Market Watch : Buying a Piece of West Germany’s Future : Investing: There is good reason to be bullish on the country’s stocks and economy. But finding the right investment vehicle can be tricky.
East Germans have not been the only ones flooding into West Germany since the Berlin Wall opened. Foreign investors have flocked there, too.
A torrent of foreign money has flowed into West German stocks in recent months as the nation expects to profit handsomely from the political changes in Eastern Europe. But investing in West German stocks can be tricky for the average investor, and many may find that they have already missed out on any substantial short-term gains.
“You might say it’s overbought,” said David Strongin, director of international finance at the Securities Industry Assn., of the West German market. “There has been a euphoria, and you would expect there to be a correction at some time. Maybe it will weaken in the short run. But in the long run, you will have higher equity prices.”
The monthly flow of foreign investment into West German stock markets nearly quadrupled in October, and the Frankfurt exchange’s DAX index has shot up 34% since November, when East Germany opened up its borders.
American and Japanese investors have bid up the price of stock funds that invest in West German companies. Shares in the New Germany Fund, which invests in companies involved in the rebuilding and modernization of the Eastern European economy, were issued at $15 each but rose to $22 after the first day of trading. The fund closed Friday on the New York Stock Exchange at $21, down $2.
U.S. brokerages such as Prudential-Bache are creating new funds of West German stocks.
“Germany is in the press every day, and (investors) are very excited about the opportunities,” said Robert Rolland, a foreign stock trader for Shearson Lehman Hutton, who reports increased American demand for such West German blue chips as Deutsche Bank, Bayer and Siemens.
Investors have good reason to be bullish on the West German stocks and economy.
DRI/McGraw-Hill, a consulting firm in Lexington, Mass., estimates that the West German economy--spurred on by a tax break--will grow 3.75% in 1990. That’s one percentage point higher than the European average.
“Right now, (West Germany) is the locomotive for Europe and it is leading the pack as far as growth,” said Peter Perkins, international economist at DRI. “It’s the biggest economy and it tends to set the monetary course for the entire Continent.”
Perkins says the West German economy will also be boosted by the European Community’s planned economic integration in 1992, as well as by the nation’s growing ties to Eastern Europe.
Investors looking at West German stocks should be aware of the significant impact played by currency fluctuations. The recent strength of the West German mark, for example, against the U.S. dollar has magnified gains for U.S. investors. A weak mark, on the other hand, will temper any increase.
“You need the deutsche mark to be strong against the dollar to have a good investment,” said Rolland. “The risk is the dollar. You never know what direction it will go.”
Investors can buy West German stocks in three basic ways:
* West German stock. Americans can buy shares directly on West German exchanges. This route provides a greater variety of stocks, but it can be complicated.
Investors will have to set up a West German bank account to receive their shares. (Unlike U.S. banks, West German banks are permitted to sell and trade stocks.) Commissions on stock transactions are higher in Germany than in this country, and dividends are paid in West German currency. West German stocks, which do not split, are also high-priced. Deutsche Bank, for example, trades at more than $500 a share.
* American Depositary Receipts. ADRs represents a foreign stock held in trust at a bank. ADRs are traded on U.S. exchanges and pay dividends in dollars.
But ADRs are generally limited to the best-known and largest foreign companies, making it difficult to bargain-hunt for lesser known but faster-growing firms.
* International mutual and closed-end funds. (Closed-end funds, unlike conventional mutual funds, issue a fixed number of shares when the fund is organized and do not sell additional shares later. Closed-end funds often trade on markets such as the New York Stock Exchange.) For the average investor, the fund route is perhaps best. They are professionally managed and convenient, say financial experts.
“For the individual investor, the best way to go is through a fund,” said Strongin at the Securities Industry Assn.
However, West German closed-end funds are trading at eye-popping premiums that have turned off investment analysts. Shares in the Germany Fund, for example, have been trading at about an 85% premium to its underlying net asset value.
“Anybody can buy (West) German stocks and buy them for less than the premium,” said Kurt Brouwer, president of Brouwer & Janachowski, a San Francisco investment advisory firm. There is no logical reason to pay that premium. I would expect that to be a dangerous way to invest.”
Brouwer and others recommend international mutual funds that hold a basket of international stocks with an emphasis on West German companies. Brouwer also likes funds such as Vanguard World International and T. Rowe Price International Equity Fund, which are heavily weighted with West German stocks.
Yet another strategy is to invest in U.S. companies with major operations in West Germany.
INVESTMENT IN GERMANY
Net monthly foreign investment in West German shares. Jan.: 1.1 Feb.: 0.33 March: 0.95 April: 0.55 May: -0.45 June: 1.5 July: 1.6 Aug.: 2.3 Sept.: 2.1 Oct.: 4.1 Nov.: 5.8
Source: Security Industry Assn.
