German Stocks Don’t Show a Nation in Recession 

(Bloomberg) --

As Germany celebrates the 30th anniversary of the fall of the Berlin wall, the export-heavy economy seems to be at an inflection point. Doubts have emerged about the outlook for Europe’s growth engine, caught in the crossfire of the U.S.-China trade war, and this week’s GDP data should shed light on whether the country is only in a “technical recession” or if the cracks go deeper.

Things change fast. Not long ago, a flood of profit warnings threatened the recovery of German equities. Now, with the risk of a no-deal Brexit gone, a more positive newsflow on trade talks and some early signs of stabilization on the macro-economic backdrop, the DAX is getting close to an all-time high, and has gained 26% so far this year. Even when excluding dividends from the total-return index, it features among Europe’s top performers, up 22%.

The renewed confidence in the German stock market suggests investors may already be betting on an improvement on the macro front. A technical recession is widely expected, hence a negative GDP print tomorrow might not be that scary.

“Maybe the worst is behind the German economy,” said VP Bank economist Thomas Gitzel in a note to clients. But a similar stock market gain next year might be hard to achieve as some structural challenges for the country remain. “So, if early economic indicators improve, we are not talking about growth rates of 2% but rather of between 0.5% and 1%,” Gitzel said.

Even fragile German politics could declare some progress this week as Merkel’s coalition reached an agreement on topping up basic pensions. It’s a positive for consumers as the package also includes a cut in payroll tax and the establishment of a new 10 billion-euro ($11 billion) investment fund. As Berenberg Chief Economist Holger Schmieding puts it: It’s a “slow-motion fiscal stimulus.”

Provided all goes relatively well regarding Brexit and a decent trade deal, “then growth prospects for export nations like Germany could brighten up,” says Merck Finck chief strategist Robert Greil. This week’s ZEW survey showed investor optimism is further rebounding from an eight-year low.

What would be needed next is confirmation from corporate earnings, but that might not be forthcoming. “The DAX index’s double-digit earnings-per-share growth in 2020 will benefit from self-help, but our EPS model doesn’t yet signal recovery,” Bloomberg’s BI analysts wrote last week. “We still need to see economic improvement, as the slowdown in global growth over 2019 has led to cuts in excess of 11% on 2020 EPS,” the strategists said, adding that there’s no sign the trend is slowing.

Investment flows show skepticism lingering over the German recovery story. ETF equity flows have consistently been negative this year, even as Europe saw investors returning recently. Germany has been the worst country on the continent this year for equity-focused ETFs, with $4.1 billion of net outflows. The trend continued in the past month, as a net $708 million departed.

Although there’s a high level of fund managers that intend to be overweight on German stocks in the future, support has declined in the past month, according to the latest Bank of America survey. Money managers also prefer France, which recently emerged as Europe’s new growth engine, while the U.K. experienced the biggest switch in sentiment, as shown in the table below.

To contact the reporters on this story: Michael Msika in London at mmsika4@bloomberg.net;Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon

©2019 Bloomberg L.P.