Germany (NYSEARCA:EWG) topped our trend table for the week ending on 2/11. Last week, we detailed a safer approach to get exposure to China’s equity market (NYSEARCA:FXI) by building portfolios that are protected against slower growth in China. Countries such as Korea (NYSEARCA:EWY) and Taiwan (NYSEARCA:EWT) have extensive trading partnerships with China and are finding audience for their products in the country.
Similarly, Germany, another export-driven economy, has become increasingly reliant on Chinese demand to sell its products abroad, with China representing about 5% of its total export volume. Germany might be another gateway to capture the robust growth of exports driven by Chinese investments and consumers.
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Sectors in Germany that did exceptionally well last year were machinery makers ad premium car makers. China overtook the U.S. as the largest overseas market for German heavy machinery.Individual car sales have sored between 63% and 132% for BMW, Daimler and Volkswagen last year as the Wall Street Journal has reported. The steadily rising Chinese yuan also fuled the surge in demand for German automobiles. As high-end auto prices remain little changed in China, the Chinese yuan’s almost 6% gain against the euro added another boost to profit margins on cars imported from Germany. At the same time, the auto sector’s successful experience could serve as a harbinger for other industries to follow. This trend, if continued, would likely to push the country’s exports to be less broad-based and more dependent on China being the driver.
There are certainly risks investors should consider before investing in (EWG) as Germany becomes more reliant on China’s market. The Chinese government is focusing on cooling down the country’s overheated economy by recently announcing a series of rate hikes. This will certainly dampen the demand for credit-sensitive imports and cast a cloud on the recovery path of many German manufacturers. A potential slowdown in exports to China may make it more difficult for Germany to offset the anemic growth in mature markets and growing investment costs in clean technologies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.