The capital market turmoil of the second half of 2011 is finally starting to show up in Europe’s real economy. Initial estimates show German GDP shrinking 0.25% in the fourth quarter of 2011, dragging down the growth rate for the year to 3% (versus 3.7% last year). If the first quarter of this year proves to be sluggish, German GDP might shrink again — meaning the German economy officially would be in recession.
Few things scare investors like the dreaded “R” word. So, my next words might take readers by surprise: It’s time to buy German stocks.
Actions have consequences, of course. But a lack of action has consequences, too. By failing to take decisive action to stabilize the debt crisis and save the euro, Europe’s politicians have created a climate of uncertainty that has eroded confidence in the capital markets. There are consequences for this. Facing the unknown, companies postpone major new projects. Would-be workers don’t get hired. With employment stability in question, consumers avoid major purchases.
Consider Greece: With ejection from the eurozone still a distinct possibility, who in their right mind would take out a loan for a new business venture? You might well find yourself on the hook for a large loan in euros with nothing to repay it but worthless Greek drachmas.
Look at the Trees, Not the Forrest
Europe — and Germany in particular — might indeed fall into technical recession early this year. Or, a successful implementation of the EU fiscal discipline treaties might do enough to restore confidence and allow for a resumption of growth.
I don’t know which scenario will occur — and it doesn’t matter.
The relevant question is not whether German GDP grows by half a percent or shrinks by half a percent and meets the precise, technical definition of “recession” (two consecutive quarters of declining GDP). No successful value investor wastes their valuable time pondering a question this useless.
The relevant question is, at current prices, “Are German stocks positioned to deliver good returns in the years ahead?” I would answer with an emphatic “Yes.”
Looking at the German market from the top down, the iShares MSCI Germany Index Fund (NYSE:EWG) — the most popular vehicle for Americans investing in Germany — trades for just 9 times earnings and yields 3.5% in dividends. But drilling down to individual stocks, the story gets even more compelling.
Siemens (NYSE:SI), the global engineering juggernaut, makes up 11% of the ETF’s portfolio. Siemens did 73.5 billion euros in revenues in fiscal 2011 and had a healthy order backlog of 96 billion euros. Most importantly, a majority of Siemens’ revenue comes from outside of crisis-plagued Europe, nearly a third comes from emerging markets, and roughly 12% comes from China and India alone.
Looking at the financials, Siemens trades for just 9 times earnings and sports a 4% dividend — a dividend that has a history of growing. The company also has virtually no debt (its $19 billion in cash and equivalents are approximately equal to its long-term debt), so it should have the financial strength to survive whatever the financial crisis throws at it.
Another smart pick is Daimler AG (PINK:DDAIF) — the maker of the iconic Mercedes-Benz, among other luxury brands. Mercedes is the premier global luxury automobile. And it is a fantastic way to get “backdoor” exposure to emerging markets. China already is the world’s largest consumer of the high-end S-Class, and China accounted for 18% of all Mercedes cars sold this past quarter. In trucks, the numbers are even better. More than half of Daimler truck sales come from Asia and Latin America.
Investors fret that 45% of Daimler’s auto sales come from Western Europe, but it does not worry me. Daimler’s high-income customers are less at risk of financial distress than the average European. But even if the atmosphere of austerity makes a dent in European sales, the stock price offers more than a sufficient margin of safety. DDAIF shares trade for less than 7 times earnings and yield nearly 6%.
Value investors often are “early” in their trades, and this might yet prove to be the case in Germany. The pattern of the past year has been for European stocks to rise in the weeks leading up to a major policy summit only to come crashing down when the summit fails to meet expectations. Only time will tell how the market reacts to the fiscal discipline treaty when it is officially announced later this month.
Still, when you buy iconic, first-rate companies trading at prices not seen in a generation, you don’t have to get the timing exactly right. You can be a little early or a little late and still do just fine. And right now, I recommend investors use any short-term setbacks to accumulate shares of Germany’s finest multinational companies. German blue chips might be investors’ best bet for triple-digit gains over the next 12 to 24 months.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new special report: “Top 5 Contrarian Stocks for 2012.” Charles Sizemore holds EWG in his Tactical ETF Portfolio and DDAIF and SI in his Sizemore Investment Letter Portfolio.