Europe’s stock market rally had to end sooner or later. Germany slipping into recession makes that seem like sooner. But there are still great companies to buy on the Continent.
European equities went on a tear last fall when fears for the region started to look overblown. A warm winter, plus deft policy responses, avoided calamities expected when Russia cut off most natural gas exports. China scrapped its zero-Covid regime, expanding a key market for European, particularly German, manufacturers. The
iShares MSCI Eurozone
exchange-traded fund (ticker: EZU) has soared by 40% over the past eight months. The good news looks priced in by now. “The market has recovered to more reasonable levels,” says Andrew Clifton, an equities portfolio specialist at
T. Rowe Price.
New dangers are massing. China’s recovery is sputtering. Colder weather might bring a new energy squeeze this year. Euro zone inflation remains above 6% (the U.S. is below 5%). The European Central Bank is likely to hike interest rates further to contain it. “We won’t see cuts from The ECB until some crisis absolutely requires it,” says Fred Copper, senior portfolio manager at Columbia Threadneedle Investments.
Germany, which accounts for 30% of euro zone gross domestic product, is cooling with these macro winds. First quarter GDP numbers were revised down to -0.3%. That’s a second straight quarter of economic shrinkage, technically a recession. Industry had a positive quarter, though, and companies added 56,000 jobs at the latest reading, says Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “In value-added terms, I don’t see a recession,” he says.
Whatever you call it, Germany’s economic might is in slow decline, argues Carsten Brzeski, chief euro zone economist at Dutch bank ING. A retreat from globalization hurts the country, which sells both East and West. The fabled German auto industry dawdled while China grabbed the lead in electric vehicles and batteries. “Will we see a rebound of the German economy? We will not,” he concludes.
All’s relative in investing, however.
Schroders
still favors European shares over a U.S. that teeters near recession itself, says Bob Armstrong, the asset manager’s investment strategist. They are cheaper, for one thing, trading at an average 13 times forward earnings, compared with 18 for U.S. stocks. The German market’s p/e ratio is 11.
Germany’s industrial machine, diminished or not, still offers attractive names, T. Rowe’s Clifton adds, like
Siemens
(SIE.Germany),
SAP
(SAP) or
Deutsche Telekom
(DTE.Germany). “Some of the criticism out there is doing the German economy a bit of a disservice,” he says. He also cites “defensive” stocks like Danish drugmaker
Novo Nordisk
(NVO), which has an inside track on treatments for diabetes and obesity, and United Kingdom-based
AstraZeneca
(AZN), a leader in anticancer drugs.
Columbia’s Copper is keen on Dutch grocery store chain
Koninklijke Ahold Delhaize
(AD.Netherlands).
Germany’s downturn marks an end to the dartboard phase of profit in European stocks. You can still make money with some homework, and luck.
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