Guten Morgen. Germany is not the favorite country of the rest of the eurozone members, but it is undeniably the engine of growth for the single currency area, and probably of the whole of the European Union. This fact was just reconfirmed this morning.
Data released on Friday show that the German economy expanded by 0.7% in the first quarter of this year, more than double the 0.3% pace of growth of the last quarter of 2015. Growth was stronger than the eurozone's 0.6% advance, and was the fastest quarter-on-quarter expansion since the first quarter of 2014.
There were no detailed releases of GDP components, but ING Bank analyst Carsten Brzeski said that, judging from available monthly data, Germany's growth was mainly driven by domestic factors. One of them was activity in the construction sector, which "boomed on the back of the mild winter weather."
Domestic consumption was another strong driver of growth, somewhat offsetting the effects of lackluster demand elsewhere in the world, as Germany's economy slowly comes to rely more on selling at home rather than abroad.
"Even if many Germans don't want to hear it, strong domestic activity is also the result of the ECB's loose monetary policy," Brzeski pointed out.
With the main German stock market indicator, the DAX, more than 8% down year to date, it would be understandable if some investors do not trust that this growth would be translated into equity gains. But there are some stocks that could offer good opportunities to investors.
German investment bank Berenberg has "kaufen", or "buy" ratings on three big equities that also have ADRs, so they are easy for U.S. investors to get into:
- Metro AG (MTTRY). This is a very good way to get exposure to the consumer sector, not just in Germany but also in Central, Eastern and South-Eastern Europe, which has benefited from more solid economic growth lately. It is a wholesaler (aking to Costco (COST)) that also has a no-frills grocery chain of supermarkets, Real. Berenberg has a price target of 30.40 euros ($34.56) for the company's Frankfurt-listed shares, slightly more than 8% higher than their current price. Their reasoning is that the retailer's wholesale business, which has faced some headwinds in Russia, is resuming its growth and will also benefit from management changes such as adopting a country-focused, decentralized approach based on customer needs. Following an improvement in profitability at the retailer in the second quarter, the investment bank's strategists raised their EPS target for Metro for the full year by 5% to 1.85 euros.
- ThyssenKrupp AG (TKAMY). With this one, investors can get into Germany's world-renowned industrial and engineering sector. It is a diversified industrial group, operating in mechanical, plant and materials technologies both in Germany and abroad. The analysts at Berenberg base their "buy" rating on growth in core and lagging businesses, a very effective restructuring program, favorable exchange rate developments and "M&A upside boosting re-rating potential." The main catalysts for the stock, in their view, will be further margin expansion in most of the profitable businesses and exits from non-core assets. Anti-dumping measures against cheap steel imports in Europe and the U.S. could also help the German company.
- SAP AG (SAP). The German software giant recently partnered with Action Alerts PLUS portfolio holding Apple (AAPL) to develop corporate apps for the iPhone. The announcement was received with enthusiasm in the world of tech, with some experts saying it could revolutionize the smartphone giant's mobile platform. The company is also transitioning to a new business model, based more on the cloud and moving away from software licensing. The strategists at Berenberg noted that cloud business growth was strong in all the geographical regions where SAP operates, with cloud revenue in Europe, Middle East and Africa increasing at a particularly brisk pace, up 49% in the first quarter. "With around 3 billion euros of cloud revenues expected in FY16, we believe that SAP is now at the critical scale at which gross margins will continue to improve in the mid-term," the strategists said.
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