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Strategy
Germany: DAX Over 5,000,
Concerned About Value, Not Politics
European bull run should continue, with Germany participating but underperforming
For the first time, the German DAX index level rose above 5,000 last week. We still believe there is more upside to the European bull run yet, and that Germany will participate in it. However, we are concerned about three things in Germany --- valuations, liquidity and consumer recovery --- which lead us to underweight the marked.
Country-specific issues are still somewhat valid
While the country-by-country approach to investing in Europe loses followers almost weekly, the performance of stocks still holds a significant country-specific element. Our approach to European investment has always emphasised picking out key themes, most of which are sector-based. However, we still think it is a major mistake to ignore national policy issues on taxation, competitiveness and liquidity, or issues on growth. Monetary and budgetary issues are much less influenced nationally due to the EMU process.
What difference could the various political scenarios make in Germany?
The equity market's knee-jerk reaction to any centre-left SPD/Green victory in the general election would be negative, in our view, because of the perception that the Greens' policies would affect the market mainly through slower deregulation and higher environmental-related taxation.
However, Joachim Fels, our German economist, and I share the view that an SPD/Green coalition government would be less damaging than the French Socialists were last year. The impact of a smaller Green faction in a coalition would be constrained, and the SPD element would hold the primary decision-making role. The policy platform of the SPD is fairly close to that of Chancellor Kohl's CDU: for example, both parties are in favour of cutting corporate taxes (as are the Greens) and simplifying the tax code. Moreover, the chances of unblocking reform in Bonn would be improved if the SPD be controlled both houses of the parliament. While Gerhard Schroder, the SPD candidate for Chancellor, may be seen as a populist, he is also a pragmatist, which could allow him to be even more progressive in reducing the indirect cost of labour in order to help reduce unemployment.
Finally, we would point out that, in the last 20 years, even in real terms, stock markets all over Europe have tended to do better under left-leaning governments than those under governments leaning to the right.
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