German Consumers Are Boosting the Economy. These Stocks Stand to Gain.
It hasn’t received a lot of attention that the outlook for Germany’s economy, Europe’s largest, is considerably better than it was just a few months ago.
Prospects looked dire earlier in the year. Russia’s invasion of Ukraine cut off a significant portion of the country’s national gas supplies. Energy prices spiked, and inflation shot up. That prompted the European Central Bank to start raising interest rates for the first time in a decade.
As the roadblocks piled up, the forecasts for a painful recession in Germany, which accounts for a third of the euro zone, came rolling in.
And yet, the economy unexpectedly grew in the third quarter. Consumers lifted spending after saving through the pandemic, accounting for most of the strength in the period. Gas prices retreated, alleviating the crunch on industry, and the country scrambled to maximize gas storage for the winter.
That is an impressive feat, especially as Germany was already under considerable pressure to adjust to a new world order. Not only is it facing energy shortages, but its trade prowess also relies heavily on China, which has been hit hard by Covid lockdowns in 2022.
Its legendary car industry, led by powerhouses Volkswagen (ticker: VOW.Germany), BMW (BMW.Germany), and Porsche (P911.Germany), are facing new competition from electric vehicles. Its famous Mittelstand, or small to medium-size companies that make up a majority of output, was just starting to recover from the pandemic when the energy crisis hit.
To be sure, economists still expect a downturn. It just won’t be as bad as feared. “Despite the eased gas situation, the overall uncertainty shock is still in the bones of industry and households,” said Stefan Schneider, chief Germany economist at Deutsche Bank in Frankfurt. “The outlook compared with two months ago has improved. But it’s still pretty poor, and there will almost certainly be a recession.”
German gross domestic product increased 0.3% from July to September. That was mainly driven by pent-up consumer demand for restaurants and leisure as lockdowns eased. But industrial output also increased.
A mild winter might yet mean that the country’s gas supplies don’t need to be rationed, and the government has promised considerable support for households with higher energy bills. Slowing inflation could help consumers maintain their strength.
If so, some beaten-down consumer-goods stocks might be worth a look. Adidas (ADS.Germany), the Bavarian maker of shoes with the three-stripe logo, has fallen about 51% this year. It trades at 26 times this year’s expected earnings and is valued in line with peers.
Puma (PUM.Germany), its rival maker of sports gear, has done even worse, down about 54% since Jan. 1. It fetches 20 times earnings and is valued at a 20% discount to its peers.
While German companies face immense challenges, the German model of capitalism—characterized by the Mittelstand, close cooperation between employers and unions, and an emphasis on trade and manufacturing—is capable of coping, according to Deutsche Bank’s Schneider.
After all, the Russian gas crisis is only the latest to hit the country, and it may not be as big as some that have come before. Reunification after the fall of the Berlin Wall and the sovereign-debt crisis a decade ago were arguably tougher obstacles.
“Over the past 30 years, the German model has, according to the international press, been at the brink of extinction several times, and somehow recklessly survived,” said Schneider. “I wouldn’t underestimate the German flexibility to adjust.”