Trump’s Slash-and-Burn Tactics Bring a Boom for German Stocks. 3 Ways to Play It.
President Donald Trump’s drive to shake up the world order is creating some surprising winners.
As the U.S. stock market reels from tariff fears, German stocks are surging because the government has committed to almost $1 trillion in new spending on infrastructure and defense. That has also changed the outlook for bonds, pushing yields up by the most since the country reunified in 1990 on Wednesday, though they are still well below U.S. levels.
The sea change in policy is creating a giddy optimism in German markets not seen in decades. It flies in the face of the country’s hard-earned reputation for fiscal rectitude and its extreme reluctance, since the end of World War II, to step up military spending. The shift could be comparable to the fall of the Berlin Wall in 1989.
Germany’s response to the threats from the U.S. to pull back military support and to impose tariffs has been the polar opposite of Trump’s approach in his second term. While the U.S. president is swiftly slashing government jobs and boasting of billions of dollars of spending cuts, Germany is increasing the size of the state.
Even after retreating Friday, the blue-chip DAX index has gained 2.2% over the past five days. Since the start of the year, it has risen 16%, compared with a slight drop for the S&P 500.
The European Central Bank did its part to fuel the gains on Thursday, lowering interest rates by a quarter point, widening the gap in borrowing costs with the U.S. The Federal Reserve kept rates unchanged at its last meeting.
The surge in German bond yields has been dramatic, but it still leaves the 10-year Bund at about 2.8%. The yield on the 10-year Treasury note, while much lower than it was earlier this year, is just below 4.3%. That lower cost of capital is good for companies that need to borrow money to expand.
For investors, it isn’t too late to take advantage of the shift across the Atlantic. True, the rally in European defense stocks may have its strongest days behind it. Rheinmetall, the German defense contractor, is up about 90% this year. France’s Thales is up more than 70%, as is Italy’s Leonardo.
There are also areas that may still be under the radar. Stocks in countries near Germany may get a boost, particularly if other governments follow the lead of the biggest economy and step up spending. France’s CAC 40, Italy’s MIB, and Spain’s IBEX are also rising sharply.
There are also sectors to look at outside of defense. Germany’s infrastructure spending will be a boon for companies such as Heidelberg Materials, up about 40% this year, and Siemens Energy, which has gained 10%.
Banks are also benefiting. Deutsche Bank, the country’s biggest lender, is up 7% over the past five days and its rival Commerzbank is up 13%.
The biggest gains from this point will probably come from companies too small to be in the DAX index, Germany’s market benchmark. The DAX has outperformed smaller stocks even as the economy has languished because those big companies’ earnings and growth benefit more from sales abroad. Companies that need a vibrant domestic economy are due for a catch-up. The MDAX index is up just 14% over the past year, compared with about 30% for the DAX.