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

Germany's lead stock index hit a record high, but there's plenty to like for the country's top exporters -- and their investors -- in the future.

Jun 6, 2014 at 6:30PM

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.

Will this stock be your next multi-bagger?
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends BMW. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers