Do you remember the time where “Made In China” was a rarely seen phenomenon? “Made In Germany” was a statement with an implied presence of quality while “Made In The US” was the foundation of a never before seen industrial revolution. 

Reality check! “Made in China” has morphed into the springboard for China’s own industrial revolution while pushing the US and Germany in the background. Germany and the US have become “partners in crime”. The crime; economic stagnation.

A quick glance at the Dow Jones and the German DAX (30 German blue chip stocks) reveals a not so subtle trend, both indexes essentially move in sync – which means down. This is troubling, because your portfolio might have Germany hidden in more places than you’d expect. The last thing you need is more US-like or US-linked performance.

Dow Jones - DAX Comparison:




As the pre-dominant European Union (EU) country, Germany enjoys a nearly 10% weighting in most diversified international ETFs such as the immensely popular iShares MSCI EAFE Index Fund (NYSEarca: EFA) or the SPDR S&P World ex-US ETF (AMEX: GWL).

Germany’s presence in European funds is as high as 27% in the Dow Jones Euro STOXX 50 ETF (NYSEarca: FEZ) and averages around 13% as in the Vanguard Europe ETF (AMEX: VGK). All in all, nearly 40 ETFs have an average exposure of 10% to Germany.

Germany’s economic numbers are starting to express the pain the average Hans (German equivalent to the average Joe) has been feeling for many years. Germany’s average consumer was “stuck with a three-prong fork”:

1) The integration of previous communist East-Germany, initiated by the fall of the Berlin Wall in 1989, was followed by much frustration (from East-and West Germany), higher taxes and a stingier social system. German tax-payers are still paying the “Solidaritaetszuschlag”, a tax levied to support the rebuilding of East-Germany. The tax was supposed to sunset 10 years after its implementation but is still going strong at a rate of 5.5% of the income tax.

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2) The end of the D-Mark (the German currency before the Euro) in 2002 not only marked the end of an era, it also marked the end of low prices. During the one-year transitional grace period prior to the final transition, consumers were allowed to pay with either currency. The exchange rate was 2:1. I. e. a carton of milk was 2 D-Marks or 1 Euro. Unfortunately, the exchange rate was seemingly ignored after the final transition as the Euro prices almost equaled the D-Mark prices. While your paycheck was meticulously calculated (2 D-Marks of income became 1 Euro), prices for everything else almost doubled, cutting the average Hans’ purchase power in half.

3) In 2007, the German Umsatz Steuer (equivalent to the US sales tax) was raised to 19% from 16%.

The iShares MSCI Germany Index Fund (NYSEarca: EWG) has lost 23.90% of its value since the beginning of the year. The NETS DAX Index (AMEX: DAX) is down 15.82% since its inception in April 2008. EWG holds 58 securities which are carved out from the larger MSCI EAFE index. DAX replicates the popular German DAX index which includes the 30 German blue chip companies.

The cannibalization of domestic growth – until now - was covered up by massive export profits. As one of the biggest exporters in the world, Germany boasts a trade surplus of over $300 billion. Brands such as BMW, Mercedes, Volkswagen, Bayer, Henckel, Lufthansa, Deutsche Bank, Siemens, SAP, etc. are renowned worldwide and add to the bottom line of the country. However, by outsourcing much of their production to countries like Poland, Czech Republic, China and India, organic growth, which stems from within the borders is stifled.

It was just a matter of time until the facade would crumble.  Second quarter data confirmed just that. Germany’s economy - which accounts for about a third of EU output – contracted 0.5% compared to the performance of Q1 2008. To make matters worse, even the Q1 numbers were revised downward to 1.3% from an earlier 1.5%. Germany will officially be in a recession, if its economy also contracts in the third quarter.

The Minister of Economy points out that the turbulence in the financial markets, the rise in oil prices and the fall of the US dollar ($50 billion trade surplus with the US) are taking their toll (sound familiar?). The challenges the German economy faces are very similar to the US challenges; dependence on foreign oil, turbulence in the financial markets and a high degree of foreign manufacturing. Most importantly, organic, future growth is suffocated by high taxes used to fund current liabilities.

Look under the hood of your investment portfolio, German related ETFs include US problems “in disguise.

Germany-related ETFs: