Heather Connon: A good time to vote for Germany

Heather Connon: A good time to vote for Germany

There is nothing investors like less than uncertainty, so it is hardly surprising that the stalemate over the German election should have caused a bit of a wobble in the country's Dax index.

While Angela Merkel's Christian Democrats were probably the City's preferred choice, as her reform proposals were more radical than those of incumbent Gerhard Schroeder's Social Democrats, a clear victory for either would have been preferable to weeks of wrangling over some kind of grand coalition.

But the jitters ended pretty quickly as investors placed their bets that political stalemate would not affect the momentum of German companies. The Dax is already Europe's best performing stock market this year, gaining 24 per cent compared with 18 per cent for our own Footsie and a mere 4 per cent for the Dow Jones in the US, as German companies have taken measures on their own to cut costs, improve productivity and boost their competitiveness.

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That contrasts with countries like Italy, where the shift to the euro has exposed the weakness both of the country's economy and its largest companies. While its politicians deliberate about whether the country should pull out of the euro now that the French and Dutch referenda on the European constitution have slowed its progress, German companies - who got used to living with a strong currency when Germany was the industrial powerhouse of the Western world - are adapting gradually to a weak domestic economy and the straitjacket of European policy-making.

The electronics group Siemens, for example, plans to cut €1.5 billion (£1bn) at its IT services business, and the Allianz insurance group is restructuring its German operations and converting itself into a public company. Others are looking overseas for sources of growth. Two of the biggest bids on the London market at the moment are from German companies: Eon's proposed acquisition of Scottish Power and Deutsche Post's agreed purchase of transport group Exel, and there are rumours about German interest in companies as diverse as British Airways and o2.

While Britain, with its liberal takeover rules, has been a particular focus, German companies have also been expanding elsewhere in Europe, both east and west.

John Hatherly, head of global analysis at M&G, says Germans have their own China on the doorstep in eastern Europe, and many companies have been outsourcing manufacturing to former eastern bloc countries as another way of cutting costs. Ownership of German companies is equally international: Hatherly points to the fact that a quarter of the shares of the 30 components of the Dax are held by international hedge funds, and as German politicians complain, they are not afraid of putting pressure on companies to perform.

Davina Curling, manager of Foreign and Colonial's Eurotrust, says: 'Even the unions realise that they no longer have the clout they used to - companies can just take their manufacturing base elsewhere. As a result, unit labour costs have fallen much more sharply in Germany than elsewhere in Europe. When the economy picks up, the operational gearing should be substantial.' Despite the strong performance of equities this year, the stock market is hardly expensive, particularly given the healthy growth expected from German companies.

That growth reflects Germany's export strength; the domestic economy remains difficult, with growth this year expected to be 1 per cent or less, about half the rate for the EU as a whole. While companies may be able to shrug off the political uncertainty, consumers may prove less robust: retailers are already struggling against falling sales, and prolonged wrangling over the structure of the coalition that will govern Germany is unlikely to help. Already surveys are showing a plunge in investor confidence.

But many investment professionals expect the effect of the stalemate to be temporary. Longer term, Germany looks a good bet. The best way to buy into this is through a general European fund; single country funds are rare and much riskier. Among the more attractive ones are the European funds from Fidelity, Jupiter and New Star.

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