The German economy looks set to remain in the doldrums during the second half of the year, but may r...
The German economy looks set to remain in the doldrums during the second half of the year, but may recover towards the beginning of the first quarter of 2002, according to Peter Lucas, investment analyst with Aegon Asset Management.
'Germany is a big exporting country and as a result they have suffered in the global slowdown. Recent rises in the price of oil has also affected the economy badly as Germany imports all of its oil,' Lucas says.
This has offset the potential advantages to the economy offered by the German government's tax cuts earlier this year, leaving domestic German consumer demand sluggish, he says.
In addition, investor confidence in the Neuer Markt, the German small companies index, has failed to recover following a number of spectacular bankruptcies over the past 12 months. This has left many fund managers wary of investing too heavily in German equities.
He also sees many big German corporates as uninspiring, with top companies often lacking dynamic management.
'German corporates tend to have quite a conservative management culture,' he says. 'As an analyst I will look at Deutsche Post, a perfectly solid company, but it doesn't appear particularly attractive if you put it next to Holland's GNT, which in comparison looks sharp and focused.'
However, Lucas believes that it is possible to find good value stocks in the small/mid-cap range, with a number of software companies having cornered the market in areas such as execution software.
He is confident that the country will avoid a full-blown recession in the third quarter, although actual growth will remain low. Investment manager at Henderson, Simon Chisholm, shares this cautious prognosis but maintains now is not the time to buy, despite the apparent abundance of attractive P/Es. While stocks appear undervalued, they are not rock bottom.
'We feel that it is perhaps a quarter too early to buy German stocks heavily. The third quarter incorporates the European holiday period, so recovery is unlikely at this time. We would also like to see some evidence that the US economic policy is starting to take effect and consumer demand stimulated before we would change this view,' he says.
Chisholm believes that many German multi-nationals, and consequently the economy as a whole, are dependent on a revival in consumer demand in the American market.
Despite this, his European Smaller Companies fund currently has holdings in several German companies. In a country where most people rent their homes rather than buy, Techem, a company that rents water meters, offers excellent long-term growth potential, according to Chisholm. A legislative demand for such meters has stimulated demand and will continue to do so for the foreseeable future. He also favours Medion, which sells electrical consumables through other companies outlets such as supermarkets, as a good growth stock.
Although long-term recovery will be export led, Lucas thinks the euro conversion process may spark a brief rally towards the end of the year. Those people holding Deutschmark's outside a bank account will need to spend them while they still can.
US demand will spark recovery.
Value remains in small/mid-cap sector.
Possible end of year rally.
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