May 21, 2019 Equities

German equities can help exploit global market opportunities

For German exporters, globalisation has opened the door to a huge market. In right mix, Dax and MDax shares provide investors with attractive opportunities.

  • As one of the top three export nations, Germany is particularly dependent on the global economy.
  • This brings opportunities and risks for investors, meaning they need a smart diversification strategy.
  • A mix of value and growth stocks, with a flexible pinch of small and mid caps, has in the past outperformed returns from simple index trackers.
4 minutes to read

German companies rank third in the global export statistics of the World Trade Organization.

International trade continues to rise around the globe. In 2018 alone, the value of all goods traded has grown by ten percent, according to the WTO (World Trade Organisation)[1]. Seventy percent[2] of global exports consist of industrially manufactured products, of which 44 percent[3] stem from the chemical, telecoms and automotive sectors. That is music to the ears of German companies, who count vehicles, machines and chemical products among their leading export goods. Just how much German products are in demand internationally is reflected by the global export league table: German companies come in third[4] behind China and the US.

The strong dependency on the global economy is a double-edged sword though. If the global economy weakens, as it did during the financial and economic crisis in 2009, German companies are hit especially hard. Still, exports from Germany were soon in high demand again because the global economy recovered quickly.

Dax and MDax strongly export-biased

Germany’s ups and downs as an export economy are also reflected in its stock market. After all, the blue-chip Dax index, comprising the top 30 German companies in terms of market capitalisation and trading volume, includes – similar to the MDax[5] – an exceptionally high number of export-focused companies. Dax members in fact earn just 22 percent[6] of their turnover in Germany, while for the MDax the figure stand at 26 percent[3]. It is therefore hardly surprising that Germany, with an openness index (reflecting imports plus exports as a share of the total economy) of around 87 percent[7], is the most open economy of the G7 country group and well embedded into global value chains. Products "Made in Germany" have a high reputation around the world and are particularly competitive.

This offers investors lucrative opportunities, provided they do not restrict their investment strategy to pure index tracking by simply shadowing the movements of the Dax and Mdax indices. That became apparent in 2018, for example, when concerns about economic growth and the trade dispute between the USA and China sent share prices broadly tumbling. Since the movements of an index never evenly reflect the price movements of its members, there are always bigger winners and bigger losers in such events. Active fund management has the opportunity here to underweight certain shares, depending on the economic situation or the sentiment in the sector, and invest instead in more attractive companies – even second or third-tier ones. Still, temporary losses are possible with this approach, for example when the stock market suffers a broad downturn that puts even the stocks of well-positioned companies under pressure.

"Our investment approach has made the management of German equities a core strength of DWS."

Tim Albrecht,

Fundamental analysis as basis for stock selection

An active "blending" approach allows fund managers – depending on where they start – to add into the mix a suitable combination of value[8] and growth stocks[9] as well as some stocks of smaller and medium-sized companies (small/mid caps).

For this, fundamental analysis is required to uncover the most promising stocks. This means looking not just at earnings and balance sheet quality, but for example also at the individual success score of a company’s top management.

At DWS, a team of proven Germany experts is working on this. Their investment strategy is based on clear principles and a defined process. This includes the active selection of individual stocks based on fundamental data such as earnings and dividends per share that are analysed by our in-house investment team.

Success based on a well-thought-out strategy

The goal of the investment approach at DWS is a concentrated portfolio with relatively low share churn.

Source: DWS International GmbH, As of: May 2019.

"One advantage we enjoy here, is the access we are given as a major investor in German stocks to the management of these companies," explains Tim Albrecht, Head of Equities for the DACH region at DWS. "Thanks to our investment approach, managing German shares has become a key strength of DWS."

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1 . WTO Press release, 2 April 2019, P. 1, lower right column.

2 . World Trade Statistical Review 2018, P. 11.

3 . ibid

4 . ibid, P. 12

5 . German share index that comprises 50 medium-sized companies, mainly from the pharmaceutical, chemical, mechanical engineering and financial sectors.

6 . Goldman Sachs Global Investment Research; as at: October 2018.

7 . Fakten zum deutschen Außenhandel, (Facts about German export trade), Page 2, 2nd paragraph.

8 . "Value" is used to describe the assets of a company after deduction of its liabilities. Following a value strategy, investors try to seek out shares in companies whose value seems underpriced. They assume that the stocks have not yet been valued fairly by the market and that this difference will be corrected over time.

9 . Shares in a company which analysts believe has the potential for increased turnover and profits in future. An investment strategy based on this assumption is described as a growth strategy.

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