubles between 2014E (0.8) and 2016E (1.6) and the recent change to our UBS EUR/USD forecast from $1.20 to $1.15 (fig 15) the market does not look over-bought.
Sweden takes top spot and Germany ranks 2nd out of 12 countries. While Sweden looks interesting as well, the Swedish Krona isn’t forecast to weaken by as much as the Euro. Germany is also the second most cyclical market in Europe, ranks 4th on valuation and 5th on earnings momentum which is just starting to improve.