3) Equities are no longer as cheap. Finally, even with a weak economy, we might still be inclined to remain overweight German stocks if the market was as cheap as it was a year ago. But after gaining 28% YTD and 6% QTD Germany is no longer one of the world’s cheapest markets. The price-to-book ratio now stands at 1.53. While this is still cheap compared to the United States, it is up considerably from a year ago, when it was 1.27, and is increasingly expensive compared to other European markets.
To be clear, longer term I still like the fundamentals of Germany, which is distinguished by its world class industrial and export sectors. And I would look to re-enter the market on a pullback, or on signs of stabilization in the German economy.
However, in the near-term I would favor taking some profit and adopting a neutral stance on German equities.
iShares MSCI Germany (NYSEArca: EWG)
Russ Koesterich, CFA, is the BlackRock Global Chief Investment Strategist.