Germany ETFs in the spotlight

Jan 18th, 2017 | By | Category: Equities

While US equities have been grabbing the spotlight recently, European exchange-traded fund investors may be overlooking potential opportunities closer to home.

German ETFs offer good return opportunity closer to home

Dax-tracking ETFs such as the b X-trackers DAX UCITS ETF (XETRA: XDAX) are up 21.8% over the past twelve months in euro terms.

After six consecutive weeks of gains, German equity ETFs pulled back slightly this week on the news that the UK is prepared to leave the single market as part of its Brexit deal.

The DAX Index slid 0.7% between 13 and 17 January, but it is still up 21.8% over 12 months and 1.0% year to date in local currency terms. German-focused ETFs have followed suit, with the db X-trackers DAX UCITS ETF (XETRA: XDAX) rising 20.9% and 1.1% over the same timeframes.

Germany has taken strong steps to open up its economy to international trade, taking advantage of a cheap euro, and has vowed to remain in the European Union. Furthermore, positive economic performance indicators suggest that the country’s economy is well positioned to face a fast-changing macroeconomic backdrop.

Between 2011 and 2015 Germany’s exports as a share of its GDP rose to new highs from 44.8% to 46.8%, according to World Bank data. Unemployment has fallen to multi-year lows, currently around 4.1%, despite a significant influx of immigrants to the country due to the refugee crisis. Inflation has also surpassed analysts’ expectations, with the German consumer price index rising to 1.7% year-on-year, the fastest increase in the last two decades.

The caveats for German equity performance include any further serious disruption to the Eurozone and the European common market, which could derail international trade. There is also the political risk of an election in Germany this year, but Credit Suisse deemed this risk to be “overrated”.

Nonetheless, Germany remains a power engine of Europe, a fact which has been rather overlooked due to the Eurozone’s structural problems.

Sterling-based investors have also enjoyed positive returns from the DAX. The same db X-trackers ETF (LON: XDDX) is up 36.3% over one year and 2.4% year to date. But investors should be aware of currency volatility, which is ongoing as the UK triggers Article 50 and formally leaves the European Union. Any further disruption of GBP/EUR could lessen returns of Sterling-based ETFs investing in German companies.

The European Central Bank has lowered its bond buying program to €60bn a month from April, but extended the program to December this year, or even further, if the need arises. Goldman Sachs does not forecast any further monetary tightening from the ECB until 2019.

Broad European and Eurozone large-cap equity ETFs were also at the top of investors’ preferences in the fourth quarter, found the latest Morningstar ETF Fund Flows Report.

“This was a remarkable turnaround in fortunes after a rather negative third quarter, when valuations were dragged down by the troubles in the German and Italian banking sectors,” the report read.

Analysts at the Bank of America Merrill Lynch said European earnings are now on their way to produce “their best years since the financial crisis” due to a falling euro and firming commodity prices.

Deutsche Bank raised its projection for the Stoxx Europe 600 Index from 6% to 9% returns for the year. The cheapest ETF tracking this index on the London Stock Exchange is the Source STOXX Europe 600 UCITS ETF for 0.19% fees. It is up 28.2% over 12 months in sterling terms (LON: S600) and 10.3% in euro terms (XETRA: SCOC) over the same period.

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