Despite her upbringing in East Germany, Angela Merkel has shown a deft capitalist touch. Under her watch the German economy has been a leading light in Europe in recent years, which helped propel her party to victory in Germany's federal election on Sunday. The outcome essentially assures she will be chosen for a fourth four-year term as German chancellor.
Granted, Merkel’s re-re-re-election wasn’t an unabashed coronation. Her ruling center-right Christian Democratic Union party had its worst showing since 1949, while its coalition partner, the center-left Social Democrats, finished second with its worst results in the post-World War II era. The rise of the nativist, right-wing Alternative for Germany party, which captured the third-highest number of seats in parliament, shocked the establishment and raises concerns about Merkel’s ability to forge a smooth-running coalition government.
Despite the political uncertainty, these have been buoyant times for the German economy, which has expanded at a steady two percent clip. And unemployment rates have moved below four percent, the lowest level since reunification.
A robust manufacturing sector gets much of the credit as Germany runs current account surpluses of around 8 percent of GDP, according to the OECD. “The industrial part of the economy is firing on all cylinders right now,” says Wade Guenther, global ETF strategist and portfolio manager at Horizons ETFs.
While German voters sent a message to Merkel during the election, investors have been bullish on Merkel and her economic stewardship. The iShares MSCI Germany ETF (EWG), for example, is up roughly 22 percent over the past year. That fund is based on the MSCI Germany Index, which tracks the nation’s leading large-cap firms. The ETF, which carries a 0.48 percent expense ratio, has roughly $4.7 billion in assets.
Still, German equities remain in catch-up mode compared to U.S. stocks. EWG, for example, has risen less than two percent on average over the past decade, according to Morningstar. The SPDR S&P 500 ETF (SPY) is up an average 7.3 percent per annum during that time.
That performance gap has led to striking valuation comparisons. While the S&P 500 trades for more than 20 times prospective earnings, the multiple for the iShares MSCI Germany ETF’s holdings are valued at around 14 times forward earnings.
Until recently, Germany was the proverbial best house in a bad neighborhood. That’s no longer the case as Spain, France, Portugal and other key European trading partners are starting to post steady economic gains. The European Commission just announced that the index of industry and consumer sentiment increased to 113 in September, the highest reading in a decade.
Growing economic activity among key trading partners has been a clear boon for Germany’s small- and mid-sized industrial firms, many of which have an export focus. Indeed, the iShares MSCI Germany Small-Cap ETF (EWGS) has surged an impressive 37 percent over the past 12 months. The fund sports a 0.59 percent expense ratio.
Investors in search of a low-cost ETF may want to look at the Horizons DAX Germany ETF (DAX). In a bid to boost its current $15 million asset base, the large cap-focused fund charges just 20 basis points. “It’s not expensive for us to run this portfolio,” says Horizon’s Guenther. “There is very little portfolio turnover, outside of periodic rebalancings, and we don’t incur costs such as hedging.”