MONEY MATTERS: 'Ach tung' investors -- Germany is a leader

By Mitchell Thomas The Daily Record Newswire During the last several years, investors globally felt the upheaval of Europe's sovereign debt crisis. Greece, Ireland, Hungary, Spain, Portugal and Italy have wreaked havoc on both the equity and bond markets worldwide. The European Central Bank and the International Monetary Fund addressed each nation with some form of a bailout to thwart a contagion effect throughout the region. Initial efforts did not inspire confidence for investors; however, the consensus among the contributing nations was to save the Euro currency and the European Union under any circumstance. Investors were encouraged to come forth and purchase the recently issued bonds from these nations, stimulated by a higher interest rate. Germany stood out as a leader under this morass of bad news. Their economy is reviving from the depths of a credit crisis and growth seems secure and perpetual. Their unemployment rate went from over 9 percent to a current 7.4 percent over the last two-and-a-half-year period. They worked directly with private industry during the height of the downturn. Unions were ingrained into both the social and political machine. The government offered to support business by subsidizing 65 percent of the wages of potentially furloughed employees for duration of two years prior to companies becoming fully responsible for employee retention. The payoff: The wage loss was minimal, the employees maintained productivity and the domestic impact was nominal. Labor costs in Germany are now considerably cheaper than neighboring nations. The workforce offers potential employers skilled, experienced and highly educated individuals trained in technology and engineering. Their productivity and efficiency are highly competitive globally. Comparatively, Germany is ranked fifth globally for having a competitive business advantage. They have a strong infrastructure, are leaders in alternative energy, and have an experienced financial market structure. They are the second largest exporter in the world, after recently becoming deposed by China. They have commanding inroads into the emerging markets, exporting their goods and services as well as surpassing the U.S. in dollar value to exports to China. They currently are 28 percent of the GDP of the European Union and their exports contribute 48 percent to their nominal GDP. The valuation of their securities is extremely compelling. Their P/E ratio is estimated to be 10.9 percent in 2011 compared to 13 percent in the U.S. Forward earnings are on a solid uptrend after coming off a phenomenal 2010 with 59 percent growth. Their dividend yield is 3.4 percent on the DAX Index versus 1.9 percent for the S&P 500. The price to book is 1.53 percent in Germany while the S&P 500 is 2.34. Contrary to the U.S., German banks are now offering credit at reasonable rates due to the elevated savings rate of its citizens. Unfortunately, not all forecasts are for clear skies ahead. Labor inflation presents a feasible headwind. Unions have a strong foothold in negotiating labor contracts. Since the workforce made sacrifices during the crisis, they now are approaching new contracts demanding a 5 percent raise, bad news for inflation. The continued sovereign debt crisis in Europe has created a large burden on Germany. They are obligated to contribute to the funding of bailouts of mismanaged nations economies. The backlash by the German citizens has put President Merkel in a vulnerable position to maintain control. Elections are to be conducted in late February and March that could culminate in creating a stalemate to enacting change and making a lame duck out of their president. The debt crisis has alerted the European community to address their burgeoning public debt. Government programs similar to our Social Security, retirement and healthcare are all being reviewed and compromised. Austerity programs are being enacted throughout each nation with a promise of varying degrees of success. As has been the European trend, the census numbers are indicating negative population growth in Germany. The revision in immigration laws may open up an influx of migrating workers from neighboring nations to affect change. Despite gray skies, Germany has been a rising star among the crumbling developed European countries. They are worth serious consideration if diversification to international equities is on your investment horizon. Mitchell Thomas is an international equity analyst/portfolio manager/head trader for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. He can be contacted at (585) 586-4680. Published: Tue, Mar 1, 2011