Germany is Europe’s second-largest economy and the world’s second-largest exporter. As a result, fears of a another global recession have weighed heavily on large-cap German stocks. France, the UK and Italy are among the country’s largest export partners, accounting for 10.1 percent of exports, 6.6 percent and 6.3 percent, respectively. Although the European economy has weakened, Italy is the only truly fiscally troubled nation of those three. Additionally, Germany enjoys deepening trade ties with a number of emerging-market nations; China accounts for 4.7 percent of Germany’s total exports. Emerging markets are expected to post robust gross domestic product (GDP) growth this year, which will provide strong support for orders of German manufactured goods.  

Germany’s export-oriented economy has generated strong growth compared to the European region. The country’s economy expanded at an annualized rate of 5.2 percent in the first quarter, far ahead of the 2 percent GDP growth that the region reported in the same period. Germany is one of the EU’s most fiscally conservative nations and has enjoyed the fruits of its export-driven economy. In May, the nation ran a current account surplus of EUR6.9 billion and its current account represented 5.7 percent of GDP in the fourth quarter.

Business sentiment in Germany also remains near the 10-year high set in February. Last month, the IFO Institute’s Business Confidence Index fell to 112.9 from 114.5 in June, signaling that manufacturers expect slower export growth in coming months. The index had climbed to 115.4 in February. However, most firms reported plans to hire additional workers.

IShares MSCI Germany Index (NYSE: EWG) tracks the country’s 50 largest companies, with 17 percent of the exchange-traded fund’s (ETF) investable assets allocated to four financial names. Of those four financial giants, only Deutsche Bank (NYSE: DB) has significant direct exposure to the European debt crisis.

The ETF has significant exposure to industrial outfits such as Siemens (Germany: SIE), which is heavily involved in the build-out of emerging-market infrastructure projects; BASF (Germany: BAS), a diversified chemicals outfit that produces its own oil and gas; and Daimler (Germany: DAI), the auto manufacturer whose venerable brands include Mercedes-Benz. In fact, those three companies account for almost a quarter of the fund’s portfolio. All three firms book extensive sales to emerging markets, which reduces their exposure to Germany’s domestic economy.  

The stable outlook for portfolio companies is reflected in the ETF’s forward price-to-earnings ratio of 11.2, compared to 13.5 for the S&P 500. With a modest expense ratio of 0.53 percent, iShares MSCI Germany Index is an inexpensive way to play the German market.

IShares MSCI Germany Index is a new addition to our Short-Term Opportunities Portfolio and a buy under 25.

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