What are German stocks so cheerful about?

The Dax index is up 15 per cent this year. That is flattered by dividend payments, which are included in this benchmark, but even excluding that, the MSCI Germany index has also risen almost 10 per cent. In a nutshell: solid.

That clashes with a very long list of reasons to worry.

Germany is on the brink of chalking up two consecutive quarters of economic contraction — a technical recession — and data releases are providing a reliable drumbeat of misery. This week, it was the turn of factory orders, which dropped 0.6 per cent between July and August, taking the year-on-year rate of decline to 6.7 per cent, even worse than analysts had pencilled in.

Added to that, Germany is fighting hard to cling on to its title as Europe’s heavyweight champion of corporate calamities. Roughly one-third of the 30 companies in the Dax index are suffering from some kind of snafu, ranging from Deutsche Bank’s excessive ambitions to Bayer’s disastrous acquisition of Monsanto, which gave it exposure to a string of lawsuits from people alleging its weedkiller gave them cancer.

Add a dash of Brexit (MSCI reckons a no-deal crash-out for the UK would deliver a 5 per cent blow to German equities), some wilting Chinese demand, and the apparently constant threat that US President Donald Trump might decide to impose tariffs on European cars (for which, read: Germany Inc) and you have a perfect recipe for the country’s stocks to hit the skids.

To an extent, the index benchmarks are a little flattering. Hitendra Varsani at MSCI points out that the MSCI Germany gauge is lagging a little behind the broader European barometer. Judging by price-to-forward earnings ratios, German stocks are cheaper than global measures. The market is punishing it somewhat.

Still, some support comes from the hope, albeit vague, that the government could be poised to embark on a green spending splurge — a hot topic among investors, according to Sophie Huynh, a multi-asset strategist at Société Générale. “[The government] has hinted that it could do some fiscal spending under the [environmental, social and governance] dimensions,” Ms Huynh said. “We’ve had a lot of questions about it. There would be political hurdles, but the ESG element could make it more acceptable.”

For now, more substantial support for stocks is coming from the European Central Bank, which is busily pumping more stimulus into the financial system, to the intense irritation of hawks inside and outside the governing council. The ECB’s open-ended bond-buying programme, which kicks in next month, means that 10-year German government debt yields minus 0.5 per cent. Unless fund managers in the region really have the stomach for high-yield debt or illiquid esoteric bets, blue-chip stocks are the best game in town. The country’s listed companies are delivering juicy cash dividends to investors who stick around.

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