German Stocks Tarred by War Find Buyers at Record Value


German stocks, punished for the nation’s trade ties to Russia and Ukraine, have gotten too cheap to turn down for some of Europe’s biggest investors.

Raiffeisen Capital Management is adding to holdings, with earnings at DAX Index companies poised to rise 21 percent in 2014, according to more than 1,000 analyst estimates compiled by Bloomberg. JPMorgan Chase & Co. and ABN Amro Bank NV say valuations are compelling after the Ukraine crisis sent Germany’s benchmark gauge to 13.2 times projected profits, close to the cheapest level relative to Europe since at least 2005.

Stocks in Germany, which has more trades with Russia and Ukraine than any other country in western Europe, are down 2.2 percent this year, compared with a gain of 2.6 percent for the Stoxx Europe 600 Index. The selloff has gone too far, according to Raiffeisen’s Herbert Perus, whose firm recently bought shares in K+S AG, Deutsche Bank AG and EON SE.

“For us, it’s a buy at this level,” Perus, who helps oversee $36 billion as head of equities in Vienna, said by phone. “If you look at German companies, they are earning a lot, and many of them are market leaders. In the medium to long term, German markets are very cheap compared with Europe.”

After almost tripling between March 2009 and July 2014, the DAX retreated 10 percent in about a month, meeting the definition of a market correction. Escalating conflict between Ukraine and Russia, along with data signaling a slowdown in Germany’s economy, has erased nearly $180 billion from equity values. The DAX lost 0.7 percent on Aug. 22, paring a weekly gain, after Ukraine said Russia was invading the country under the cover of an aid convoy. It rose 1.2 percent at 9:09 a.m. in Frankfurt today.

Relative Valuation

Selling pushed the DAX’s valuation more than 2 percentage points below that of the Stoxx 600, the widest gap since at least 2005, according to data compiled by Bloomberg. Germany’s biggest companies will boost earnings by 21 percent in 2014, compared with increases of 9.6 percent in the European gauge and 10 percent for the Standard & Poor’s 500 Index, estimates compiled by Bloomberg show.

“The selloff is overdone,” Lucy Macdonald, the chief investment officer for equities at Allianz Global Investors Europe, said in a phone interview from London. Her firm manages $457 billion. “Valuations are looking more interesting for Germany after the drop. The impact on corporate growth is relatively limited.”

Allianz, Fresenius

Macdonald’s firm owns shares of its Munich-based parent Allianz SE (ALV) and Fresenius SE, a maker of health-care products. Full-year earnings projections for Allianz have climbed to 13.86 euros a share, from 13.35 euros in February. The average analyst estimate for Fresenius’s profit in 2014 is 2.04 euros a share, near the 90-day average, data compiled by Bloomberg show.

German shares were battered in a selloff that sent the Euro Stoxx 50 Index down 9.3 percent from June 19 through Aug. 8. France’s CAC 40 Index lost 9.1 percent in the period, while Spain’s IBEX 35 Index slid 9.7 percent and Portugal’s PSI 20 Index tumbled 25 percent.

Germany is Russia’s biggest trade partner after China, with one in 10 exporters selling everything from machinery to vehicles and chemical products to the former Soviet nation. With Germany also relying on Russia for oil and gas, the value of trade between the two countries totaled almost $88 billion in 2013, according to data compiled by Bloomberg. Ukraine’s trade with Germany amounted to $8.5 billion last year, surpassed only by its ties with Russia and China.

Russian Sanctions

The German economy shrank 0.2 percent in the three months through June, the first contraction in five quarters, after a warm winter shifted production to earlier months. Sanctions against Russia preceded a Bundesbank warning on Aug. 18 that “unfavorable international news” may hurt Germany’s recovery.

After the European Union curbed Russia’s access to bank financing and advanced technology last month, the country responded by banning some food imports from the region. German investor confidence fell to the lowest level since 2012 in August, the ZEW Center for European Economic Research in Mannheim said Aug. 12.

The DAX’s price-to-earnings ratio of 13.2 is still higher than its five-year average valuation of 11.9 and compares with a September 2011 low of 7.8. The DAX rallied 174 percent from a March 2009 through its July record after European Central Bank President Mario Draghi said in July 2012 that he would do whatever it takes to preserve the euro.

By contrast, Spain’s IBEX 35 is more than 50 percent away from its 2007 peak, while Portugal’s PSI 20 and Italy’s FTSE MIB Index would each have to more than double to recover their highs of that year.

Less Attractive

German stocks have already benefited from investors seeking safer returns in the aftermath of Europe’s debt crisis, making their valuations less attractive now, according to Mouhammed Choukeir, who helps manage 5.7 billion pounds ($9.5 billion) as chief investment officer at Kleinwort Benson.

“Germany is not an expensive market, but it’s not as compelling as it used to be,” said Choukeir in a phone interview. “You should look at German valuations in the context of the past five years. If you observe the way the market is reacting, it’s not trading on fundamentals, but on the macro environment and geopolitical tensions.”

Germany’s economy will rebound, according to Richard Webb, a portfolio manager at JPMorgan’s asset-management unit in London. While gross domestic product fell in the second quarter and factory orders contracted in June, data since then has been better. A report last week showed its manufacturing expanded in August faster than economists had forecast.

Wage Growth

“The slow data in Germany was temporary — it’ll change,” Webb, who manages European equities, said in a phone interview. “There’s a domestic-consumption story in Germany that will be sustained in the long term. We’re seeing wage growth of 3 to 4 percent. That will feed into consumption.”

German wages rose 3.6 percent in the three months through March, the third quarter that growth held above 3 percent. Webb’s firm, which manages $1.6 trillion globally, owns shares in German property stocks LEG Immobilien AG and Gagfah SA, as well as Hornbach Baumarkt AG, an operator of home-improvement stores across the country.

Weakening Euro

DAX companies that earn revenue from international regions will also benefit as the euro weakens, according to Didier Duret, chief investment officer at ABN Amro’s wealth-management unit in Amsterdam. He owns shares in Kuka AG, a robotics supplier that earned 67 percent of its sales outside its home market last year, and BASF SE, a chemicals maker that made about 80 percent of its revenue in markets other than Germany.

The euro has fallen 5 percent against the dollar from a March high. The currency is trading at its lowest level in almost a year after European investors facing record-low interest rates sent the most money overseas in six years.

“The short-term volatility in German stocks is an opportunity to re-enter the markets after a violent correction,” Duret said in a phone interview. “Investors shouldn’t overestimate geopolitical risk. We’re positive on Germany, the valuation levels are attractive.”


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