DAX 10,000: Is Europe's Biggest Market Still Its Biggest Opportunity?

Record markets aren't limited to the U.S. these days.

Germany's DAX (DAXINDICES: ^DAX  ) surged past the 10,000-point intraday mark on Thursday for the first time. While much of Europe has floundered with the Continent's dragging recovery, the German economy has kept up its gains, recording 0.8% GDP growth in the first quarter and surging on rising domestic demand.

Yet despite the DAX's rise to record levels, Germany's stocks have plenty of room to run. According to Bloomberg, the index trades at a price to estimated earnings valuation of 13.8, a significant distance below the S&P 500's (SNPINDEX: ^GSPC  ) 16.4 valuation. With major exporters in Germany such as Volkswagen (NASDAQOTH: VLKAY  ) and BMW (NASDAQOTH: BAMXF  ) off to strong starts in 2014, is Germany still a sure bet for investors?

Bold moves from the ECB

Source: Wikimedia Commons

The European Central Bank's unprecedented move to push forward negative deposit rates helped the DAX hit its new record. While some analysts and economists in Germany have decried the move, it could be a blessing in disguise for Europe's largest economy. Germany's exports, the foundation of this trade-driven market, didn't fare quite as well as usual in 2014's first quarter. Trade actually slowed down German GDP growth in the quarter.

However, the ECB's new moves could have a huge effect on that trend by weakening the euro, a positive that would help leading export companies like automaker Volkswagen boost overseas sales through the rest of the year. Plus, more aggressive stimulus moves -- up to and including quantitative easing, even -- aren't off the table for the ECB, particularly as European periphery states such as Italy and Spain continue to struggle with downbeat growth. That might not please German politicians, but stimulus moves that weaken the euro are a great sign for investors of the nation's top exporters.

Still, many economists believe that Germany's GDP growth is poised to slow throughout the rest of the year. Even excluding major stimulus moves, however, German exports look poised for a major bounce back.

Exports rose 3% in May after the slow start to the year, and investors need to keep an eye on two critical points: a comeback for emerging markets and growing U.S. consumption, which hit a snag in America's frigid winter and depressed the earnings of many U.S. companies.

Can emerging markets keep up?
Emerging markets are a major key to German companies and for investors hoping to make the most of the country's stocks. Developing economies have been hit hard by slowing growth and capital outflow in the last few years, particularly China, which has seen its GDP slow to an annualized growth rate of below 7.5%. Despite that, optimism has risen over the past few months: An HSBC survey this week showed business activity in emerging markets hit a three-month high in May.

That's key for top German automakers and their shareholders. Volkswagen counts China as its largest market, and it's there that the company has made its strongest gains lately. VW sold more than 900,000 cars in China over the first four months, recording sales growth of more than 17% year over year and far exceeding its 2% growth in Germany. If China can keep up its broad economic growth and swelling middle class, Volkswagen and other emerging market export leaders in Germany will be poised to ride higher.

However, VW has struggled mightily in the U.S. this year, and the chilly winter can only take some of the blame. Volkswagen's U.S. sales plunged by more than 15% year over year in May and more than 10% through the year's first four months. Yet even with China's opportunity, the U.S. isn't a market VW and German stock investors can overlook. Rival BMW recorded record American car sales in May, with year-over-year sales growth of 5% in the U.S. through the first five months of the year. 

Economists expect U.S. growth to pick up after the winter, fortunately, and if Europe can mount even a slightly stronger comeback, it'll mean big things for Germany's top companies. Europe's weakness has cost German firms with a major presence on the Continent, such as Siemens (NASDAQOTH: SIEGY  ) , dearly. Siemens' fiscal second-quarter sales fell by 2 % even as China shined for the company, with Europe's ongoing weakness weighing on results, particularly in Siemens' energy business. That's led to disappointment from this stock in 2014, as Siemens' shares have trailed the DAX year to date.

^GDAXI Chart

^GDAXI data by YCharts

Europe is less of a critical cog for automakers and other export-dominant firms, but it's still a major market that can't be ignored by investors and companies alike.

Europe's top economy won't be stopped
Germany may see GDP growth slowing in the second half of the year, but Europe's largest market still has plenty of opportunity abounding for savvy global investors. With the likelihood of a weaker euro to strengthening emerging markets and the U.S., exports and top exporters look poised for growth through the rest of 2014. While Europe's economy is still in the danger zone, Germany is the gold standard on the Continent. While investors, as always, should buy into strong businesses for the long run above all else, there's plenty to like about Germany's market heading into the future.

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