Is Germany the new US?
The performance of German stocks since the beginning of the year has been impressive. Whilst global equities[1] have risen by 2.7%, the DAX has soared 22%, much more than European equities, which have nonetheless risen by 10.7%.
For the last few months, the stars seem to be aligned for the German stock market: a new conservative Chancellor, in theory favourable for investors, albeit tempered by the fact that he governs at the head of a broad coalition – the ideal constellation for markets; an historic reform of the budget rules, supported by a rare consensus in the country and enabling the government to stimulate economic growth through debt; a gigantic stimulus package for military and infrastructure spending, encouraged by the European Union; and lastly, the political will to support productive investment over the long term, as highlighted by the corporate tax relief plan unveiled on 4 June. The latter should reduce corporation tax in Germany by 5 percentage points by 2032.
So is Germany the new US? Will the Rhine be awash with capital, as has been the case in Silicon Valley for decades? There are some headwinds tempering this idyllic scenario.
Firstly, the corporate tax relief plan is not enormous – EUR 46 billion by 2029, or a little less than 1% of GDP over four years. This will not radically transform the economic landscape. The package of new military and infrastructure spending is much more significant at around EUR 1,000 billion over 12 years, but there are unlikely to be any tangible effects before 2026. In the intervening period, forecasts for economic growth are still gloomy: just 0.1% for 2025 according to the Bloomberg consensus, after two slightly negative years, with only 1.1% forecast for 2026. Far from an upsurge, even if forecasts may – for once – be revised upwards.
In addition, Germany will have to deal with the trade war prosecuted by the US, and it is particularly fragile here: the structure of its economy is extremely sensitive to global trade, due to the share of exports in the turnover of its companies. As the global growth outlook has been undermined by the US measures, there will be considerable adverse weather to overcome.
Lastly, the German market has been primarily driven by two sectors at the expense of all others – capital goods, including Rheinmetall and Siemens Energy, and SAP, the country’s technology darling. But these stocks are now very expensive. After a rise of 205% since the beginning of the year (and 2,400% over five years!), Rheinmetall is trading on over 60x forecast 2025 earnings on the basis of the Bloomberg consensus, versus the DAX rating of 17x earnings. As for Siemens Energy, it has surged by 77% this year and is trading at close to the same earnings multiple as Rheinmetall. At this valuation level, upside surprises will be difficult, whereas any disappointment will have a major impact.
That said, large caps are not the only side to the country. Small companies offer some advantages. Whilst they have risen by 25% this year, they still have significant catch-up potential versus large caps over the last five years. Less exposed to the vagaries of global trade, and supported by domestic stimulus packages, they could perform very well in the coming quarters, were we to see a positive feedback loop in confidence.
The stance of the current government will be key to maintaining the enthusiasm that has recently returned to the country. If it is successful – as it has been thus far – it could reap the benefits of a redirection, however partial, of flows that have traditionally been channelled towards the US, as other European countries are bogged down in their own fiscal difficulties. The first signs are encouraging.
After the hour of Silicon Valley, is it now the time of “Metal Valley” on the Rhine?