And with some justification, for China and the two Asian “tigers” share some alluring characteristics like:

• A highly competitive and innovative manufacturing industry.
• Excellent government and workforce discipline.
• Modest fiscal and monetary stimulus (or, like China, they started from a position of budget surplus).
• And an export orientation that seems likely to benefit quickly as order is restored in the global trading economy.

But there’s another country that shares those characteristics. It’s nowhere near East Asia. But investors can expect this particular economy to also bounce back from this recession with considerable vigor.

I’m talking about the center of supposedly sclerotic Old Europe itself: Germany.

Germany lacks the huge financial sector that has been the bane of the United States and British economies, but it has manufacturing industry that is the envy of the world. Its balance of payments surplus was $205.8 billion in the 12 months through April, and is expected to be 4.4% of gross domestic product (GDP) for all of 2009.

The German government resisted the urge to splurge on “stimulus” packages, and consequently is expected to run a budget deficit of only 4.4% of GDP in 2009 – a ratio that’s far smaller than those of other “advanced” economies, and one that should be easy to finance. Furthermore, the European Central Bank (ECB) has been the most conservative of all major central banks outside Brazil, and German Chancellor Angela Merkel has indicated pretty strongly that it had better stay that way, as she is worried about inflation.

German labor discipline is world-famous, partly because of its sophisticated system of “mitbestimmung” (co-determination) between industry and labor unions. Thus, Germany loses only four days to strikes per 1,000 employees in an average year, an average that’s well below the same statistic for each of its European neighbors. Skill levels are also excellent, because of the superior German education system, much of which is run in partnership with industry.

Because of its more conservative fiscal stance – with less stimulus – Germany has suffered through a much-deeper recession than many other countries, with first-quarter GDP down 6.9% from the previous year.

By comparison, economic output declined 2.5% in the United States and 4.2% in Korea, but 8.8% in Japan and 10.2% in Taiwan.  However, manufacturing orders stabilized in April and it seems likely that Germany will experience a return to growth in the second half of 2009. The ZEW indicator of German economic sentiment for June came in at 44.8 – up more than 13 points from the previous month, and a three-year high. When Germany starts to recover, its economic rebound is likely to be healthy, without resurgent inflation or bond market turmoil, because of Germany’s cautious fiscal and monetary policies.

What to buy? Well, for a start there’s the German exchange-traded fund (ETF), the iShares MSCI Germany Index (NYSE:EWG). At $489 million, it’s surprisingly small, but it has a Price/Earnings (P/E) ratio of 12 and a yield of 6.4%, meaning it provides shareholders with a decent income. It also provides a much-broader exposure to the German market than do the American Depository Receipt (ADR) shares, which relate only to very large companies, and not to the highly successful “mittelstand” medium-sized enterprises.

There are eight German companies whose ADRs have a sponsored full listing on the New York Stock Exchange (several others have moved to the Pink Sheets recently because of the costs of Sarbanes-Oxley compliance). Of these, Infineon Technologies AG (OTC ADR: IFNNY), a semiconductor manufacturer, is making a loss, while Qimonda AG (OTC ADR: QMNDQ), a maker of computer memory devices, is in bankruptcy.
That leaves six possible profit plays:

• Allianz SE: (NYSE ADR: AZ): This huge insurance company sold its shares in Dresdner Bank AG and is now a shareholder in Commerzbank AG (OTC ADR: CRZBY). Allianz lost money in 2008 because of investment losses, but is trading on only nine times projected 2009 earnings, with a 5% dividend yield.

• Daimler AG (NYSE ADR: DAI): A major automaker, and producer of the upscale Mercedes Benz brand (including the fashionable “Smart” small car), Daimler is now thankfully devoid of Chrysler LLCinvolvement. Daimler gratuitously tossed away a considerable amount of shareholder value with two foolish diversifications – into aerospace in the 1980s and into Chrysler in the 1990s. If management can keep its eyes on the road (stay on the black stuff between the trees), this stock could be quite attractive. Daimler’s shares are trading at 20 times recession-year earnings. The dividend yield is only 1.7%, but overall there’s a lot of upside in an economic recovery.

• Deutsche Bank AG (NYSE ADR: DB): This is Germany’s premier bank and investment bank, but it is currently losing money and the stock yields only 1%. For a play on a German financial sector recovery, I prefer Allianz.

• Deutsche Telekom AG (NYSE ADR: DT): Germany’s traditional fixed-line telephone service, Deutsche Telekom also has mobile-phone operations and has increased its revenue by also offering high-speed Internet access. Currently operating at a loss, DT also cut its dividend. Avoid – there are better telecom plays out there.

• SAP AG (NYSE ADR: SAP):  A globally known provider of so-called “enterprise resource planning” (ERP) software, SAP shares have a dividend yield of only 1.2%, and are trading at 19 times prospective earnings. The stock looks a bit pricey to me: I like the sector, but not SAP’s bureaucracy-friendly product line.

• Siemens AG (NYSE ADR: SI): With its wide array of product offerings, Siemens is operationally akin to General Electric Co. (NYSE: GE). Indeed, with  heavy-equipment offerings that range from locomotives to electric power plants, Siemens is selling the kinds of products that are likely to benefit from heavy “stimulus” spending worldwide. The company has recovered from losses in 2006. But the shares are trading at only 11 times estimated earnings for the 12 months that end in September. That low valuation, coupled with a nice dividend yield of 2.9%, makes the stock appear fairly attractive.

Source: Germany: Emerging Market Profit Potential, With (Only) Developed Market Risk

Less than two months later, however, BofA sold $2.8 billion of its shares in the Beijing-based China Construction Bank, a jarring about face made necessary by the U.S. bank’s need to raise cash.

And Bank of America isn’t the only Western lender making such a move.

Just this week, the Royal Bank of Scotland Group PLC (ADR: RBS), Great Britain’s biggest government-controlled bank, sold its $2.3 billion stake in the Bank of China Ltd. (Pink: BACHF), the No. 3 Chinese lender – also because RBS needed to replenish its capital position. That stake represented 4.3% of the Bank of China’s outstanding shares.

RBS, BofA and UBS AG (UBS) – all early “strategic investors” in China’s biggest banks – have now each trimmed their investments in those banks, thanks to the expiration of restrictive “lockup periods.” UBS said last month that it had sold its entire 1.33% stake in the Bank of China.
More divestitures are expected.

“Undoubtedly, foreign banks will continue to expand their footprints in China,” Zhao Xijun, deputy director of the School of Finance at Renmin University of China, told The Wall Street Journal. “But they will be more focused on developing their own businesses, rather than buying a Chinese lender.”

Cash-strapped Western banks – desperate to raise money in the face of the worst financial crisis since the Great Depression – are paring their stakes in top China banks. That will bring in needed capital today but at the cost of lost future profits tomorrow in an economy that’s the world’s fastest-growing, and a market in which a burgeoning middle class figures to create all sorts of lucrative businesses for players with the ability to stay in the game.
On China’s end, the divestitures are forcing Beijing to reassess its strategy of using foreign know-how to assemble a world-class banking system.

Since 2005, foreign financial institutions such as Bank of America and the RBS have pumped more than $25 billion into Chinese banks as part of a high-dollar game of quid pro quo engineered by the Red Dragon’s regulators: Foreign investors would gain access to China’s banking market, and in return would show China’s banks how to make money in a free-market environment.

As these developments demonstrate, the global financial crisis continues to worsen, meaning the bailout strategies used so far haven’t had the desired benefit. BofA received a $15 billion infusion from the U.S. Treasury Department’s $250 billion “recapitalization” effort. The Edinburgh-based RBS received $29 billion in bailout money of its own after taking $10.2 billion in write-downs in 2008.

As a Money Morning investigation has demonstrated, many U.S. banks used bailout money to go on a global shopping spree, instead of retiring bad debts or boosting lending to businesses and consumers. The payback has been rather quick in some cases.

As the divestments have now demonstrated, the worsening financial crisis is forcing financial institutions to sell promising assets, and to do so at a point when the value of those holdings is probably at or near their nadir.

“For RBS, they don’t really have much choice,” Samuel Chen, a Hong Kong-based analyst at JPMorgan Chase & Co. (JPM), told Bloomberg News. “They would probably rather hold it.”

Indeed, as one analyst said, Western banks are selling out at prices where they should actually be buying.

“Although the selling by foreign strategic investors may put some short-term pressure on prices, bank stocks are undervalued given their long-term growth prospects,” Zhang Xi, a Beijing-based analyst at China Galaxy Securities Co., told Bloomberg News.. “Now is a good time to buy Bank of China and other big lenders.”

Goldman Sachs Group Inc. (GS) still owns 16.5 billion shares in Industrial & Commercial Bank of China, the world’s largest bank by market value, and has agreed not to sell the shares until after April 28, according to published reports. American Express Co. (AXP) and Allianz SE (ADR: AZ) are among the Commercial Bank of China’s other U.S. and European shareholders.

Source: The Global Financial Crisis Will Cost Western Banks a Share of Future China Profits

This from Money Morning:

Commentators are tripping over one another to declare this country or that country’s stimulus package as a primary reason to pour money into its stock market. Yet if you look at the highly damaging long-term effects of such loose monetary and fiscal policies, an investor can come to only one conclusion: You should invest in the country with the smallest stimulus package.

Stimulus packages are all the rage right now. President-elect Barack Obama has promised an $800 billion package for the United States, which equates to nearly 7% of U.S. gross domestic product (GDP). And there are plenty of others:

• Japan has a stimulus package of $720 billion – roughly 14% of GDP.
• South Korea plans two stimulus packages – the larger of them “green” – totaling about $50 billion, or about 6% of GDP.
• Great Britain is expected to inject about $177 billion into its economy, the equivalent of 8% of GDP.
• France has a modest $40 billion stimulus package in place but that’s on top of a $300 billion European Union (EU) stimulus package, so the total’s about 3% of GDP.
• China has announced a $586 billion stimulus – almost 20% of GDP – and now appears to have decided even that is too little.

Then there’s Germany. When the British stimulus was announced, Germany’s finance minister, Peer Steinbruck, described it as “crass Keynesianism.” Since then, he’s been forced to back off that stance a bit: On Jan. 12, Germany announced a stimulus plan totaling $70 billion over two years.

Still, even that is only is a relatively modest 2% of GDP, and Germany’s 2009 budget deficit – even with the stimulus – is projected to come in at less than 3% of GDP. That’s far less of a deficit than the country faced during the 2001-2003 recession, and means that Germany enjoys one of the soundest fiscal positions of any country in the world.

Germany’s short-term economic outlook is unexciting, as is currently the case for most countries. According to The Economist, the country’s GDP is forecast to shrink by 1.4% in 2009, after actually advancing 1.0% in 2008. That’s equal to the Euro zone average and equal to Japan, a bit less than the United States (projected at minus 1.2%), but better than Britain (minus 1.7%). But at a projected 1.0%, at least inflation at 1% is expected to be satisfactorily low.

Where Germany stands out, however, is when you look at its balance of payments, which is in surplus by $265 billion in the year to November 2008 – the equivalent of 6.6% of GDP. That immediately distinguishes it from the finance-based economies of the United States and Britain, both of which have perennial balance-of-payment deficits.

The most impressive thing about the German payments surplus is that it is achieved against a background of some of the highest wage rates in the world, very heavy tax and Social Security costs and a strong euro exchange rate. Even though it has among the world’s highest labor costs, Germany also has among the world’s highest labor skill levels, and those are more concentrated in manufacturing than in finance or business services, making the German economy less vulnerable to this finance-based recession or to erosion through globalization.

Like other countries, Germany will see its exports hit by this global recession, but it has the ability to grow domestic demand to compensate without affecting its budget or payments position.

For a decade and a half, the German economy and its budget were bedeviled by the huge costs of integrating the former communist East Germany into the West. However, that was a one-off cost; anyone who graduated high school in East Germany under Communism before 1989 is now nearing 40, so younger workers have been given the education and training common to their splendidly productive West German counterparts. From about 2005 on, the drag on the budget and on productivity from East German integration costs has begun to decline, and it will continue declining in the years ahead.

With its low budget deficit and large payments surplus, Germany is the strongest economy in the EU. It is potentially the strongest economy in the world; while the United States, Japan and Britain will struggle for years with the nasty side-effects of their massive government-stimulus spending, Germany will remain in sound shape.

It is thus likely that over the next few years, the huge flows of “safe haven” money that for decades helped prop up the U.S. Treasuries market will flow instead into the German bund and equities markets: After all, where the hell else is there? That will reduce German interest rates and increase multiples on German stocks. For an international investor, it thus becomes essential to have a significant part of your portfolio in German stocks.

What to buy? Well, for a start there’s the German exchange-traded fund (ETF), the iShares MSCI Germany Index (NYSE:EWG). At $334 million, it’s surprisingly small, but it has a Price/Earnings (P/E) ratio of 9.6, and a yield of 6.6%, so this ETF provides decent income as well as a broad exposure to the German market.

There are eight German companies whose American Depository Receipts (ADRs) have a full sponsored listing on the New York Stock Exchange (several others have moved to the Pink Sheets recently because of the costs of Sarbanes-Oxley compliance).

Of these, Allianz SE (ADR:AZ) and Deutsche Bank AG (DB) are both caught up in the travails of the global financial-services sector, while financial services industry’s travails, while Daimler AG (DAI) offers the limited prospects of the automotive industry (though Daimler’s a good bet once economic recovery is clearly in sight). Infineon Technologies AG (ADR: IFX), a semiconductor manufacturer, and Qimonda AG (ADR: QI), a maker of computer memory devices, are each currently making losses.

That means there are only three other possible recommendations, which is why, if you want a broad exposure to the German market, you should also consider a mutual fund or an ETF like EWG.

Deutsche Telekom AG (ADR:DT) is Germany’s traditional fixed-line telephone service, which has mobile operations and that also has increased revenue by providing high-speed Internet access services. Based on both 2008 and 2009 earnings, the P/E ratio of its shares is a somewhat high 15. On the other hand, however, the stock’s dividend yield is better than 8%. A dividend cut must be possible, but the company in general seems fairly recession-proof.

SAP AG (ADR:SAP), the well-known international maker and marketer of enterprise software, has a lower dividend yield of only 2.1%, but much better earnings-growth prospects: 2009 is currently projected ahead of 2008. At 14 times earnings, the stock currently looks cheap for this sector.

Siemens AG (ADR:SI) is active in a broad range of heavy equipment, including items such as locomotives and electric power plants – the very kinds of businesses that are likely to benefit from heavy “stimulus” spending worldwide, especially infusions aimed at infrastructure development, which is very much the case in China.

With Siemens having recovered from losses in 2006, the company’s shares are now trading on only 8 times estimated earnings for the year to September 2009, with a dividend yield of 3.7%. They seem attractively priced.

Source: Four Ways to Profit From the Country With the Smallest Stimulus Package

UBS announced yesterday (Tuesday) that it lost $329 million in the second quarter after taking another $5.1 billion hit in write-downs on subprime assets. That compares with a profit of $5.12 billion a year ago. The bank has written down a total $42.5 billion in the past 12 months.

After announcing its results, UBS said it would “reposition” itself to “allow maximum strategic flexibility in its future development.” The restructuring effort includes separating the bank’s business divisions into three autonomous units, as well as a management shakeup. Four new members will be added to the bank’s Board of Directors, and Markus Diethelm and John Cryan will take over as Group General Counsel and Group Chief Financial Officer.

“We are delighted that Markus and John will join our Group Executive Board, and, when it is formed, the new Executive Committee, filling these critical positions with two high-caliber senior managers,” said Chief Executive Officer Marcel Rohner.

Both the turnover in management and abandonment of the single-bank model are widely seen as moves to appease investors who are growing impatient with UBS’ continued losses. However, analysts remain divided over whether or not the bank will go so far as to jettison its securities unit.

“We believe that UBS investment bank will be not fully owned and even potentially disposed of by UBS over the next two years,” said JPMorgan Chase & Co. (JPM) analyst Kian Abouhossein.

However, the UBS Chairman Peter Kurer told journalists on a conference call that the bank has “no specific plans to dispose of any business unit at this time,” leading others to speculate that the bank is merely trying to pacify its raucous investors.

“They bought themselves some time,” said Joerg de Vries-Hippen, who oversees about $26 billion, including UBS stock, as chief investment officer for European equities at Allianz Global Investors (ADR: AZ), told Bloomberg News. “By separating the business units they are showing that they are listening to investors but not going as far as breaking up the universal bank business model.”

It’s not just investors the bank is worried about losing, either. UBS lost 140 client advisors from management units in the second quarter, Bloomberg reported.

“Talent in private banking is rushing out the door to competitors who are taking advantage of the bank’s difficult situation,” said Bernhard Bauhofer, the founder of Wollerau, Switzerland-based consulting firm Sparring Partners GmbH.

Clients have followed many of those executives out the door, as the company said there were net new money outflows of $41 billion during the second quarter.

“A big part of the money outflows were international,” Helmut Hipper, a fund manager at Union Investment told Reuters. “The reputational problems are hitting home internationally.”

An investigation by the Internal Revenue Service has also detracted from UBS’ credibility. The IRS has issued a summons for customer information, alleging the bank helped clients evade U.S. taxes. UBS said it would stop servicing American accounts, and the Swiss Finance Ministry is evaluating whether or not the bank should offer any further compliance.

Also, New York State Attorney General Andrew Cuomo has brought a multi-billion lawsuit against UBS, accusing the Swiss banking giant of pushing billions of dollars in auction-rate securities onto ordinary investors as the market collapsed earlier this year.

Source: UBS Restructures Management, Hoping to Restore Confidence After Second Quarter Losses

Back in October, the Oracle of Omaha’s trip to South Korea encouraged our own bullishness on that country’s stock market.

And now Buffett has decided to have a look at Germany.

On a recent trip to Europe, Buffett made stops in Germany, Switzerland, Spain and Italy. But his first priority was to meet with leaders of the German mittelstand – the family-owned, medium-sized companies that are the backbone of the German economy.

“We would like more family owners of German businesses who, when they feel some need to monetize their business, think of Berkshire Hathaway,” Buffett said to the Financial Times.

Buying into privately held companies – usually those whose ownership remains in the hands of the founding family – is an investment play Buffett has run time and again – and virtually always successfully. Back in 2006, he made what then was his largest investment ever outside the U.S. market, when he spent $4 billion for an 80% stake of an Israeli metalworking firm that was family operated. At the time, Israel was out of fashion with U.S. investors, though Buffett’s headline-making deal changed those attitudes rather quickly.

Like Israel was then, and like Japan is now, Germany is currently unfashionable with U.S. analysts. As is also true of Japan, it seems to come as a surprise every time Germany comes out with a positive gross domestic product (GDP) number. Both countries had horrible periods in the 1990s, but analysts who think Germany is doomed to slow growth forever haven’t been paying attention.

The Seeds of a German Economic Rebound

Germany’s problems of that period were largely due to the 1990 German reunification, which German Chancellor Helmut Kohl foolishly carried out by equalizing the West and East German currencies and making East German labor hopelessly uncompetitive in the process. The net result was 15 years of huge subsidies from West to East and a series of real estate disasters as Western construction companies overbuilt in the East.

Since about 2005, however, the costs of reunification have begun to decline – they were always likely to be a finite problem, as the Eastern education system was reformed and produced more productive workers – and the German growth rate has begun to increase.

Indeed, over the near-decade since the introduction of the euro, German labor competitiveness has increased by about 20% against its fellow European Union members, a very good performance. German companies have a healthy position in Eastern Europe, too, where economic growth has been rapid and wage rates remain far lower than in the West.

Germany has a substantial balance of payments surplus – about 5.5% of GDP in 2007, slightly larger than the United States’ deficit – and a budget deficit of only 0.4% of GDP. The Economist estimates that Germany will grow at 1.7% in 2008 and 1.6% in 2009 – not stellar, but still faster than the United States, which will be lucky to eek out 1% GDP growth this year (and much faster per capita if you discount for the 1% annual U.S. population growth).

Unlike some of its EU neighbors, German industry has suffered only moderately because of the euro’s strength. It helps that many German companies have substantial manufacturing operations in central Europe, which has become a haven of German-style (and mostly German-speaking) labor practices and engineering skill, but where labor costs remain low. Add in German companies’ reputations for superb organization and quality control, and you have an industrial machine that is fairly immune to exchange rate fluctuations and even to cheaper emerging market competition.

Even inflation at 2.4% is not much of a problem in Germany, and the strong euro should hold German inflation down by suppressing rises in dollar-denominated energy and commodity prices, while not doing much damage to Germany’s healthy balance of payments surplus.

Profit Plays to Call Now

So, what to buy? Well, be careful with the banks. There are too many banks in Germany, most of them propped up by their local governments, and the banking system’s lack of good ideas for making money has recently been shown by two banks, IKB Deutsche Industriebank AG and Sachsen LB, getting in serious trouble for overexposure to U.S. subprime mortgages. However, most German banks do have an advantage over U.S. banks in their limited exposure to non-mortgage U.S. debt.

Nevertheless, if you want a German financial services play, I would avoid even the mighty Deutsche Bank AG (DB) and go for the banking/insurance conglomerate Allianz AG (ADR: AZ). While Allianz does own Dresdner Bank, which has had its own problems and write-offs, it is also Germany’s largest property, casualty and health insurance company, making it one of the world’s leading insurers. And Allianz is trading at a slightly lower price/earnings (P/E) ratio than Deutsche at about 7, has a nice dividend yield of 4% and is selling at less than 1.2 times book value, a key metric for financial services companies, which tend to sell at 2 or 3 times book.

You should also look at Germany’s great engineering companies. The largest, Siemens AG (ADR: SI), has recovered from its losses of a couple of years ago and is now selling at a P/E ratio of about 8, although its dividend yield is still only 1.6%. Still, Siemens’ powerful worldwide position should allow it to continue its recovery, and there is a good chance of dividend increases – a return to Germany’s traditional conservative 50% dividend payout rate would cause its dividend to treble.

A third possibility is Fresenius Medical Care AG & Co. (ADR: FMS), the world’s largest manufacturer of kidney-dialysis machines, again a global player. This firm has a somewhat higher Price/Earnings ratio, currently about 19 on projected 2008 earnings, but its technological capability and strong market position give it attractive growth potential.

Finally, in the tech sector you might look at the business-software provider, SAP AG (ADR: SAP), whose shares carry a P/E of about 18 on estimated 2008 earnings, though they yield only 1%. SAP is the leading manufacturer and installer of so-called “enterprise resource planning,” or ERP, software, a business whose usefulness to companies has greatly increased as its products have matured and the firm’s earlier installation problems have largely been overcome.

Unlike Buffett, most individual U.S. investors don’t have the opportunity to buy the German mittelstand directly, but even large German companies can offer attractive values.

Source: Germany, Warren Buffett Likes It, and So Do We