Wages wag the tail of the DAX
This week, Germany celebrated its Tag der deutschen Einheit (Day of German Unity) marking twenty-two years since the wall was torn down between East and West.
Back in the present, Frankfurt’s main share index, the DAX, has outperformed all of its European peers this year and in dollar terms has outshone almost every other global equity index. Re-unification has been painful, fostering social tensions and still huge disparities between east and west, but some analysts argue that it is precisely those disparities, not least in wages, which have underpinned the primacy of German stocks today.
There are other crucial factors of course. Germany’s high-value and high cost exports such as BMW cars are in high demand in countries such as China and India, all the more because of the weak euro. And despite the outperformance, the market seems to price German stocks as bargains — they currently trade around 10 times forward earnings compared to over 12 times for the world index. According to fund managers at Baring Asset Management:
Overall, we continue to see a compelling earnings environment…, yet this is not necessarily being translated into higher equity valuations… We also believe another positive driver for equities is dividend yield in Germany, which remains supportive at around 3.5% after inflation.
They reckon that this makes German stocks a great bet, as long as PE valuations remain low and dividend yields competitive.
For analysts at Jyske Invest International, though, Germany’s ability to keep a lid on wage inflation thanks to re-unification plays a more fundamental role.
German government data showed in August that gross income per jobholder in the new federal states in the east in 2011 was only 25,097 euros compared with 30,300 euros in the west. Compensation per employee in the former GDR in 2011 still only accounted for 15.5 percent of what employers paid workers in the whole of Germany, up only one percent since 1991.
On the day Germany celebrated the anniversary of unification this week, Jyske said in a note:
Germany’s success is driven by strong exports, among other things due to the German wage trend. German wages rose by about 5% from 2000 to 2011 while in Denmark and in many Southern European countries wages rose by 30%-35%. The German wage trend is, among other things, due to the German reunification which gave companies access to abundant labour at low wages in East Germany.
Back in 1989, West Germany sought to wrestle a communist nation into a free market economy, promising to leave ‘Blooming Landscapes’ in its wake. That vision failed to materialise, but as Jyske notes, there are unintended consequences offering a boost to the combined economy today. Could this pattern be applied in future to wage disparities and distortions in the euro zone as well?
— By Shadia Nasralla