article on EWG.........
German ETF May Lead If Bounce Is For Real
Wednesday July 12, 7:00 pm ET
Murray Coleman
Since bottoming June 13, fortunes are rising again for Barclays' German exchange traded fund.
IShares MSCI Germany Index (AMEX:EWG - News) now has a Relative Price Strength Rating of 73. That puts it on par with this year's hottest ETFs, most of which are focused on foreign stocks and gold.
That's after losing 17.5% from May 10 through its bottom. Since then, its has recovered nearly half that loss, making it one of the world's top 20 performers in 2006.
"Markets dependent on oil and commodities, like Venezuela, Indonesia and Norway, are doing better," said Gary Tapp, equity strategist at SunTrust Robinson Humphrey. "But they're smaller and much less diversified."
He heads a team that oversees SunTrust's all-ETF portfolio.
That includes a small stake in iShares MSCI Germany.
German Sweet Spot
"The global economic expansion we're seeing is playing right into Germany's sweet spot," he said. "It's exporting a huge amount of capital goods to emerging markets."
As a result, Germany has a current account surplus of 4% of GDP. By comparison, the U.S. has a deficit of 6%, Tapp says.
Before, when the U.S. slowed, so did Europe and Asia. What happens if domestic markets undergo a slowdown?
"The world economy is much more robust these days," Tapp said. "China, Eastern Europe and Latin America are seeing real growth spurts. These areas are in a much better position than in the past to sustain growth even if the U.S. slows somewhat."
Undervalued
Another positive that Tapp sees is that iShares MSCI Germany slightly lagged its international rivals last year, gaining 9.64% vs. MSCI EAFE index's 13.32%. "So you could argue Germany's a market that might not be as extended as other developed international markets," Tapp said. "In fact, we think it's still looking fairly cheap right now."
The DAX is trading at 12.7 times forward 12-month earnings. "That's actually the lowest it has been in the past five years," Tapp said. "Most of the U.S. indexes are trading above 15 forward EPS."
Corporate earnings in Germany are expected to grow 13% in 2006 and 10% in 2007, better than the U.S. "And Germany's starting with lower valuations," Tapp said.
One negative exists, he adds. The European Central Bank appears to be in the early stages of a new rate hike cycle.
"Their rates are well below ours right now," Tapp said. "They usually take a very gradual stance."
Right now, European short-term rates are at 3%. Tapp expects them to go to 4% by the end of 2007. "But that would be a fairly low level still," he said. "We don't think it would be enough to stop their stock markets from growing."
