Germany: the sick market of Europe?

Compared with the previous year, “the German economy continued to grow. The price-adjusted GDP in the second quarter of 2014 was up by 0.8% (1.2% when calendar-adjusted) on the 2Q of 2013,” highlights the Federal Statistics Office (Destatis) today in its press release.

German equity market

The European equity market is down 6.5% since the recent peak two months ago. But the German market is down 10%. Over the month of July, Equity investors sold Germany more aggressively than any of the other European countries. As UBS experts point out, “Germany has underperformed the wider European market sharply year to date and has almost given up all its gains as a “safe haven” during the Eurozone debt crisis. It may be the case that foreign investors, who have been big net buyers of European equities over the last year (particularly the US), view the German market as a large and liquid proxy on Europe and it is the first country to “sell” when there are concerns over the region as a whole”.

However, UBS analysts see four supports for German equities:

1. “a weaker Euro should help boost exports in the economy, but also the high exposure of overseas revenues in the stock market.
2. Germany is one of the most cyclically exposed markets in Europe (after Sweden) and should benefit from an expected pick up in global growth in H2.
3.  Valuations are now attractive with the P/E relative to Europe at a 10% discount and close to a 10yr relative low.
4. Financial leverage is low compared to the rest of Europe and falling.”