Heading into the final few days of March, it’s become widely accepted that now the European crisis (which started as an economic crisis in Greece, but which morphed into a political crisis in Germany) is over. For now.
Cumberland Advisors Chief Global Economist Bill Witherell shares the firms thoughts on the matter, and is encouraging investors to realise that things there (economically) are actually looking up:
Of future importance to the long-term strength of the euro is the apparent commitment to form an “economic government” for the Monetary Union, which would promote stronger coordination of economic policy. Should this come to pass and involve effective coordination of fiscal policy and of action to reduce structural impediments to adjustment, it would address the most important shortcomings in the structure of the Monetary Union.
Ms. Merkel is leading this drive, pushing for new measures for disciplining countries that persistently run excessive deficits. French President Nicolas Sarkozy seems to be putting the emphasis more on cooperation and coordination. He and all other eurozone leaders except Merkel will resist very strongly any steps that would require renegotiating the Lisbon Treaty. Progress on this issue will not be achieved rapidly, but we are optimistic that the eventual outcome will be a plus for the single currency.
One investment implication of these developments is that the headwinds for eurozone equities resulting from the Greek sovereign-debt crisis should no longer be a significant factor going forward. The strength of those headwinds can be hinted at by comparing the year-to-date (March 25th) performance of the MSCI Index for Germany, a -4.29% total return, with the +8.14% total return for the MSCI Index for Sweden, a somewhat similar European country not within the eurozone. We anticipate the performance of German equities will improve in the coming months.
Recent economic data for Germany have been encouraging. Manufacturing orders are strong. The current-conditions index registered in March the largest rise ever (4.6 index points). While the March ZEW investor confidence index eased slightly, it suggests the recovery is intact. Domestic retail sales remain depressed. Fortunately, the main driving force in the German economy is exports, for which the prospects, on balance, look good. While fiscal consolidation in its eurozone partners will depress their demand for German exports, the strengthening global economic recovery and the recent weakness of the euro should be more than offsetting positive factors. The World Trade organisation just released its projection of a strong rebound in international commerce, a 9.5% advance in global trade in 2010, following a 12% drop last year.
Our International and Global Multi-Asset Class all-ETF Portfolios get exposure to the German equity market with the iShares MSCI Germany Index ETF, EWG. The index tracked by this ETF seeks to capture 85% of the publically available total capitalisation of the German market. Its largest holdings are Siemens (9.62%), the major energy firm E.ON (9.36%), Bayer (7.35%), Allianz (7.11%), BASF (6.94%), Daimler (5.03%), SAP (4.95%), and Deutsche Bank (4.78%). These are firms that can take advantage of the expected strong advance in world trade.