I am quoted saying that I do not care about where a company is domiciled, only where it derives its revenue and raw materials, and its prospects for superior returns. As a firm, we are seeking alpha globally, scouring markets where there is reasonable political stability and sufficient liquidity. The process is region, country, sector, industry and the stock. This works for our long and short positions.
Many investors have fled European (region) investments when the so called PIGS hit the fan (Portugal, Ireland, Greece, and Spain) just a few months ago. The country that was in the best position to support its fellow members of the European Union was and still is Germany. Can a country be an investment theme? The markets have embraced BRIC, emerging markets, emerged markets and look down their noses at mature markets. But some mature markets are worth a close look as they offer the political stability and the liquidity we seek. Fortunately there are exporters and multinationals to analyze. These firms benefit from being headquartered where there are advanced technologies, engineering and a history of multinational business ties.
With a population over 83 million and a median age of 44.3 years, and life expectancy over 79 years Germany still stands as the strongest country on the continent. But the birth rate is low at 8.18/1,000 (ranked 220th) compared to the world median of 19.86/1,000 and a median age of 28.4 (thank you to the CIA for the data). There are obviously some young and growing countries skewing the data, mostly not in the west.
Germany’s DAX 30 index touched a 52 week high earlier this past week. I think Institutional Investor Magazine has set the stage for this rebound success story well in its most recent issue.
In Berlin, Chancellor Angela Merkel huddled with her ministers and advisers and concluded that the violent downturn that followed the collapse of Lehman Brothers Holdings in late 2008 would give way to a conventional, vigorous recovery. They bet that strong demand from emerging markets in Asia, Eastern Europe and Latin America would pull German industry out of recession before long. The government could limit itself to short-term stimulus measures; all policymakers had to do was build a bridge to get from one side of the “V” to the other without “falling into the abyss halfway,” as one senior government official put it.
Today, Merkel and her team are feeling no small amount of vindication. While many of its European Union partners are worrying about the fallout from the region’s debt crisis and U.S. officials grow concerned about the risk of a renewed recession, Germany’s economy has come roaring back to life.
Let’s look at some specific and recent supporting data. On Thursday, as reported by MarketWatch.com
The German government revised higher its forecast for economic growth in 2010 on Thursday. The Economics Ministry said gross domestic product would expand by 3.4% in the current year, slowing to 1.8% in 2011. The government in April had forecast 2010 growth of 1.4%. A sharp upward revision was widely expected after second-quarter GDP expanded at a 2.2% quarterly pace, the strongest in two decades. The revised forecast is in line with the projections of the country’s leading research institutes, which have estimated growth of 3.5% in 2010.
Continuing on Friday, according to MarketWatch.com
The Munich-based Ifo Institute’s business-climate index jumped to 107.6 in October from 106.8, its fourth consecutive monthly rise and the strongest reading since May 2007. Economists had forecast a decline to 106.4.
The rise reflected an increase in indexes measuring economic expectations and current conditions. The expectations index, which measures the outlook of business leaders over the next six months, rose to 105.1 from 103.9, while the current-conditions gauge rose to 110.2 from 109.8.
The Ifo readings are based on monthly survey responses from about 7,000 firms in the manufacturing, construction, wholesale and retail sectors.
Also on Friday Volkswagen AG on Friday said it more than tripled its year-to-date profit on strong demand for passenger cars like the Passat in the world’s biggest markets. This iconic German company is not in the top 10 holding of iShares MSCI Germany Index (NYSEArca: EWG) which is one way to play the market moves in Germany.
Technically speaking The S&P 500 has EWG beat on a trailing 12 month basis. Year-to-date the two are basically tied, however any shorter timeframe, 6, 3 or 1 month and EWG is building a commanding gap as it pulls away from even a rising US index.
To achieve sustained alpha, my firm prefers specific names and I have blogged before about German-based multinational holding Siemens AG (NYSE: SI). It is among the top 10 holdings for EWG and is a classic exporter and multinational company.
I had placed clients in this stock on March 5, 2010. On April 28th President Obama visited a Siemens plant in Fort Madison, Iowa that manufactures components for wind power generation underscoring the multinational nature of the firm. The company is an exporter and has operations around the world. This is key based on the demographic information in which I began this post. Both Germany and SI need the outside world for profits and workforce. Back on 8/31/10 I posted on the changing demographics in Germany and how it will eventually change the country’s economic and political activity. Questions from an investment perspective begin with when, and how much will it impact its stock markets?
From my own post:
In just 20 years, in 2030, it is estimated that there will be an equal number of people in the workforce as there are receiving pensions.
The issues begin in the corporate sector. Who will take the place of the retiring workers? Where will they acquire the skills necessary to do the advanced jobs? How will institutional knowledge of the inner workings of companies transfer smoothly between generations?
The questions get more urgent and basic when moving to the public side of this equation. Who will pay the taxes? What tax rate will be necessary for a manageable debt? Starting 15 years from now what will the debt service look like as the country’s workforce and retirees approach equilibrium (a word I use as an oxymoron in this instance).
SI addresses this with 176 research and development centers in 30 countries, and for example almost 9,000 employees in the growing market of Brazil. SI is positioned for the demographic changes that are influencing business decisions and revenue today as well as into the future.
There are important lessons to be learned.
Where are the knowledge workers required for the near future? Who will take care of aging populations? What will healthcare look like? Is this sounding all too familiar in Japan, Germany and the US?
All countries and societies require a pyramid structure with the vast majority of the population “up and coming” supporting the remaining retirees. Modern medicine and public policies are changing the dynamics of this structure in many developed countries. These potentially dangerous demographic trends will not stop unless our policies change.
We are able to track these trends and policies for investments: long and short. We know that SI is rolling out electric refueling stations for cars and trucks in several countries. We are still a few weeks away from earnings, as of now SI has a Return on Equity on a trialing 12 month basis of 11.65%, operating margins over 9% and forward PEG of 0.39.
Our job is selecting the best stocks and use ETFs where we need exposure and do have the expertise such as with agricultural commodities. Investing in EWG will capture some of the positive attributes of SI.
For now SI is our sole Germany-headquartered investment. To perform all of our research on the region and country and uncover one clear winner is what we refer to as our daily work, and for now, we calculate this investment will continue to be rewarding for our investors.
Disclosure: Mr. Corn is Chief Investment Officer of E5A Funds LLC. Through various equity strategies under his supervision he is currently long SI.
