Last November, we highlighted an interesting dynamic in Europe: the continent was running at two distinct speeds. On one side, Spain, Greece and Ireland (part of the so-called PIIGS) were soaring, while Northern European heavyweights—France, Italy, Germany, and Sweden (we call them the FIGS)—were stuck in the doldrums, bogged down by cyclical and structural challenges.
Fast forward to January 2025, and it seems the mainstream is catching up. The Financial Times recently echoed this trend, noting this month how the "periphery" markets of Europe are leaving traditional powerhouses like Germany and France in their dust.
However, with a contrarian mindset, we are now turning our attention to the beaten-down FIGS - particularly Germany and Sweden, in search of new opportunities. These economies have been hammered by surging inflation and rising interest rates, leaving many investors skeptical. However, could these hard-hit markets now offer up some interesting opportunities?
Is the tide beginning to turn?
Germany has spent much of the last two years stuck in the doldrums, swinging between recession and stagnation. For many investors, the story has been unappealing: low growth, inflation, political uncertainty, and trade tensions (now with added US tariffs) have made Germany, and by extension Europe, a tough sell.
Despite Germany’s broader struggles, there have been pockets of opportunity. Last year, two of our best-performing stocks were German: Siemens Energy and Friedrich Vorwerk, both beneficiaries of a sweeping rebuild of energy infrastructure. Siemens Energy, a DAX stalwart, surprised even the most bullish investors by surging +300% in 2024 - outperforming even the mighty Nvidia.
That said, standout success stories have been the exception, not the rule. Germany’s sluggish performance, alongside a similarly weak France, has left many investors steering clear of European markets altogether.
Yet, as contrarians, we’re starting to see green shoots in Germany. While France grapples with mounting debt and political unrest, Germany’s fiscal prudence has left it with a rock-solid balance sheet. With elections approaching, there’s also hope for a pro-growth, centre-right coalition that could deliver much-needed reforms. Furthermore, falling interest rates are beginning to breathe life into Germany’s property market. Stabilising house prices and signs of consumer confidence could spark a broader recovery as we head into spring.
Feedback from the ground level
Our renewed interest in Germany was sparked at a European real estate conference late last year. Real estate and housing, in our view, often provide a window into the broader economic mood.
We met with the management teams of the two Spanish housebuilders we own – Neinor and Aedas Homes – which were both predictably upbeat in their assessment of the opportunities. But it was our meeting with Instone, Germany’s leading listed housebuilder, that caught our attention. Instone had been hit hard by the downturn in German property, but management expressed surprising optimism. Key forward-looking indicators like customer reservations and notary appointments have started to hit their highest levels since mid-2022. Sentiment has improved as mortgage rate visibility has increased, and financially stable customers are finally returning to the market. House prices, which had been sliding, have now stabilised and begun inching upwards.
German house price inflation
Source: Instone Q3 results presentation 2024
Furthermore mortgage approval data in Germany shows a visible uptick - still far from trend growth, but undeniably heading in the right direction. If this momentum continues, Germany could be on the brink of a sustained housing market upcycle.
Volume of private mortgage finance in Germany
Source: Hypoport financial reports Q1 - Q3 2024
Germany’s challenges remain, but we’re starting to see early signs of recovery. From stabilising real estate markets to the potential for pro-growth political reforms, the conditions for a turnaround are beginning to fall into place.
But this isn’t just a German story. The Q3 ECB Bank Lending Survey confirms that the rebound in mortgage demand is broad-based across the Eurozone. According to the survey, banks reported a strong net increase in housing loan demand, the highest jump since Q2 of 2015. The increase was even stronger than expected, signalling recovery from the steep declines caused by the ECB’s monetary tightening cycle.
Source: European Central Bank - Q3 2023 bank lending survey
Declining interest rates and improving housing market prospects were the main factors that had a positive impact on housing loan demand, with banks also indicating that housing market prospects had become supportive.
Germany’s housing market has been among the hardest hit in recent years, but the data shows flickers of recovery. Mortgage approvals are rising, interest rates are falling, and sentiment is improving. Stabilised property prices are helping to bring cautious buyers off the sidelines.
If these trends continue, Germany could be poised for a housing market resurgence that boosts consumer confidence and injects new energy into Europe’s largest economy.
Germany heads to the polls
Next up on Europe’s political calendar is Germany’s elections in February. If the last 12 months have taught us anything about elections, it’s to expect the unexpected. That said, Germany’s political landscape is far more moderate than in France, where the extremes dominate the conversation.
Current polls suggest Germany’s largest party, the Christian Democrat Union (CDU), is likely to come out on top. With a manifesto promising tax cuts, structural reforms, and pro-business policies, a CDU-led government could breathe new life into Europe’s largest economy. Key will be building astable and sensible coalition, but unlike France, where political uncertainty lingers, Germany’s path to stability appears far clearer.
One of the most exciting possibilities is a potential easing of Germany’s self-imposed debt brake (which limits the budget deficit to just 0.35% of GDP per year). Relaxing this rule could unlock a wave of much-needed investment in infrastructure and defence, giving the German economy a long-overdue boost.
A sick man no more?
Germany has been here before. Dubbed the "Sick Man of Europe" in the late 1990s and early 2000s, the country struggled with low growth, high unemployment, and structural challenges. History may not repeat itself exactly, but post-Covid Germany still hasn’t returned to full strength.
Trump tariffs remain a worry, but if the incoming US president is able to deliver on his promise and bring peace to Ukraine on reasonable terms, European and, in particular, German companies will likely play an important part in the rebuilding effort.
Next month’s election could be a pivotal moment for the country and Europe as a whole. With investors downbeat on Europe, could 2025 be the year Germany finally gets back to health?
Fund Manager, VT Downing European Unconstrained Income Fund
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