2 Surprising Stock Rallies: Volkswagen and Germany
Don’t look now, but Volkswagen stock is on a tear. German equities in general are outperforming their country’s dismal economic statistics.
Shares in VW, the global auto industry’s sick man, surged 20% in the past two months. Germany’s leading stock index, the DAX 40
DAX, is up 10% over the same period, while the S&P 500 is about even.
Volkswagen’s rally may run out of gas, or charge. Germany’s looks like it has legs.
VW, whose nine million vehicles a year include Audis, Porsches, and Skodas, plus the namesake brand, has two basic problems: cost and product. Average margins run 2%, while management is targeting 6%, says Stephen Reitman, who covers European autos for Bernstein Research.
CEO Oliver Blume settled for half a loaf at best on costs in a tangle with unions late last year. Instead of the unprecedented German plant closures he had threatened, he wrested a 10% cut in head count—by 2030.
“VW was essentially priced for bankruptcy,” says Michael Field, European equity strategist at Morningstar. “But I can’t say this is the end of their troubles.”
The big test for product will come in 2026, when VW tries to play catch-up in electric vehicles with four models priced below 25,000 euros ($26,028), says Germany-based industry analyst Matthias Schmidt.
Leading Chinese producer BYD may be faster off the mark, with its factory in Hungary starting budget EV production later this year.
The key to understanding other German stocks is that DAX 40 companies reap 80% of their revenue outside of Germany, says Maximilian Uleer, head of European equity at Deutsche Bank. In that context, investors are anticipating tailwinds.
Economic growth in Europe and globally is poised to accelerate, a little, this year. The European Central Bank keeps cutting interest rates while the U.S. Federal Reserve pauses. The ECB shaved 25 basis points, to 2.75%, on Jan. 30. Power prices, which buffeted German industry after Russia’s 2002 invasion of Ukraine, are back near prewar levels.
Germany is relatively shielded from President Donald Trump’s tariff threats, with just 10% of its exports bound for the U.S., adds Carsten Brzeski, global head of macro at ING Research. Volkswagen and other big names already manufacture extensively within the U.S.
That all should translate into an 11% jump in earnings for DAX constituents this year, after a 9% decline in 2024, Deutsche Bank predicts. Industrial companies will rebound from a negative 10% to 20% gains, Deutsche estimates.
Morningstar’s Field is scouring for value in names that remain traumatized by post-2022 events—like chemical giant Bayer, which has lost 60% of its value since the war in Ukraine started, and utility RWE, which is down by a quarter.
Brzeski fears national trauma ahead from German elections looming on Feb. 23. The center-right Christian Democratic Union looks poised to be top vote-getter. Less predictable is whether the far-right Alternative for Germany, or AfD, will win enough votes to force the CDU into a torturous three-way coalition with the Social Democrats and Greens.
The AfD exceeding its current polling around 20% would deliver a sentiment shock that could hurt German companies no matter where they do business. At best, “the risk of another divided, muddle-through government has increased over the past few weeks,” Brzeski says.
At VW, Blume will have to wield a sharper budget ax, score big with those four new EV models, or both. Otherwise, Field says, “his job may be open a year from now.”