Market Watch : German Issues: Expect Payoff Much Later

The West German stock market has suddenly come back to life after a dismal spring. That’s stirring new interest in the market on the part of U.S. investors, who are remembering all those post-Berlin Wall stories about the united Germany’s dynamic future as the economic leader of the “new Europe.”

Should you have money invested in German stocks? Yes, most global market strategists will tell you. Will you have to wait awhile for your payoff? Most likely, yes. But to try and time the turn of events in Germany would probably be futile. When that market moves, it moves very quickly.

In the first quarter of this year, the West German market was the world’s hottest. From January 1 to April 2, the Frankfurt exchange’s 30-share DAX index rose 10%, to 1,976.43. In the same period, the U.S. market fell 3.4% and Japan’s plunged 26%.

But just as the U.S. and Japanese markets rebounded in the spring, Germany’s stagnated. Steve Keddell, who handles big U.S. investors’ trades of German stocks for Deutsche Bank in New York, notes that the German market was hit by a number of problems at once: concerns about the cost of unification; rising interest rates; a strong Deutschemark, which hurt export profits, and turmoil in Brazil, a big market for German firms.

Those problems sent the DAX down to 1,787.39 by June 13. Then, last week, buyers returned, boosting the DAX 80.66 points for the week to 1,872.92 on Friday.

Is this the start of a new surge ? That’s probably up to American and Japanese investors. Because the German stock market is relatively small, “in the short term, what drives German stocks is the action of outsiders” who suddenly throw large sums at the stocks, says George Murnaghan. He runs two international stock mutual funds for T. Rowe Price Associates in Baltimore.

Some American investors believe that relief over the economic cementing of East Germany with the West on July 2--via East Germany’s conversion to West Germany’s currency--could precipitate a flood of money into German stocks. “The market could rebound violently,” says Frank Jennings, who runs American International Group’s $500-million international investment portfolio.

On the surface, German stocks don’t appear overpriced. Keddell says the average stock on the Frankfurt exchange sells for 14 times estimated 1990 earnings per share, about on par with U.S. stocks and well below Japan’s still-lofty price/earnings ratios.

The big question now is whether West German companies will be able to show decent profit growth this year and next. Keddell admits that his expectations are coming down. “We originally expected 12% (average) earnings growth this year, but we now see 9%,” he says. And for 1991, he sees just 7%.

The problem is that no one knows what West German companies will have to invest to revitalize their East German counterparts, as unification proceeds. There is a growing realization, however, that “these companies will have to spend a lot of money before they can earn anything,” Keddell says.

George Noble, one of Fidelity Group’s key international stock managers, toured the two Germanys earlier this month. He returned to the United States sobered about chances of a fast payoff from unification. In fact, Noble cut back a bit on his Overseas Fund’s position in German stocks.

The East German economy is a shambles, he says. Its plants are grossly inefficient. Officials at a West German auto parts plant told Noble about an Eastern counterpart that employs 800 people. The Western plant produces as much with 150.

Everyone knows there’s a huge bill that the West Germans will have to pay to rebuild the East. The German stock market may even be prepared for little or no earnings growth by German firms this year and next, as capital spending soars. The big unknown, says Noble, is whether social upheaval in the East will lead to rioting. That could panic foreign investors.

“I think you’re going to see unemployment be a real problem,” he says. Add the potential for interest rates to remain high--as the two Germanys borrow massively to fund unification--and Noble believes German stocks could slide further this year.

But beyond the short-term gloom, he says he is convinced that the German market could one day be the world’s best--because German economic power is certain to be pre-eminent in Europe. If you think you can time the market, good luck. The smartest investors will probably put money into German stocks this year, and vow not to touch them for three years minimum.

Here are some mutual funds that specialize in German stocks or have heavy investments in that market:

* Germany Fund, New Germany Fund and Future Germany Fund. They trade on the New York Stock Exchange. All are managed by Deutsche Bank Capital, 31 W. 52nd St., New York, NY 10019. Write for annual reports.

* Fidelity Overseas Fund, Fidelity Europe Fund. Call (800) 544-6666 for prospectuses.

* T. Rowe Price International Stock Fund, International Discovery Fund and Europe Fund. Call (800) 638-5660 for prospectuses.

FRANKFURT’S RISE

How the Frankfurt stock exchange’s 30-share DAX index of West German stocks has performed since late 1988.

Close on June 22, 1990: 1,872.92