May 10, 2019 Equities

Why German equities enhance any portfolio

German companies – old-fashioned and inflexible with no competitive edge? By no means. Here’s what distinguishes German companies and makes them attractive to investors.

  • As a business location, Germany is known across the world for innovation, cutting-edge technology and high productivity.
  • Everyone can find the ideal conditions to succeed there, from small owner-managed IT companies to large listed businesses.
  • The German stock market boasts a plethora of companies that are world leaders in their industry. However, it is difficult to identify the most promising ones without the help of a securities adviser.
4 minutes to read

It may be hard to believe, but when it comes to innovation, Germany is the global front runner[1], ahead of the US and Switzerland. That is the finding of the Global Competitiveness Report 2018, an annual World Economic Forum report examining the global economy’s competitiveness. The capacity to innovate is one of twelve factors that determine a country’s overall ability to compete; Germany does very well there, too, coming in third behind the US and Singapore.

Springboard to Central and Eastern European markets

Alongside Germany’s capacity to innovate, the study’s authors highlight the country’s economic stability, high level of economic development and highly skilled workforce. Companies based there also appreciate the infrastructure, including an extensive transport network, and secure investment conditions. Finally, as Europe's largest economy, Germany plays a key role in the European single market and serves as a springboard to developing markets in Central and Eastern Europe.

Promising second-tier stock

The ‘Mittelstand’ has always formed the backbone of the world-famous ‘Made in Germany’ brand. It comprises small and medium-sized enterprises (SME), but also larger private and family-owned companies. Some attractive companies from this sector are listed on the stock market. However, sitting alongside well-known global Germany businesses, it is often hard for the Mittelstand to attract investors’ attention, although some of them are so-called ‘Hidden Champions’ – companies that have carved out a leading position in certain niches.

According to one competitiveness study by the World Economic Forum, Germany is one step ahead in terms of capacity to innovate compared to other countries.

Actively managed funds can relieve investors of the burden of searching for shares with the best prospects.

Broad range of investments on the German stock market

Around 430 companies are currently in the General Standard[2] and the Prime Standard[3] of the Deutsche Börse. The German stock market therefore offers a broad range of investments that are highly rated by both domestic and foreign investors. Various indices tracking the performance of specific sectors help these investors to navigate the stock market jungle. These include the TecDax[4], the SDax[5], the MDax[6] and the Dax, which comprises the 30 largest German companies by trading volume and market capitalisation.

However, because there are so many stocks and shares, it is hard for investors to make the right picks for their portfolios. This is where actively managed equity funds come into play. They are in a position to add value for investors by not simply focusing on stock market indices and thereby on company size and industry sector. DWS experts select the most promising shares by reviewing company balance sheets and analysing firms’ market potential, for example.

Although the stock market has rallied in the last few years, further share price increases are still possible, particularly in Germany where shares are more attractively valued than in the US, as shown by the price-earnings (P/E) ratio (a ratio of the share price to net annual earnings per share). The P/E ratio indicates the level of annual earnings needed to buy one share. The 30 companies in the Dax index currently have an average P/E ratio of 12.6[7], which is significantly lower than the corresponding figure of 16.8 for the S&P 500 Index,[8], which contains the 500 largest publicly traded US companies.

Why investors are increasingly betting on German equities

More and more German investors have turned to the stock market in recent years, due to equities’ good long-term prospects, low interest rates and the debate about the future of pensions. In 2018, shareholder numbers rose for the fourth year in a row to reach their highest level since 2007, according to the DAI (Deutsches Aktieninstitut), the German equity institute. The data also show that indirect investments through investment funds have increased markedly, while direct investments have fallen.

Compared to the US market, German shares look attractively valued.

For investors with a long-term investment horizon, studies show that the point at which they invest in the stock market is of secondary importance.

Studies have also shown that timing, that is the moment of entry into the stock market, is not that significant in the long term; the main thing is simply to be invested. The Dax, for example, gained 7.5 percent a year over the last 30 years.[9]

Dax performance in the past five years

4/18 - 4/19 4/17 - 4/18 4/16 - 4/17 4/15 - 4/16 4/14 - 4/15
Dax -7.6 % 1.4 % 23.9 % -12.4 % 19.3%

Past performance is not a reliable indicator of future performance; Source: Bloomberg L.P., DWS International GmbH, as of 03.04.2019.

The old proverb about planting trees is therefore equally relevant here. The best time to buy German shares was 30 years ago. The second best time is now.

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1 . Word Economic Forum: The Global Competitiveness Report 2018, p. 239.

2 . General Standard: a market segment where companies meet legal reporting obligation requirements.

3 . Prime Standard: a market segment where companies must meet legal reporting obligation requirements and, additionally, adhere to international standards and publish quarterly reports or ad hoc communications in German and English, as well as holding analyst conferences.

4 . The TecDax reflects the performance of the 30 largest technology companies on the DAX.

5 . SDax: select index for smaller companies

6 . MDax: index of 50 medium-sized companies from traditional industries

7 . Based on 12-month earnings estimates, source: Datastream, as of: 16.4.2019.

8 . Based on 12-month earnings estimates, source: Datastream, as of: 16.04.2019.

9 . Source: DWS Investment GmbH, as of: 15.01.2019

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