Will Germany's Momentum Help European Markets Find Their Stride?

European markets haven't enjoyed the gains that American investors have gotten used to in 2013, but stocks across the Atlantic might finally be turning the corner headed into the end stretch of the year. Germany's DAX (DAXINDICES: ^DAX  ) picked up nearly 3% over the past five days, bringing its full-year gains to more than 9%. While Germany might be leading Europe out of recession, questions linger for this top economy -- particularly as it heads into a potential turning point of its own. Is Germany still a rewarding spot for investors?

Europe turning the corner
For European investors, Germany's upcoming political election marks a major point of uncertainty in the region's fragile recovery. German Chancellor Angela Merkel has presided over the country's struggling growth so far, but even as the German economy has struggled to find much traction, it has beaten out its European peers to defy contraction in the past few quarters. Indeed, Germany's economy grew 0.7% in the year's second quarter, one of the top rates among Europe's largest economies.

Still, Merkel's government isn't so sure it can keep up that level of growth, and Berlin expects a slowdown in the third quarter. Exports, already a huge driver for the German economy, slowed down in July, with industrial production falling 1.7% from June. Overall, Germany's Bundesbank predicts that the economy will grow 0.3% for the full year, although it's not likely that Germany will fall into contraction in coming quarters like harder-hit nations such as Italy and Spain.

Investors have been craving signs of stable growth in this region, and Germany's markets are the best option in Europe -- particularly as the country's economy has grown in competitiveness. Germany ranked as the World Economic Forum's fourth most-competitive economy this year, ahead of the U.S. by one spot. If Germany can maintain that competitiveness as it recovers, it should perform solidly for investors in the future.

Still, that doesn't mean that every stock in Germany is right for investors. Doing your homework on every company you buy into is critical in such a recession-hit region as Europe. Take Deutsche Bank (NYSE: DB  )  This top financial stock hasn't had much of a positive impact for investors this year, with shares climbing only 2.4 year to date. Now, Deutsche Bank is under investigation by Japanese regulators in a bribery probe of the company's investment banking unit.

Regulators for Japan's Securities and Exchange Surveillance Commission haven't commented on the matter, and may or may not enforce sanctions, but it's another obstacle cropping up for a financial firm that doesn't need any more headaches. Deutsche Bank's already struggling to convince investors that it's well-capitalized, despite the company's $3.88 billion capital increase back in April that briefly led to analysts raising projections for the financial stock. The bank earlier in the year announced that it had hit current leverage ratio requirements, but with many European banks under scrutiny, investors may want to opt for caution in Deutsche Bank's case. It's no reason to sell in a panic, but, as always, performing due diligence is a must.

Deutsche Bank's hardly the only German firm under regulatory fire, but Bayer's (NASDAQOTH: BAYRY  ) situation in China could be quite a bit messier. Chinese regulators have already launched sweeping investigations of the health-care sector, and Bayer announced this week that Beijing's added the company to its target list.

China's investigations into anti-competitive behavior and corruption have expanded significantly since GlaxoSmithKline (NYSE: GSK  ) first captured the spotlight in this story. Bayer's a big player in the Asia-Pacific region – it receives more than 20% of global revenue from the region -- so it can't afford a big hit from Beijing. While nothing's been decided yet, Bayer investors have to keep a close eye on these developments.

Bayer and other German stocks have struggled to gain traction this year, but better times could be on the way. 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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