German stock market crash highlights FX and investment risk

The German stock market slump seen on July 24 emphasises the need for a broad investment portfolio and a diversified range of trading partners in today’s turbulent economic climate, industry experts argue.

Investors have exercised caution around German car manufacturers, Volkswagen, BMW and Daimler, as they are undergoing investigations around the ongoing diesel emission scandal.

This has caused DAX, a German stock index, to nearly go into the red with its biggest drop since 2008 – down 378.94 points (3.2%) to 11,432.72.

The skyrocketing value of the euro has also negatively impacted export-reliant German firms.

Tom Elliott, deVere Group’s international investment strategist, says: “Eurozone stock markets have felt the pain of a strong currency in recent weeks, as investors think that improving economic data will force the European Central Bank (ECB) to curtail its bond-buying program prematurely and – if inflation picks up – lead to interest rate hikes.”

“The euro’s rally against the dollar is a timely reminder, if another one was needed, of the risks a general tightening of monetary policy can pose to any large business,” Natasha Lala, FX firm OANDA’s managing director, tells GTNews.

“For financial officers responsible for budgeting and forecasting, the euro’s bounce creates further uncertainty which most are all too aware of,” she says.

Motor is driving DAX down

The DAX 30, a key German stock market index, is now faced with a problem that that has previously contributed to stock market falls.

“[DAX’s] motor sector – led by BMW, Daimler and Volkswagen- is under a cloud as more jurisdictions line up to fine the companies over diesel emissions,” says Elliott.

“Last week, the Mayor of London announced plans to seek compensation from Volkswagen after the true scale of the company’s diesel-fuelled cars’ contribution to the city’s air pollution became known. The sector is at risk of punitive fines across the world,” he says.

Elliott argues that this scandal is damaging the ‘Made in Germany’ brand which he describes as being, “embarrassing for the German auto sector and for German exporters more generally”.

However, it is likely to be a passing phase, he adds.

How resilient is the car industry?

“The fines will be absorbed by shareholders, and meanwhile the German auto sector will return to the real long-term battle: is there a durable market for high quality, driver-driven, private cars?” asks Elliott.

German and European car manufacturers face their biggest threat from US technology firms developing innovations such as driverless cars and battery cells.

Changing social habits are also a threat with trends for car-pooling and young adults driving less in developed economies.

“The German stock market crash is a timely reminder of the need to broadly invest so that portfolios will have exposure to the young companies likely to benefit from driverless cars for example,” says Elliott.

“Diversification of portfolios across sectors, asset classes and regions will ensure investors are best-placed to take full advantage of the present and future opportunities and to mitigate the risks,” he adds.

Not only should businesses diversify their investment portfolio, but also their trading links. For example, a recent survey by Lloyds Bank Commercial Banking found that 85% of British firms that have exported to the EU in the past year, and is the region they have exported to the most in the last 12 months for 54%. Many of these firms may feel the economic shock waves from Germany.

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