So far in 2010, most European stock markets have plunged as traders grew increasingly wary over the health of the euro zone and the future of the common currency. In addition to declining stock market prospects, some countries such as Spain and Portugal have been hurt by the decline in the euro; because these nations are among the biggest importers in the world, a declining euro makes goods even more expensive to buy. While the crisis has tempered most investors’ expectations for European GDP growth, the declining euro could be great news for export-intensive economies such as Germany, and could help many European companies to quickly grow overseas operations despite weakness in their home market. That’s exactly the scenario playing out around iconic German carmaker BMW, one of the 15 largest car makers in the world and the third largest in Germany. The company gave a sharp boost to its 2010 guidance on Tuesday, a move that sent shares up about 8% in late trading in Frankfurt.
The company is now predicting that sales will rise by about 10% on the year, while the operating margin will increase more than 5%. This is largely due to the weak euro; the declining value was cited by Barclays as a main reason for tripling the earnings estimate for BMW; analysts estimate that every 1 cent decline in the value of the euro would boost earnings by 0.02 cents.
The company also cited a rebound in U.S. and European sales as well as robust sales out of China. BMW recently announced that it plans to export an additional 10,000 3-Series vehicles from its Munich plant to China, even though the cars will be subject to a 25% import tax. Chinese demand for luxury cars is so high that domestic production of BMW cars cannot keep up, forcing the company to send more cars to the quickly growing emerging market despite the steep tax. However, some analysts see more than sales in China as a catalyst for continued price appreciation of BMW shares. “It’s not just strong sales in China, it’s also the delivery of new models and the effect of cost-cutting steps,” said John Buckland, an analyst at MF Global UK Ltd [also see Five ETFs For A Tumbling Euro].
Germany ETF In Focus
What remains to be seen is whether these trends can be easily replicated by other large industrial exporters in Germany, a development that could give the German stock market a shot in the arm. BMW’s bright outlook helped to propel the main ETF tracking the country, the iShares MSCI Germany Index Fund (EWG), up by more than 2.7% in mid-day trading in New York (although BMW makes up less than 3% of EWG’s total assets). The top holdings of the fund include industrial giant Siemens (10.7%), E.On (8.3%) as well as BASF (7%). In terms of sectors, the fund is weighted most heavily towards industrial materials, which makes up close to one-fourth of the fund’s total assets, as well as financials (18.2%) and consumer goods firms (17.1%). Like most funds tracking the economies of Europe, EWG has posted a loss so far in 2010, sinking by almost 10 [also make sure to read ETF Plays For The End Of Europe's Recession].
Another Way To Play: ROB
While BMW is a relatively small auto company, it is the biggest manufacturer of luxury automobiles in the world, and as such it helps to set the trend for luxury good producers. For investors seeking a way to focus on the luxury segment of the market as opposed to an individual country, the Claymore/Robb Report Global Luxury Index ETF (ROB) presents a compelling choice. In terms of individual holdings, BMW receives the top allocation at 4.9%, with the second spot going to fellow German car maker Daimler (4.8%). The fund holds 32 companies in total and is heavily focused on consumer goods (45%) and consumer services (36%) firms. Germany represents the third largest allocation by country, with France and the U.S. taking the first two spots. ROB is up more than 2.6% today and has produced a gain of almost 50% over the past 52 weeks [also read Beyond XLY: Three Pure Play Consumer Discretionary ETFs].
Disclosure: No positions at time of writing.