Germany is the economic powerhouse of Europe and the world’s fourth-largest economy
The rocket boomed overhead. A deep, reverberating explosion that sounded more like an artillery shell then a firework.
Germany’s Brazilian-born striker, Cacau, had just scored the team’s fourth goal in their opening World Cup match against Australia.
Someone in Berlin was obviously in a celebratory mood.
I’ve been in the German capital since the start of June. How Germany reacts to Europe’s debt crisis is crucial to whether we see an economic recovery or a further slide into calamity.
I want to find out firsthand which it will be.
At a recent investment meeting in France I talked to a prominent German businessman. He told me that Germany’s earners and savers are sick to the teeth of paying for what he called “siesta and fiesta” in Greece, Spain and Portugal.
His words stuck with me.
Germany is the economic powerhouse of Europe. It is the world’s fourth-largest economy. And the world’s second-largest exporter, after China.
If German voters like the one I met in France stop supporting the bailouts en masse, the E.U. is toast. We would see a disintegration of the whole project before the end of the year.
This hasn’t happened yet. And from what I’ve seen so far in Berlin, Germany’s prime minister, Angela Merkel, remains popular. But as I’ve said here before it’s almost inevitable that the euro will slide further versus the dollar.
This spells opportunity.
The euro has already fallen roughly 30% against the dollar. This means that German exports just got 30% cheaper for U.S. customers. It also makes German exports far more competitive compared to U.S. exports, which are priced in dollars.
Almost a third of Germany’s economy is made up of exports. This puts it at a huge advantage as the euro devalues.
But investors don’t seem to care. The problems in Europe have investors spooked…and spooked good. And they’re selling European stocks.
So far this year, Greek stocks have fallen about 36%…Spanish stocks are down about 27%…and Italian stocks are down about 20%. German stocks are down roughly 2%. But they are still undervalued compared to U.S. stocks.
This is a great contrarian opportunity.
Contrarian investors go against the crowd. They are fearful when others are greedy and greedy when others are fearful.
Right now, investors don’t like European stocks. The crowd is fearful. But what they’ve forgotten is that German stocks will actually benefit from the crisis in the euro over the long run. This means it’s time to buy.
An easy way to do this is to buy the iShares MSCI Germany Index Fund ETF (NYSE:EWG).
EWG trades like an individual stock. But it tracks 51 companies based in Germany. German blue-chips Siemens, E.ON, BASF, Bayer, and Allianz make up 35% of these companies. Another 18% is made up of financial companies. And 55% of the companies EWG tracks are in the industrial, materials, utilities and consumer discretionary sectors.
After their performance against Australia last week, the German football team are front-runners for winning the World Cup. I expect the German economy to be one of the big winners from the crisis in the euro, too.
