The German economy is going through difficult times. GDP growth has lagged behind other European countries and the United States in recent years, due to soaring energy prices and weakness in China, an important trading partner. However, there are signs that the headwinds facing Germany’s industry are starting to abate.
These were among the topics on the minds of business leaders and investors who gathered for the 13th Goldman Sachs German Business Conference in late September. More than 170 German listed companies were represented and more than 1,000 participants gathered to hear and meet companies. The three-day event was held in Munich, a growing hub for the European technology sector, where Goldman Sachs recently opened a second office in Germany.
Michael Schmitz, Co-Head of FICC and German-Austrian Equities in Global Banking & Markets, said: “Many corporate leaders and investors are not only attending the conference, but more broadly, are interested in this country. “I am very concerned about the structural issues in the country,” he said. “There is reason to believe that Germany will return to growth in the medium term, but it will be a long journey.”
There are developments that could help revive Europe’s largest economy. Energy shortages are easing and Germany’s green energy transition is attracting investment, according to Goldman Sachs Research. Citing research from our analysts, Schmitz said German stocks could be poised for further gains.
We caught up with Mr. Schmitz after the meeting to discuss the attitude of German business leaders and investors, the rise in German stocks, the country’s important auto sector, and the recent competitiveness report by former European Central Bank President Mario Draghi. We talked about the reaction to.
Is the German economy overvalued or undervalued?
The German economy is going through very difficult times. The country has fallen significantly below other developed countries in recent years. Germany’s real GDP has actually remained unchanged since 2019, according to Goldman Sachs Research. Let’s compare this with other developed countries. The Eurozone grew by 5%, and the US saw GDP increase by 9% over the same period.
Some of Germany’s challenges are short-term, such as its past dependence on Russian natural gas. Others are more structural, such as the economy’s dependence on Chinese trade. But we have dealt with challenges before in Germany, and we see opportunities for the economy in the coming years.
What was discussed at the conference about opportunities for German companies and the German economy?
The management team, customers and investors gathered in Munich all believe in Germany’s core strength and its potential. Despite the challenges we see every day, Germany remains a stable and attractive place to do business.
People are very interested in trends in foreign direct investment in Germany, which suggests that green and digital projects can grow significantly in Germany. Germany may see more opportunities to develop artificial intelligence infrastructure startups to strengthen retention of technology talent.
For example, Tesla can help prove that Germany is well placed to lead Europe’s green transition. The company has decided to build and now expand its European Gigafactory near Berlin to take advantage of high local skill levels and supply chain connections across all regions.
Another positive is that up to 160 billion euros (about $175 billion) of Germany’s federal budget is allocated to hydrogen infrastructure, according to the Economist Intelligence Unit. This could ensure the survival of Germany’s energy-intensive industries, which have previously relied on cheap natural gas imports, into the future.
Does this mean the German economy is getting over its problems?
Many business leaders and investors at the conference, and more broadly, are deeply concerned about the country’s structural challenges. The country lacks investment in public infrastructure and lags behind key indicators such as digitalization, according to Goldman Sachs Research. Our economists recognize that our economy is more regulated when compared to other developed countries.
There is reason to believe that Germany will return to growth in the medium term. Energy shortages are easing and, as mentioned earlier, the country has opportunities in green energy and AI. But it’s going to be a long road.
The automotive industry is of paramount importance to Germany, and the outlook for the industry is clearly difficult. According to Goldman Sachs Research, the automotive sector directly contributes around 4% to Germany’s GDP, with an overall impact of almost twice that. It continues to lose global market share. As electric vehicles become more important, they lack cost competitiveness against China.
Chemicals are an important industry for Germany. Is there an opportunity there?
Turning to chemicals and natural gas supplies, which are critical to the industry, Goldman Sachs Research predicts that Germany will see a significant increase in liquefied natural gas (LNG) supplies between 2025 and 2028. , it is said that there is a possibility of benefiting from the energy crisis. It was triggered by the conflict between Russia and Ukraine.
The long-term outlook for gasoline prices looks favorable for Germany. Our strategists predict that energy supply growth will increase significantly, pushing the global gas market into material glut. Combine this with a large-scale green energy transition and Germany looks well placed to benefit. In an interesting development and positive inflection point, our researchers reported that electricity demand in Europe is already increasing by 1% or 1.5% in some regions. That’s a reason to be optimistic.
How do you explain the rise in Germany’s DAX stock index amid economic challenges?
That’s very interesting. The DAX is up over 14% year-to-date in 2024 (as of October 10), and the index is up 19% for all of 2023. The DAX has outperformed France’s CAC 40 so far this year. It is resilient because it is not strongly tied to the German economy. According to Goldman Sachs Research, just 18% of DAX companies’ sales are generated in Germany.
In contrast, our research analysts note that 33% of the MDAX Midcap Index is exposed to Germany, and SDAX Small Caps is 50% exposed to Germany. As of August, MDAX was down 12% for the year. Goldman Sachs Research said the mid-cap index should be the main beneficiary of lower interest rates and appears to be undervalued relative to its growth rate.
Another thing our research analysts have noted is that equity inflows into Europe in general and Germany in particular have been consistently negative since the beginning of 2022. And there’s another notable data point. That means the share of German listed stocks in German households’ portfolios has changed from 75%. The portfolio ratio of 10 years ago is now only 50%.
It sounds negative, but it’s actually constructive. As the situation improves, we could see investors gradually entering the stock.
What was talked about at the conference about Mario Draghi’s recent Competitiveness Report?
Looking back, since 2012, annual industrial investment in Europe has lagged behind the United States by nearly 2% of GDP, according to Goldman Sachs Research. This is a serious issue. And the Draghi report on EU competitiveness deals with precisely this issue. He offers actionable policy proposals at sectoral and organizational levels. He wants to bring about structural changes in Europe’s economy to address sluggish productivity growth. He estimates that total additional investment would need to amount to around €750 billion to €800 billion to return investment rates in the EU to 1970s levels.
Investors shared during the conference that financing these proposals remains the most challenging issue. There are major hurdles to implementing President Draghi’s recommendations.
Finally, how important are the recent economic stimulus measures in China?
This is very important for Germany. China remains one of Germany’s largest export markets and the country’s largest source of imports, according to the German Statistical Office. In general, therefore, this is a very positive development in the short term for the still China-biased German economy. If the situation in China improves, Chinese demand could increase, at least in the short term. However, the Chinese authorities must now implement the announced policy measures. However, in the medium to long term, it is reasonable to expect that some German companies will seek to reduce their dependence on China and diversify their export markets and supply chains. But this takes time.
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