German stocks price in sanctions tail-risk

August 12, 2014

By Olaf Storbeck

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The German economic mini-miracle is on hold. Thursday’s announcement of second quarter GDP, which was not affected by Russian trade hostilities, will probably show a decline from the weather-boosted beginning of the year. Investors are looking for worse. The 8.7 percent drop in the DAX stock index since July 3 puts it among the worst performers of major European stock markets.

Russia seems to be the big market worry. But the trade restrictions will only reduce 2014 German GDP growth by 0.2 percentage points, according to Berenberg, which still expects a respectable 1.6 percent annual increase.

Exports to Russia are falling quickly, but that makes little difference to the overall economy. Russia is only the eleventh largest foreign market for Germany, accounting for 3.3 percent of all exports. Besides, the Russian headwinds are not as strong as the tailwinds from other countries. Volkswagen’s first half car sales in the BRIC countries – Brazil, Russia, India and China – increased by 8.1 percent, even though Russia was down 8.4 percent.

The EU sanctions have little direct effect on Germany, because the country is not strong in banks and military goods, the most affected sectors. The worst hit so far is a 100 million euro contract Rheinmetall lost after the German government revoked the export license. The Russian block on food imports is also not a big deal for Germany.

Still, investors are not entirely wrong to worry. Russia could yet use its most potent trade weapon: gas. Germany gets 39 percent of its imports from Russia and a serious supply disruption could wreak havoc on the price.

It’s certainly no more than a tail risk. Gas prices for delivery next winter are down 5 percent since January, and there is enough of the stuff in storage to keep the country supplied for about three months, 70 percent more reserve as at this time last year, according to data from Gas Infrastructure Europe.

A gas war probably won’t happen. But if Moscow ever does decide to sacrifice $80 billion a year of hard currency revenue generated by gas sales to Europe to make a political point, then investors will probably worry about something even worse.

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