Goldman Has Some German Stocks To Sell You

Tyler Durden's picture

Having offloaded its short-dated Ukraine bonds to clients (recommending they buy them in size when Yanukovych was ousted for a decent loss so far), the boys from Goldman are up to their old tricks with a lorry-load of German stocks to sell you... "Year to date, the DAX is one of the worst performing indices in Europe (down 4.6% relative to the European market which is flat)... but we think the overall German market will outperform the pan-European STOXX Europe 600 index, and also highlight a list of DAX stocks that are currently Buy rated by our analysts."


Via Goldman Sachs,

Year to date, the DAX is one of the worst performing indices in Europe (down 4.6% relative to the European market which is flat). A substantial part of this underperformance happened in the last two weeks as political issues surrounding the situation in Crimea and weak data out of China negatively impacted the DAX. In addition the reform agenda in Italy and continued good data from the periphery has likely steered more investors to look at recovery stories there rather than in the core. This underperformance remains modest compared to the strong performance of the second half of last year and we continue to see good upside in the DAX for three main reasons:

1) Earnings exposure to global growth recovery

2) Stronger domestic demand dynamic in Germany

3) Still attractive valuation relative to the European market

Our Global Markets team also initiated today a trade on the DAX index

DAX offers exposure to global growth recovery

We expect the recent weakness in macro data out of the US to prove transitory and growth to pick up from 2Q. In China, while risks to our growth forecast in the near term are to the downside, our economists expect growth to improve from current levels as the year progresses. The DAX offers the highest degree of operating leverage in the European market on our estimates and therefore should benefit from the acceleration in global growth we expect. When measured as the ratio of EBIT growth to sales growth, Germany's median degree of operating leverage is 2.5x. This means that for every percentage point of sales growth one can on average expect 2.5 pp of EBIT growth.

DAX offers high degree of operating leverage

Source: Worldscope, Datastream, Goldman Sachs Global Investment Research.

In our conversations with clients, we find there are often concerns about German exposure to the weakness in emerging markets. However, when looking at sales exposure data reported by Worldscope, we don't find the DAX to be substantially more exposed to emerging markets than the broader European market. The table below details the sales exposure of Germany. Of course, sales exposure for the DAX might underestimate the true amount of exposure given the JVs of the autos companies are not included in sales exposure (autos sales are over a third of DAX total sales) and it is likely the EM exposure of the DAX is more specifically China-related.

It however appears that the DAX is really more sensitive to global growth overall rather than just EM growth. This is also true when looking at the recent price action of the DAX: it outperformed the market from June 2013 even as EM underperformed (as measure by our EM exposure basket). At the time, our global leading indicator index (GLI) was in the expansion phase characterized by positive growth and positive acceleration, it has since moved to slowdown (positive growth and negative acceleration). We continue to expect a return into ‘Expansion’ later this year in line with our optimistic outlook for US growth, and therefore anticipate the current slowdown to remain mild.

DAX is more exposed to global growth than just EM Performance of the DAX and our EM exposure basket (both relative to market)

Geographical revenue exposure breakdown for European indices

Source: Worldscope, Datastream, Goldman Sachs Global Investment Research

DAX tends to outperform when growth is improving

Source: Datastream, Goldman Sachs Global Investment Research.

Currency can also have an impact on the big German exporters and recent comments by ECB President Draghi suggest that the ECB may be becoming more focused on the issue. Draghi said in a speech last Thursday that the level of the exchange rate was "increasingly relevant in our assessment of price stability". He also said that "any material risk of inflation expectations becoming unanchored will be countered with additional monetary policy measures". Related to this, Bundesbank head Weidmann also said that "the euro exchange rate is not a policy target for us as monetary policy makers but, of course, the euro enters like other variables in our assessment of the economy". In that sense, it also affects our projections for inflation and real growth". These comments ought to be seen as helpful for the export-focused companies. That said, our FX strategists forecast the euro to be roughly flat versus the dollar over the next six to 12 months – and we don’t see the currency as a big support or hindrance to a positive call on the DAX. Indeed over the longer term there has been a slight positive correlation between DAX relative performance and the euro versus dollar exchange rate. A strong euro is often coupled with better European growth and lower risks both of which are supportive of the DAX. Short term though any signs of a weaker euro would most likely boost sentiment for the DAX, provided the trigger was not a risk-off environment.

3-month correlation DAX vs. market (weekly returns) with EUR/US$

Source: Bloomberg, Goldman Sachs Global Investment Research.

Stronger domestic demand dynamic; and more resilient EPS revisions

In addition to the higher gearing to an improved global growth dynamic, we also believe that domestic demand in Germany will support the relative performance of the DAX. Our economists expect German real GDP to grow by 2.0% and 2.1% in 2014 and 2015 respectively: this compares to only 0.9% and 1.2% for the Euro area. This better growth is driven by a pick-up in consumption and fixed asset investment. Recent macro data from Germany has been supportive; most recently the January Industrial Production figures released on Friday (March 14) showed continued robust growth. I/B/E/S earnings expectations have also been more resilient for the DAX than for the broader market: since the beginning of the year DAX 2014E earnings have been revised down by 1.9% while the pan-European market has seen revisions of 4.2%.

Still attractive valuation relative to the broader European market

As a result of more resilient earnings and underperformance year to date the DAX, which was already inexpensive relative to the European market, has become even more attractive. On a 12-month forward P/E basis, the DAX currently trades on 11.9x a 13% discount to the 13.7x the STOXX Europe 600 is on. This 13% discount is about a standard deviation away from the historical average.

DAX valuation is attractive relative to the European market

Source: I/B/E/S, Datastream, Goldman Sachs Global Investment Research

Sector composition and what we like in Germany

The operating leverage highlighted above is mostly driven by its sector composition: relative to the STOXX Europe 600, the DAX has overweights in autos & parts, chemicals and technology, and underweight in commodities and food & beverages. We favour cyclical sectors (especially those with exposure to developed market recovery) and are underweight basic resources (which the DAX has very little of) as well as relatively expensive defensives (we are underweight food & beverages).

We are underweight chemicals and industrial goods & services (two sectors which are important in the composition of the DAX) but this is somewhat mitigated by two key facts which are not captured by simple sector exposure analysis. First, Bayer which is the largest stock in DAX is classified as a Chemical while the majority of its business is actually pharmaceuticals. Secondly, a large part of the industrial goods and services sector is in the electrical equipment segment on which we are less negative than the EM exposed machinery.

Sector composition of European equity indices

Source: Goldman Sachs Global Investment Research.

While we think the overall German market will outperform the pan-European STOXX Europe 600 index, we also highlight a list of DAX stocks that are currently Buy rated by our analysts.

DAX Buy-rated stocks
Buy* denotes Conviction List membership.

Source: Datastream, Goldman Sachs Global Investment Research.


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Soul Glow's picture

The DAX is one of the first indecies I would short.

Groundhog Day's picture

Muppets about to get hit by a Mercedes

bania's picture

there's a killer on the road, his brain is squirming like a toad.

angel_of_joy's picture

DAX will be the hardest hit by any serious economic counter-sanctions from Russia.

Same, in the case of a significat economic slowdown in China and/or other major "emerging markets".

Not even muppets can be THAT stupid...

Richard III's picture

Aye, verily - the DAX is down 4.6% for the year, thus, the rogues at Goldman proclaim it should be bought ? Exxon Mobil is down even more, year-to-date - why not buy that one in its stead ? Tangibles such as oil shale and LNG shall ever trump indigestibles as sauerkraut and braunschweiger, in this Trader's ledger.

Freddie's picture


Supposedly the big German companies were raising hell about the Ukraine.   My guess is Merkel was told that she better tell the USA to back off or else.

Cognitive Dissonance's picture

Ignore what they say and watch what they do.

Dr. Engali's picture

I have watched. Year after year I watch them suck the life out of this country. It's too painful to watch the bloated squid feed any longer.

Grande Tetons's picture

1) Earnings exposure to global growth recovery

LOLOLOLOLOL....oops...just pissed myself. 

mrblah's picture

Ah yes, E.On, that not so small German company which has multi-billion dollar gas deals with Russia.

Couldn't think of a better time to buy in myself!

Bonapartist's picture

muppets get slayed and Goldman gets paid

Dr. Engali's picture

I think it's funny they keep talking about global growth like it's going to come back or something. Uhmmmm helloooooo everybody is in debt up to their eyeballs and it's all they can do to service it. Idiots.

Grande Tetons's picture

Global growth is the central bankers' Halley's comet. 

1stepcloser's picture

Debt based monetary systems gota love'em

DrunkenMonkey's picture

New suckers are born everyday.

Bonapartist's picture

Buy German coal companies- their coal usage is at its highest there since 1990 as the dumb shits finally figured out green energy ain't gonna cut it and maybe Pooty-Poot dials back on the NatGas a wee bit.

1stepcloser's picture

and nat gas supplies get suspended from the east..

piceridu's picture

...paging Mr and Mrs. Bagholder...Mr. Goldman on line one

Rising Sun's picture

Wow!!!! This is fucking awesome!!!!


Only one question.  Do these stocks come with swamp land or a bridge in Oklahoma?

jonjon831983's picture

Is their client the fed or something?  Buy everything.

agent default's picture

That would explain Kermit.

stant's picture

sucks being us. but at least i am aware of it

ronron's picture

opportunity knocks. buy the shit.

DirkDiggler11's picture

What a surprise, GS trying to fuel the Nazi war machine. Just in time to do GS's "dirty work" in the Ukraine eh ?
This shit in Europe ain't over by a long shot, no matter how incompetent Obumma and his harem of Reggie's are ...

Make_Mine_A_Double's picture

LOL - luv the Kermit coming in from the cold at Check Point Charlie.

Sublime Classic!

homiegot's picture

That Kermit picture is hilarious. Reminds me of the Excorcist.

nah's picture

looking to accumulate positions in greed, is Crimea still a buy

qmacro's picture

dax 30 companies earned in 2013 less than in 2012, while the share prices rates rose by about 30% in 2013
long-term liabilities rose almost as much as the gains

Iam Yue2's picture

The logic is interesting.

GS seemingly believe; "We don’t think markets have fully priced the growing risk of the Fed having to hike rates sooner than its current projections suggest."

Vis a vis rate hikes and the Dax, Commerzbank had this to say;

"The prospect of rate hikes by the Fed should limit the rise of the DAX. Last year, the tapering discussion in May caused the DAX to slump in the summer. Ahead of the Fed’s last round of hikes from 2004 onwards, the DAX likewise consolidated for six months."

Strange then, that in such an environment GS would be suggesting DAX stocks............

assistedliving's picture

hmmm GS vs ZH bashers...tuff call

Billy Sol Estes's picture

Are they in defense contractors? As in, Merkel will manufacture an army for the Euro Union?