Coronavirus Beaten Down Stocks/Funds Series – iShares MSCI Germany ETF

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This article first appeared on Trend Investing on April 21, 2020; therefore, all data is as of this date.

In this ‘coronavirus beaten down stocks/funds’ series of articles, I look at both stocks and funds that have been beaten down due to the COVID-19 (coronavirus) market sell-off and are near or below their 5-year low, are very well valued, and have potential to rebound strongly as we recover.

Today, I look at Germany, a market that has been heavily sold off and is now bouncing up after recently hitting a 9-year (2011) low, and trades on a PE ratio of 10.8. Germany looks to have contained the coronavirus and has commenced slowly reopening their economy.

Germany

Source: Wikipedia

iShares MSCI Germany ETF (EWG) – Price = USD 22.68

As shown on the charts below, the EWG fund has recently bounced up slightly and is still at a 7.5-year low (2012 level). The fund is down 36% from a 2017 peak and 23% YTD.

iShares MSCI Germany (in USD)

iShares MSCI Germany 5 year price chart

Source: Bloomberg

iShares MSCI Germany ETF – 24-year performance chart (in USD)

Source: iShares MSCI Germany ETF

iShares MSCI Germany ETF 1996-2020

The chart below shows that the EWG fund is back at the October 2012 price level, or a 7.5-year low.

Source: Seeking Alpha

A look at what drives the German economy

Germany has a population of ~83 million and their 2020 GDP is currently forecast at -7.0%, rebounding in 2021 to 5.2%.

According to Wikipedia:

Germany is a great power with a strong economy; it has the largest economy in Europe, the world’s fourth-largest economy by nominal GDP, and the fifth-largest by PPP. As a global leader in several industrial and technological sectors, it is both the world’s third-largest exporter and importer of goods. A highly developed country with a very high standard of living, it offers social security and a universal health care system, environmental protections, and a tuition-free university education. Germany is also a member of the United Nations, NATO, the G7, the G20, and the OECD.

Germany’s exports account for almost half of its economic output.

Germany’s main exports in 2017 were: Motor vehicles, trailers and semi-trailers (18% of total exports); machinery and equipment (14%); chemicals and chemical products (9%); computer, electronic and optical products (9%); electrical equipment (6%); basic pharmaceutical products and pharmaceutical preparations (6%); other transport equipment (5%); food products (4%); basic metals (4%); and rubber and plastic products (4%).

Germany’s main export partners in 2017 were: The US (9%), France (8%), China, the UK and the Netherlands (7% each), Italy, Austria and Poland (5% each), Switzerland (4%) and Belgium, Spain and Czech Republic (3% each).

Germany exports by sector

Source: Trading Economics + Own chart creation

Key summary points on the German economy

  • Germany is quite linked to global GDP. If global growth is strong, then there is strong demand for Germany’s exports, and vice versa.
  • German exports do rely somewhat on autos and machinery. Right now demand for autos (especially high-end German autos) is significantly down due to the global economic slump due to COVID-19. This should recover soon, assuming the global economy starts to recover.

IMF German GDP forecasts – minus 7% in 2020, rebounding to +5.2% in 2021

Source: IMF

IMF global GDP forecast for 2020 GDP is now -3%, rebounding to +5.8% in 2021

Source: IMF Blog

The coronavirus impact in Germany

Worldometers reports that Germany has had 147,065 coronavirus cases and 4,862 deaths, as of April 21, 2020. The chart below shows German coronavirus daily new cases have significantly decreased.

Source: Worldometers.info

German government response

Germany has been one of the world’s most successful countries at containing the spread of coronavirus. Germany plans to slowly start re-opening their economy now.

A report yesterday on Nine News quotes:

German Chancellor Angela Merkel has warned that the country had achieved a “fragile, partial success” against the coronavirus outbreak… The German federal government is suggesting the country-wide lockdown be extended until at least May 3, although restrictions will be loosened to allow smaller businesses and public places to re-open. Businesses with a sales floor area of up to 800 square metres will be allowed to open their doors from Monday (April 20, 2020), along with car dealerships, cycle shops and bookshops, provided that proper hygiene is maintained. Wednesday’s proposals also cleared the way for school pupils in their final year to sit their exams.

Germany has contained the coronavirus and plans to slowly reopen now

Source: Wall Street Journal

The iShares MSCI Germany ETF details

The iShares MSCI Germany ETF seeks to track the investment results of an index composed of German equities, with exposure to large- and mid-sized companies in Germany.

Top ten holdings

Source

Breakdown by sector of the German fund

As shown below, the top 3 sectors are consumer discretionary (15.8%), financials (15.76%), and information technology (15.75%). Health care (13.55%) and industrials (12.42%) are also significant.

Source

The reserve bank interest rate in Germany (ECB rate) is 0%, and the 10-year bond rate is -0.45%. Germans tend to be good savers, and house prices are reasonably priced compared to many other countries. German government debt to GDP is 61.9%, and household debt to GDP is ~54% which is much lower than many other countries.

German house prices compared (Euros psqm, based on capital city rates)

Source

Valuation

The current PE ratio is only 10.8, with a dividend yield of 3.42% for the iShares MSCI Germany ETF.

The PE of 10.8 shows the market is undervalued. Given the low forecast 2020 GDP of -7% and the fact Germany is a key global exporter (including autos and machinery), it is understandable why the PE ratio is currently much lower than normal.

The chart below shows the German PE ratio tends to hover between about 15 and 20 in normal recent years. After the GFC, PE ratios were very low (about 10), and they are very low again now (10.8).

Germany historical PE chart (to 2018)

Source

An aerial view of Berlin, the capital city of Germany

Risks

  • A prolonged global economic downturn would hurt Germany’s export led economy, notably a large fall in global auto and machinery demand would hurt Germany. Also, the auto industry is undergoing a major change towards electric vehicles which is a risk for Germany. For now, Volkswagen [Xetra:VOW](OTCPK:VWAGY) (OTCPK:VLKAF) and BMW (OTCPK:BMWYY) are making reasonable progress to catch industry leader Tesla (TSLA).
  • Germany looks to have contained the coronavirus and has commenced slowly reopening their economy. There is risk of a setback.
  • Sovereign risk – Germany has low sovereign risk.
  • Currency risk. The stocks in the iShares Germany fund are priced in Euro, and the fund is priced in USD.
  • Market sentiment – COVID-19 (coronavirus) has been causing global lockdowns and economic disruption, which in turn has lowered investor sentiment.

The auto industry switching to electric vehicles is a risk and a challenge for Germany – BMW head office in Munich

Source (video)

Further reading

Conclusion

The German economy is a well-diversified export-led economy. Germany is the powerhouse of Europe with the world’s 4th largest economy, and the world’s 3rd larger exporter and importer of goods. Motor vehicles, trailers and machinery are key exports. One small advantage right now is their strong global drug companies such as Bayer (OTCPK:BAYZF) (OTCPK:BAYRY) and Merck (OTCPK:MKGAY) (OTCPK:MKGAF).

Germany looks to have contained the coronavirus and has commenced slowly reopening their economy.

As a result of the coronavirus market selloff, the iShares MSCI Germany ETF is now down 36% from a 2017 peak and 23% YTD, or back at the October 2012 level (7.5-year low). This has resulted in the historical PE ratio for the fund dropping to a low 10.8, last seen just after the end of the GFC.

Risk remains with the coronavirus and the degree and length of global economic disruption ahead. Germany does somewhat rely on car sales, so clearly global car sales will be a factor to consider. A prolonged global recession will not help Germany to recover as they are an export-led economy.

I rate the iShares MSCI Germany ETF as a buy for investors with a 3-5 year time frame.

As usual, all comments are welcome.

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Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.

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