Germany’s lower house of parliament is expected to agree on Thursday to new emergency legislation, allowing the government to bail out struggling energy companies that have run into financial difficulties due to rising gas prices. According to a Bloomberg report, German gas giant Uniper is in talks with the government on a bailout package worth $9.4 billion. As Russia’s Gazprom began scheduled maintenance work on its key Nord Stream 1 gas pipeline on July 11, there are growing fears that Russian gas supplies to Germany will be cut off indefinitely, meaning German consumers and industry could face a tough winter.
But while Germany has underperformed this year due to continued supply chain disruptions, rising input costs and slowing growth, relative valuations have also fallen to reflect rising earnings. in this more cyclical market, offering opportunities to investors. So here’s what they should focus on:
The economic environment has become more difficult. Contrary to expectations at the start of the year, the growth outlook for the German economy has darkened. Global supply chain issues, the Russian-Ukrainian war, rising energy prices and high inflation are all headwinds, and we now expect GDP growth of just 1.5% this year. and 0.9% in 2023. German companies are also affected by reduced growth prospects and economic and trade challenges in the United States and China, two key regions for German exporters.
This is also reflected in a tougher earnings outlook for German companies. While current consensus earnings expectations are still in the mid-to-mid range, we believe earnings risks are tilted to the downside. The challenges for German businesses are likely to increase, and rising costs (eg rising energy, wage and interest costs) could hurt corporate profit margins in the coming quarters.
As growth prospects darken, equity valuations are attractive. Due to the sharp decline in the equity market in recent months, the consensus P/E for 2023 has fallen to around 10x, below the long-term average. The dividend yield of around 4% is still attractive compared to government bond yields. We see attractive opportunities for long-term investors, although short-term risks should not be ignored.
Thus, with market uncertainty and volatility remaining elevated, we favor value stocks that are attractively priced and offer a high dividend yield. We also like big, quality names that are well positioned to benefit from long-term growth, and will therefore ensure that portfolios are protected from short-term risk.