Exports drive strong outlook for German equity ETFs

Dec 12th, 2012 | By | Category: Equities

Despite a generally tough environment for European equities, German corporates continue to benefit from positive underlying domestic economic fundamentals and strong demand for their goods and services globally, according to Baring Asset Management.

Exports drive strong outlook for German equity ETFs

German corporates, such as blue-chip giant Siemens, continue to benefit from strong demand for their products globally.

The London-based asset manager believes that share price valuations for the German market remain attractive on both a relative and historic basis and that German companies  strong earnings growth and the likelihood for superior earnings in the future.

Rob Smith, manager of the Baring German Growth Trust, a traditional unit trust, said: “Our outlook for German equities continues to be supported by what we see as improving economic and corporate fundamentals for the continent’s biggest economy.”

He added: “From where we stand, Germany benefits from a number of positive macroeconomic drivers, including strong employment data, a high savings ratio, well-maintained corporate balance sheets, and competitive in-demand exports which are increasingly directed towards a recovering US economy and improving Chinese economy.  On this last point, Germany’s share of exports to markets outside of Europe compares favourably against rival economies on the continent.  This upward trend is based, amongst other things, on the competitiveness, quality and desirability of what it exports.”

Looking at the past five years, German exports as a share of total EU-17 exports have grown from around 31% as of Q1 2007 to a third (33%) as of Q1 2012.  Similarly, Germany’s share of EU-17 exports to countries outside of the EU has risen from 23% in Q1 2007 to over 25% as of Q1 2012.  The signs indicate that this growth is set to continue as German goods continue to be in demand from customers in both developed and developing economies.

For investors seeking targeted exposure to German equities, exchange-traded funds (ETFs) based on two key German indices – the blue-chip DAX and the broad MSCI Germany – provide liquid access at extremely low cost.

The following are available to UK and European investors:

Amundi ETF MSCI Germany (CG1)
The fund is synthetically replicated and tracks the MSCI Germany Index, a free-float capitalisation-weighted index that aims to capture 85% of the publicly available equity universe in Germany. The index has approximately 50 holdings ranging in size from €68 billion to €1.2 billion. Companies categorised as Consumer Discretionary comprise 16.8%, Materials 16.2%, Financials 15.9%, Industrials 13.7% and Healthcare 13.0%. Major holdings include Siemens, BASF, Bayer, SAP and Allianz. The fund is listed on the London Stock Exchange, NYSE Euronext, Brosa Italiana and Deutsche Börse, and comes with a TER 0.25%. The fund has UK Reporting Status.

db X-trackers DAX ETF (XDAX)
The fund is synthetically replicated and tracks the DAX Index. This index reflects the blue-chip segment of the German market, comprising the 30 largest and most actively traded companies on the Frankfurt Stock Exchange (Deutsche Börse). Major holdings include Siemens, BASF, Bayer, SAP and Allianz. The Chemicals sector has the largest weight with 24.6%, followed by Automobiles & Parts with 14.1%, Industrial Goods & Services with 13.4%, Insurance with 10.3% and Technology with 9.4%. The fund is listed on the Deutsche Börse, NYSE Euronext, Mercado Continuo Espana, Stockholm Stock Exchange and SIX Swiss Exchange, and comes with a TER 0.15%. The fund has UK Reporting Status.

Synthetically replicated. Tracks the DAX Index (see above). The fund is listed on the Deutsche Börse and comes with a TER 0.15%. The fund has UK Reporting Status.

The cheapest fund available appears to be the ComStage ETF DAX TR (CBDAX) from Commerzbank, which is listed on the Deutsche Börse and SIX Swiss Exchange and charges just 0.12% per year. However, this fund has only been registered in Germany, Austria, Luxembourg and Switzerland, meaning the adverse tax treatment for UK investors (and those of other countries) would likely negate the small fee advantage.

US-based investors looking for German equity exposure could consider either the iShares MSCI Germany Index ETF (EWG) or the First Trust Germany AlphaDEX ETF (FGM), both listed on the NYSE Arca.

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