Making New Money In the Old World

Today, we’re going to look at another way to profit from the euro’s demise – one that doesn’t involve options.

Old World, New Trouble

Other than Ted, the only people I’ve met who love what’s happened to the euro are a couple of currency traders and anyone planning a summer vacation in Europe. The euro is down 30% against the dollar since last November. They are ecstatic. Investors in European stocks? Not so much.

Eurozone stocks are down 9% year to date in local currencies. And down a whopping 22% in terms of dollars. Compare that to just a 2% decline in the S&P.

And investors are voting with their feet. According to EPFR Global, fund outflows from European equity funds as of May 19 were the worst since April 2008.

The general consensus is that Europe, with its aging demographics, socialistic bureaucracy, and monetary struggles, will be hard pressed to outperform emerging markets in the coming years. But there is an upside to the devaluation of the euro.

A weak euro benefits exporters since it makes a country’s products cheaper for foreign customers. And that’s a boon for international sales. 

The Biggest Beneficiary Of a Weak Euro

The big winner in all this won’t be Spain or Greece. Most of their trade is within the Eurozone. The country that stands to gain the most is the fifth-largest in the world in terms of GDP… the second-largest exporter in the world and the largest, by far, in the Eurozone.

Almost 30% of this country’s GDP comes from exports – the machinery, chemicals, vehicles, and household equipment that they send all over the world. That country, of course, is Germany. 

The Oddball Of Europe

Mountains of debt have been piling up in Europe. The big question is whether the countries that are in trouble will be able to service their debt… let alone pay it off. And too much debt is a drag on GDP. But Germany isn’t like the rest of Europe (or the U.S.) in that regard. Consider these deficit-to-GDP ratios:

Germany has its fiscal house in order. And its stock market has not taken the pummeling the other bourses in Europe have. The Greek market is off 35.9% year to date. Italy’s is down 20.4%. Spain’s is off 27.6%. Germany’s? Down just 2.4%. Still, the German market is undervalued compared to the U.S. and represents a great buying opportunity. 

Where To Invest

A good place to start is with the iShares MSCI Germany Index Fund (EWG). EWG has holdings in 51 companies based in Germany. Its top five positions are in Siemens, E.On, BASF, Bayer, and Allianz – which represent 35% of its portfolio.

At 18%, financials is the biggest sector held by the fund. But 55% of its holdings are in industrials, materials, utilities, and consumer discretionary.

As you can see, the EWG (dark blue line) has dramatically underperformed the S&P 500 (brown line) over the last year:

US Market Decisively Beat German Market Over Past 12 Months

But don’t expect this to continue. Over the last five years, EWG (red line) outpaced the S&P (blue line):

But German Market Outperformed the U.S. Market Over Past 5 Years

There is, of course, more upside in individual companies – particularly those in a position to take advantage of the weaker euro. How do these companies do it? Here’s a hint: They’re already accelerating profits in a market set to soar, thanks to the instability in the EU.