German Locomotive Losing Steam

August 12, 2014

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The recent economic news from Germany, which has the largest economy in Europe and is considered the “locomotive” for the Eurozone, has not been good. Factory orders in June declined -3.3 percent from the May level, -2.4 percent from a year earlier. This followed a -1.6 percent drop in May. The purchasing managers index for manufacturing has been flat for three months. Industrial production registered an advance of only +0.3 percent over the May rate, following declines in the previous three months. Retail sales and car sales were weak in April and May. The German 10 year Bund yield has declined to a record yield of 1.06 percent.

German GDP growth probably ground to a halt in the second quarter, and may have declined, following a quarterly gain of +0.8 percent in the first quarter. While some pickup is likely in the coming months, the year 2014 growth is likely to fall below the previously expected +2.0 percent. In the medium term growth should ease to Germany’s full employment growth for Germany, about +1.5 percent per annum due to a declining labor force. Nevertheless, the German economy will likely grow faster than its Eurozone neighbors. Eurozone growth this year is likely to be only about +1.1 percent.

The tensions between Ukraine and Russia have been affecting business confidence, with the latest round of sanctions and counter sanctions adding to the perceived risks for trade. All Europe has been affected by these tensions as well as by the stalling of the German economy. The Italian economy, for example, appears to be slipping into recession. The French economy also has failed to establish sustainable growth. While the Spanish economy is seen as having been transformed by its structural reforms, industrial production in Spain fell by -0.8 percent month-to-month in June, following a -0.6 percent drop in May. The euro has slipped to a nine month low.

German equities have under-performed this year. The iShares MSCI Germany ETF, EWG, declined -8.25 percent over the past four weeks and is down 10.74 percent year-to-date, substantially below the year-to-date -6.03 percent decline in the iShares MSCI EMU ETF, EZU, which covers all the equity markets in the European Monetary Union. In our international and global portfolios we decided to close our Germany-specific positions which we had held since January of 2012.

The fundamental and technical factors for German equities do not appear as attractive now as is the case for some other markets. In Europe, the UK economy continues to out-perform, with growth this year likely to be better than 3 percent, higher than that of any other G7 country. We also have positions in the equity markets of Spain, Norway and Belgium.

One factor having a negative effect this year on the US dollar returns from equity markets in the Eurozone has been a decline in euro-US$ exchange rate. It is now at a nine month low. We are maintaining a position in the WisdomTree Europe Hedged Equity Fund ETF, HEDJ. It includes a hedge against changes in the euro-US percent rate. It also favors European firms paying higher dividends. This ETF is down only -1.42 percent year-to-date, far less than the -6.03 percent decline for the EZU Eurozone ETF cited above.


The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

The preceding is an abridged commentary by Cumberland Advisors and has been reposted with permission of the author. Cumberland Advisors commentaries are available at

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