We continue to favor gaining long exposure to the German stock market (ETF: EWG).
With economic data highlighting more clearly that the German economy is not falling back into a recession, we expect the current mispricing to decline with price moving higher. It appears that the market has worried too much about the road ahead. With the core picture of reasonable activity data, improving readings from corporate earnings, and ongoing healing in the private sector, the current level of macro surprises in Germany is consistent with stronger markets.
The data continues to be a touch better, with a slight improvement in credit growth and a further easing in financial conditions. Credit conditions have improved, and as a result any significant weakness in industrial output and exports will be short-lived. Assuming that another recession is avoided, the employment situation should continue to normalize, albeit at a very modest rate. In addition, we also believe that fears concerning a downgrade of Germany's financial sector credit rating will temporally unwind as economic growth picks-up and the financial sector's health improves.
Though our forecasts for Germany are still below consensus, it now seems likely that some stabilization in industrial production will follow and the growth picture will look a little better for a while, consistent with our forecasts. Provided the technical position is sound, this is the optimal point in the cycle to be taking a long position on the German market index.
