Dax’s big fat Greek boost

Kathleen Brooks
THE prospects for Europe’s southern economies may be fading fast, but what is one country’s loss can be another’s gain. The euro, driven lower by investors’ fears over a Greek debt crisis, could be a boon for German exporters.

The single currency has fallen steeply against the US dollar; it is down 9 per cent since December. A weak euro makes German goods cheaper, which should boost exports in the near term, especially to the US and to China, which has adopted a de-facto peg to the dollar since the start of the financial crisis.

“Germany is the silver lining to the Southern European economies’ cloud,” says Patrick Schowitz, European equity economist at Bank of America Merrill Lynch. Germany is the world’s second largest exporter, behind China. As the conditions improve for its exports, the outlook for the Dax, the blue-chip stock index containing 30 of Germany’s largest companies including Adidas and BMW, looks bright.

Although German growth stagnated in the last three months of 2009, after emerging from recession in the second quarter, growth should bounce back. In fact, export data for December was 3.4 per cent higher than a year earlier.

Jennifer McKeown, from Capital Economics, a consultancy, wrote in a note on Friday that she expected Germany to be one of the Eurozone’s top performers this year, boosted by the recovery in global investment that is sure to boost demand for German-made capital goods, and its strong trade links outside of the euro region.

There is little reason that a European slowdown would hurt German exports. Bank of America Merrill Lynch’s Schowitz points out that German trade to Greece, the most beleaguered of Europe’s periphery economies, makes up less than 1 per cent of its total export trade. In fact, the US is Germany’s second largest trading partner, and exports to China continue to grow strongly.

Emerging markets such as Asia and Latin America are becoming the main source of growth for exporters, says Schowitz, and German companies, with their developed trade links, are well placed to take advantage of this shift in export demand to the emerging world.

Germany’s public finances are also in much better shape than their counterparts in the US, UK and Europe. Germany did not indulge in a spending binge, households are far less indebted and the country doesn’t need the painful de-leveraging that faces its European counterparts such as the UK, Greece, Portugal, Italy and Spain.

Thus, the German economy has less need for tax rises and cuts to government spending than some of its European peers, which is good news for German corporations.
This crisis has merely heightened the contrast between economies within the European Union. It has highlighted the robustness of the German economy, and also its well-placed position to benefit from a global recovery.

This should support the Dax, and spread betters who take a long position in the index could stand to benefit from a rebound in the index in the near term.

Be aware, says Schowitz, that the Dax can experience bouts of volatility, especially when investors become risk averse. However, if export data continues to expand strongly, then growth in the first quarter of this year could rebound, which should be reflected in the index.

So, a Greek crisis could turn into a big fat German opportunity for its traders.