German Stocks to Buy in a QE Euro Zone
Dow Jones Global Indexes | Global Stock Markets
The European Central Bank on Thursday finally fulfilled investors’ hopes that it would start buying government bonds as part of its battle to lift the euro zone’s chronically low inflation and kick-start its moribund economy.
ECB President Mario Draghi said the central bank would buy 60 billion euros ($69 billion) worth of assets each month from March until the end of September. These purchases will include sovereign debt, private sector bonds, and debt issued by European institutions. The figure exceeded analysts’ forecasts.
Quantitative easing has been a thorny issue in Europe since it was mooted last year, with wealthier euro-zone countries such as Germany reluctant to take on the credit risk of poorer ones. Some claimed it would destroy any incentive for governments to implement painful structural reforms in the euro zone’s more troubled economies.
There were also concerns that QE would go beyond simply lifting inflation and push the euro zone toward the hyperinflation suffered by Germany in the 1920s.
Despite that, European stock markets have been buoyed by growing expectations that the ECB would follow the U.S, Britain, and Japan into full-blown QE. The Stoxx Europe 600 index had by Wednesday’s close—and ahead of the announcement—risen 4.6% since the start of the year.
The promise of QE appeared to insulate investors against recent market setbacks, such as crumbling oil prices and the Swiss National Bank’s ceasing to cap the Swiss franc against the euro—a move widely assumed to be in anticipation of QE. The index added over 3% more by the European market close on Friday.
Stocks have risen, but the euro has fallen, dropping to its lowest level against the dollar in over a decade. Tim Gregory, head of global equities at London’s Psigma Investment Management, says Germany may have given into pressure within the ECB because its economy is best placed to benefit from QE.
Says Gregory, “QE will drive down the euro, which clearly gives an advantage to exporting economies, of which Germany is Europe’s biggest.”
He adds that with prices skirting dangerously close to deflation, German concerns about QE bringing high inflation no longer seem credible. Since slashing euro-zone interest rates to near zero hasn’t boosted inflation, the ECB had no choice but to dig into its tool-box of alternative measures.
Euro-zone consumer prices fell an annual 0.2% in December, leaving it well short of the ECB target of just under 2%.
Morgan Stanley’s chief European economist, Elga Bartsch, says that cyclical sectors have usually performed best around previous QE announcements, especially autos, industrials, chemicals, and media. Utilities, banks, real estate, and food and beverages have consistently been relative underperformers, she says.
AUTO STOCKS FIGURE prominently in the list of German companies that Gregory says could do well from QE. His main play is auto-parts maker Continental (ticker: CON.Germany), which should see earnings lifted by its exposure to the dollar relative to the falling euro. He also likes auto makers BMW (BMW.Germany), Daimler (DAI.Germany), and German chemical company Linde (LIN.Germany).
“BMW would definitely benefit from a lower euro,” Gergory says. “Linde should benefit but it did lower guidance last year as a result of weak end markets. It’s a major emerging-markets growth story though, so a long-term winner facing short-term head winds.”
JPMorgan Cazenove analyst Jose M. Asumendi has Continental at Neutral with a 178 euro ($202) price target. “Although we are Neutral on the stock, we retain our positive view of Continental’s operational performance as the automotive group continues to outgrow global auto production by four to five percentage points thanks to market-share gains,” he says. The stock closed at €202.90 on Friday.
Asumendi has BMW and Daimler at Overweight with price targets of €105 and €78, respectively. “BMW will enter a strong product-momentum phase between full-year 2015 and full-year 2018 with over 70% of its volumes being renewed during the period,” he says. BMW shares closed at €102.80 on Friday.
On Daimler he says: “We believe Daimler’s earnings should see growth over the next couple of years from better product momentum.” Its shares closed at €79.75 on Friday.
Barclays European chemicals analyst Andreas Heine has Linde at Overweight with a €177 price target. “We do not assume industrial production picks up,” he says, but the strong dollar should drive earnings next year.
Heine adds that 55% of Linde’s sales are in the U.K. and in dollar-linked regions. Its stock closed on Friday at €165.30.