There's been no stopping Germany's DAX (^DAX) stock index recently. Even Washington's political brinkmanship hasn't slowed Germany's leading index, as the DAX picked up another 1.7% over the past five days, and set an all-time record high on Friday.
Is Europe ready for investor confidence, however? Germany's economy is performing well, but there are still holes in the slow, steady march higher for the continent's top economy. Can German stocks and the DAX deliver?
Germany's Europe problem
Trade-reliant Germany kept its exports growing in August. Exports jumped 1% in the country as compared to July -- a mark that did miss expectations of 1.5% -- while Germany also grew its trade surplus for the month. Trade has helped the German economy climb out of recession overall, as it posted a 0.7% gain in the second quarter. As long as the country's overseas activity continues to remain in the black, Germany should be able to lead Europe's sluggish economic comeback.
Yet, that same broader European effort to escape the recession is weighing on Germany's – and investors' – prospects. Unemployment remains high in the rest of the eurozone, and major economies, such as Italy and Spain, have yet to dig out of recession. That's crushing European demand for Germany's trade, an especially dark prospect considering the country relies on Europe as its largest trade partner. There's only so much that China, the U.S., and other countries worldwide can do for Germany's economy and its leading export firms, such as carmakers like Volkswagen (VWAGY 0.67%), if Europe can't rebound.
Germany's exports of goods rose sequentially in August, but they have fallen year over year. The country's leading businesses are facing challenges from within, as well. Germany's electricity prices have jumped recently, costing businesses and consumers more to keep the lights on. Research and analytics firm IHS projects that more pain could be on the way as the country embraces renewable energy subsidies; such spiking costs could even impact trade data in the future due to the higher cost of operations.
To counter that trend, some leading German firms have turned their attention overseas. Volkswagen's already one of the leading carmakers in China, and the firm is planning on expanding production in the country to solidify its dominance in the world's hottest auto market. But Volkswagen's not stopping in China: The company's also investing more into Brazil, where it's the largest exporter in the growing market.
VW and German competitor BMW (BAMXF -3.91%) are also pushing hard into India. Both companies are launching new cars in the country, even as new car sales have slumped significantly this year in India. Nonetheless, the country's sheer population size and growing middle class present a significant incentive to BMW and VW in the long run by tapping into this market now. Still, BMW and VW will have to contend with local rival Tata Motors (TTM) to capture the Indian market like the latter has won over China. Tata's purchase of Jaguar has put the company into even more direct competition with BMW in the future.
BMW and VW have some flexibility to work with, however. The former's China sales jumped 21% in September, while VW has outsold closest competitor General Motors in China over the first nine months of 2013. If the two companies can keep up their international push, they'll be well-positioned to withstand the ups and downs of a volatile European market for some time to come.
