German Stimulus Stinginess Opens Opportunity Window
German Stimulus Stinginess Opens Opportunity Window
By Martin Hutchinson, Contributing Editor, Money Morning
Editor’s Note: Picking up the pieces from our credit crisis, and the stimulus package designed to help the markets are all everyone is talking about recently. And it’s a pretty good likelihood that it’s all we’ll be hearing for a while. Having a good handle on which governments are doling them out and the amount they’re spending is important. It doesn’t just tell us which governments are overspending for results, it uncovers nations that haven’t been spending as much. It’s a window for investors to pick up some solid foreign stocks.
Four Ways to Profit From the Country With the Smallest Stimulus Package
Commentators are tripping over one another to declare this country or that country’s stimulus package as a primary reason to pour money into its stock market. Yet if you look at the highly damaging long-term effects of such loose monetary and fiscal policies, an investor can come to only one conclusion: You should invest in the country with the smallest stimulus package.
Stimulus packages are all the rage right now. President-elect Barack Obama has promised an $800 billion package for the United States, which equates to nearly 7% of U.S. gross domestic product (GDP). And there are plenty of others:
- Japan has a stimulus package of $720 billion – roughly 14% of GDP.
- South Korea plans two stimulus packages – the larger of them “green” – totaling about $50 billion, or about 6% of GDP.
- Great Britain is expected to inject about $177 billion into its economy, the equivalent of 8% of GDP.
- France has a modest $40 billion stimulus package in place but that’s on top of a $300 billion European Union (EU) stimulus package, so the total’s about 3% of GDP.
- China has announced a $586 billion stimulus – almost 20% of GDP – and now appears to have decided even that is too little.
Then there’s Germany. When the British stimulus was announced, Germany’s finance minister, Peer Steinbruck, described it as “crass Keynesianism.” Since then, he’s been forced to back off that stance a bit: On Jan. 12, Germany announced a stimulus plan totaling $70 billion over two years.
Still, even that is only is a relatively modest 2% of GDP, and Germany’s 2009 budget deficit – even with the stimulus – is projected to come in at less than 3% of GDP. That’s far less of a deficit than the country faced during the 2001-2003 recession, and means that Germany enjoys one of the soundest fiscal positions of any country in the world.
Germany’s short-term economic outlook is unexciting, as is currently the case for most countries. According to The Economist, the country’s GDP is forecast to shrink by 1.4% in 2009, after actually advancing 1.0% in 2008. That’s equal to the Euro zone average and equal to Japan, a bit less than the United States (projected at minus 1.2%), but better than Britain (minus 1.7%). But at a projected 1.0%, at least inflation at 1% is expected to be satisfactorily low.
Investing In Germany
Where Germany stands out, however, is when you look at its balance of payments, which is in surplus by $265 billion in the year to November 2008 – the equivalent of 6.6% of GDP. That immediately distinguishes it from the finance-based economies of the United States and Britain, both of which have perennial balance-of-payment deficits.
The most impressive thing about the German payments surplus is that it is achieved against a background of some of the highest wage rates in the world, very heavy tax and Social Security costs and a strong euro exchange rate. Even though it has among the world’s highest labor costs, Germany also has among the world’s highest labor skill levels, and those are more concentrated in manufacturing than in finance or business services, making the German economy less vulnerable to this finance-based recession or to erosion through globalization.
Like other countries, Germany will see its exports hit by this global recession, but it has the ability to grow domestic demand to compensate without affecting its budget or payments position.
For a decade and a half, the German economy and its budget were bedeviled by the huge costs of integrating the former communist East Germany into the West. However, that was a one-off cost; anyone who graduated high school in East Germany under Communism before 1989 is now nearing 40, so younger workers have been given the education and training common to their splendidly productive West German counterparts. From about 2005 on, the drag on the budget and on productivity from East German integration costs has begun to decline, and it will continue declining in the years ahead.
With its low budget deficit and large payments surplus, Germany is the strongest economy in the EU. It is potentially the strongest economy in the world; while the United States, Japan and Britain will struggle for years with the nasty side-effects of their massive government-stimulus spending, Germany will remain in sound shape.
It is thus likely that over the next few years, the huge flows of “safe haven” money that for decades helped prop up the U.S. Treasuries market will flow instead into the German bund and equities markets: After all, where the hell else is there? That will reduce German interest rates and increase multiples on German stocks. For an international investor, it thus becomes essential to have a significant part of your portfolio in German stocks.
What to buy? Well, for a start there’s the German exchange-traded fund (ETF), the iShares MSCI Germany Index (EWG). At $334 million, it’s surprisingly small, but it has a Price/Earnings (P/E) ratio of 9.6, and a yield of 6.6%, so this ETF provides decent income as well as a broad exposure to the German market.
There are eight German companies whose American Depository Receipts (ADRs) have a full sponsored listing on the New York Stock Exchange (several others have moved to the Pink Sheets recently because of the costs of Sarbanes-Oxley compliance).
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