Danger Looms at BASF and Siemens as Germany's DAX Falls

Despite rare optimism from European manufacturers in the past few days, investors in leading German stocks didn't have a week to remember. The DAX (DAXINDICES: ^DAX  ) shed more than 1.2% over the past five days to put a damper on a past month that has been successful for the index relative to its year-to-date gains. While the economic climate in Europe's leading economy may be picking up, a few leading companies have recently soured expectations. What's the impact on your portfolio? Let's check out the latest from across the Atlantic.

Business is on the rise, but is it enough?
Germany's composite purchasing managers' index for July recorded a preliminary reading of 52.8 on Wednesday (a reading of 50 shows neither expansion nor contraction in private-sector activity) -- the PMI's highest score in five months. It was part of a general upswing for PMIs across Europe; France's PMI also swung to a 17-month high. Societe Generale analysts dubbed the mark "impressive" as sentiment begins to pick up in Europe that the eurozone could finally be digging its way out of the recession.

However, France's reading of 48.8 shows that Europe's second-largest economy still faces business contraction, and most European nations are hardly in the clear. Indeed, even Germany still faces plenty of problems. While Germany's manufacturing activity rose out of contraction territory for July, also hitting a five-month high, its reading of 50.3 indicates that the sector is barely keeping its head above water. Declining sales to China, Germany's largest export partner outside of Europe, will hamper manufacturing optimism in future quarters, considering that Europe as a whole still is far from reaching economic growth.

Many analysts have pointed out that the German economy's recovery won't be enough to dig the eurozone out of its hole. The best German stock investors can hope for is that Europe's worse-off economies won't hit the DAX too hard in coming quarters.

Leading German conglomerate Siemens (NASDAQOTH: SIEGY  ) bit shareholders this week, raising a red flag about its full-year outlook. The company said it does not expect to meet its operating-profit target in 2014. Siemens's CEO already predicted back in May that the company's profit this year would be on the low side of the company's estimates of between 4.5 billion euros and 5 billion euros.

Blame faulty wind turbines, which already cost Siemens dearly in its third-quarter earnings, released in June. Alternative energy is not working out well for the company since turbine blades broke in California and Iowa, with Siemens announcing earlier that it will replace its current wind unit chief. The firm has already said that it will close its solar-power unit that failed to find a buyer. Pricing pressures are weighing on energy generation and other markets, and we'll see just how bad things have gotten for the company when it releases its earnings for this quarter on Aug. 1.

Siemens isn't the only German stock offering caution. BASF (NASDAQOTH: BASFY  ) followed right in Siemens' footsteps this week when the chemicals giant said that it will struggle to meet its profit target for 2013 due to challenges in China. The company's second-quarter earnings fell by more than 4% as global demand has faltered. While BASF's CEO still feels optimistic that his company will boost sales and earnings overall this year, Europe's ongoing slump won't help BASF's predicament.

German stocks like BASF have struggled to beat Europe's slump -- and the DAX's lackluster performance on the year is testament to how the global economy's slowdown has hurt investors. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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