German equities have come into focus as European markets were thrown into disarray this week. With so many headlines pushing these stocks around, it is worth dissecting them one by one, starting with the news out of Italy.
As nationalism and populism continue to roil European equity and bond markets, fears that Italy could lean toward an exit from the euro drove the most recent volatility. This fueled demand for dollars, hurting European companies. Germany, however, could emerge relatively unscathed.
Here are some factors to consider. Indeed, the country's market would be hurt by an Italian exit in the long run, as the remaining countries in the euro would be stronger and the euro would reflect that, making it more difficult to export German goods.
However, we still see this as a low probability and are holding out for a technocrat government that is more likely to stay the course. Thus, we should see some recovery in these stocks later in the summer.
Furthermore, the continued announcements out of the U.S. regarding tariffs with China and other foreign nations could actually turn out to be a win for Europe and Germany in particular.
While steel and aluminum tariffs will hurt Mexico, Canada and the EU, we would suspect that countries will simply turn to trade with each other, leaving the U.S. out of the game.
Moreover, the most recent negotiations between the U.S. and China on automobile tariffs actually leave German automakers in a potentially winning position given how much they currently trade with China.
In sum, as the markets are downbeat for now, we are looking for German strength later this summer.
