German stocks exposed to Germany itself have long underperformed local companies that sell outside the country.
That may be about to change, with higher wages and social security payments benefiting companies selling to German consumers just as the country’s export champions hit troubles.
The FTSE Multinational Germany index, which includes companies that record at least 30% of their sales abroad, has almost doubled since the depths of the financial crisis in 2008. The index, which takes into account dividend payments, is up 90% in that time, even after a more recent slowdown in demand from emerging markets.
The FTSE Local Germany index, which tracks companies that record at least 70% of their sales inside the country, has produced a less impressive 30.8% total return over the same period.
That matches Germany’s economic performance over recent years. Even as the eurozone’s sovereign debt crisis raged, demand for German products abroad rose.
But things may be changing. The forces that kept Germany’s export machine pumping — the weak euro, stagnant wages at home and the growing demand of emerging markets — are now all under threat.
“The German economic model was really about making the country very export driven, keeping wage costs down. We’re now playing catchup with demand, you’re finally seeing some wage growth coming in,” said Dhaval Joshi of BCA Research.
Even as emerging markets have struggled in recent years, the weak euro has buoyed German exporters by making their goods relatively cheaper abroad.
The currency fell from nearly $1.40 in April 2014 to as low as $1.06 last March. But the European Central Bank’s latest stimulus announcements, boosting its bond buying program and cutting interest rates further into negative territory, no longer seem to be putting pressure on the euro.
At the same time, domestic focused stocks are seeing some positive factors at home.
On Friday, the IG Metall trade union reached a deal with employers that will raise pay by 4.8% for 700,000 employees over the next 21 months. Last month, a major union in the chemicals sector demanded a 5% increase for 550,000 workers.
Of course, rising wages are a double edged sword. As well as benefiting from a boost to demand, companies see their labor costs rise too.
But it’s not only rising wages that might work for German consumer stocks. German retirees are receiving a boost from their public pensions, which rose by over 4% this July, the fastest increase in 23 years.
Consumer spending statistics show that Germans are already spending more. Consumer spending increased by 1.9% in 2015, the largest rise in 15 years, according to the country’s statistics office.
Not all analysts are convinced that the fortunes of these the two sectors are about to change around.
The German export machine is still ticking over. The country’s current account surplus hit a record 8.6% of GDP in 2015.
“Based on our forecast for global growth, German exports are likely to accelerate again after a moderate slowdown during the course of 2015,” said Goldman Sachs analysts in a research note published last week. “We also expect no further acceleration in final domestic demand, which we forecast to grow around 2% over the next two years.”
Germany’s frugal consumers aren’t likely to transform into U.K.-style big spenders any time soon. Still, the economic outlook seems much more supportive for Germany’s unloved domestic stocks than its famous exporters.