Euro Windfall

The Color of Cheap Money

Source: imago, Handelsblatt, Bloomberg
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  • Why it matters

    Why it matters

    The ECB’s relatively relaxed monetary policies have led to a decline in the value of the euro, which is fueling a boom among German exporters.

  • Facts


    • A Commerzbank study concludes DAX companies will gain €13 billion ($15.1 billion) in profit from the weaker euro.
    • The Commerzbank forecast assumes that the euro will fall by 10 percent against the dollar again this year.
    • The euro has lost 15 percent of its value against the dollar over the last year.
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Mario Draghi’s monetary stewardship of the European Central Bank in Frankfurt may raise hackles in Germany, a country where credit cards are still viewed suspiciously by many retailers as bogus forms of money.

But the Italian banker’s relaxed policies at the 19-nation central bank have had the bonus effect of weakening the euro, creating a beneficial export-driven wave of new business for the country’s exporters.

Economists believe the German economy could grow by 1.2 percent to 1.5 percent this year, partly because of the sharp decline in the price of oil and the weaker euro. These two “special economic stimulus programs” are not just boosting Germany’s gross domestic product; they will also provide German companies with a massive influx of additional profits in 2015.

This currency-related windfall is based on previously unpublished calculations by Commerzbank, which Handelsblatt has obtained.

The calculations, based on the premise that the euro will lose another 10 percent of its value against the dollar this year, highlight the special profits the 30 companies on the blue-chip DAX Index and 50 companies on the mid-cap MDAX Index will derive from the shift in the exchange rate. The report concludes that DAX-listed companies will gain an additional €13 billion ($15.1 billion) in profits, an increase of about 8 percent. The calculations include companies such as RWE and E.ON, two energy providers that do not do business in the United States and, therefore, do not benefit from currency effects.

“Next to the falling price of oil, the weak euro is the biggest driver of profit for many German industrial companies.”

Stephanie Lindeck, Julius Bär

The second-tier MDAX-listed companies stand to gain an additional €2 billion, for an increase of about 6 percent.

“Next to the falling price of oil, the weak euro is the biggest driver of profit for many German industrial companies,” said Stephanie Lindeck of Julius Bär, a Swiss private bank. The businesses that benefit the most from a declining euro are those that pay their invoices and wages in euros but do their financial reporting in dollars.

In other words, the currency effect alone will boost revenues for companies that produce goods in Europe but sell them in the United States or Asia. More than three-fourths of all major German corporations listed on the stock exchange benefit from this mechanism.

Two of the biggest winners among DAX-listed companies are specialty chemicals company Lanxess and fertilizer producer K+S. But companies like Bayer, with a predicted gain of 14 percent, and BMW with 11.6 percent, can also thank the ECB. Merely the monetary watchdogs’ announcement of a massive sovereign debt-buying program has already pushed the price of the euro down to below $1.16, making the euro 15 percent weaker than it was a year ago. And the downward trend is likely to continue if the central bank satisfies the expectations of financial markets this Thursday.

In addition to the many beneficiaries of a weak euro, some companies are on the losing end. Retail chain Metro can expect to see a 20-percent drop in earnings. The Düsseldorf-based group pays for 40 percent of its products in dollars but sells none of them in the United States. Its electronics subsidiary, Media Saturn, buys almost all of its electronics parts in Asia – and pays for it all with hard dollars.

This is bad news for Metro, because companies with high dollar expenses but low dollar revenues are especially hard-hit by the decline of the European currency. According to the Commerzbank calculations, if the euro rate is 5 percent lower on average in 2015 than in 2014, the company’s pretax profit will be one-tenth smaller than previously estimated. A 10-percent drop in the rate would translate into a decline in the pretax profit by a fifth. In fact, the euro was already trading at below that level on Thursday morning.

The strong dollar is also hurting Adidas and Lufthansa, although the rapidly falling price of oil is reducing the cost of kerosene, so that profits at Germany’s largest airline will likely increase rather than decrease. In Lufthansa’s case, one economic stimulus program, the low price of oil, is offsetting the other – the expensive dollar.

But Metro and Adidas are exceptions. All the companies that export to the United States but produce relatively little in Europe stand to profit from the currency turmoil, including the overwhelming majority of those listed on the DAX. The situation was completely different in the first half of last year, when the euro was expensive, adversely affecting companies such as BASF and software giant SAP. Today, on the other hand, the euro rate provides them with a tailwind.

A prime example is the German automobile industry, which still produces many luxury vehicles in Germany and exports them around the world, especially to the United States and China. For VW, the beginning of the euro’s decline in the fall came at just the right time, allowing declining profit margins to recover once again.


German Blue Chip Stocks in Demand-01


The weak euro also benefits smaller companies, such as Carl Zeiss Meditec, a producer of medical technology from the eastern city of Jena, which generates a quarter of its revenues in the United States. If the euro had remained stable, revenues would have increased by 8 percent in the fourth quarter over the same period in 2013. Instead, revenues increased by 13 percent.

The euro’s decline also brings other advantages to many German companies. For instance, it could eventually help them increase their market share abroad. “Because products manufactured in the euro zone become cheaper in the United States and Asia, thereby improving competitive conditions, many companies will sell more and oust competitors,” said Markus Wallner of Commerzbank. However, this secondary effect cannot be calculated in advance.

German exporters aren’t the only ones benefiting from the weak euro, which is also good for many producers throughout the euro zone. Aircraft manufacturer Airbus is a case in point, because it builds it planes in Europe but sells them at dollar prices. According to the company, its profits increase by €100 million for every cent by which the euro is devalued against the dollar. The exchange rate has fallen by 20 cents since early 2014, which translates into €2 billion in additional profits.

As internal calculations show, Sanofi also benefits from the weak euro. France’s biggest pharmaceutical company generates about a third of its revenues in the United States. Its profits increase by 0.5 percent for each percentage point drop in the euro’s value against the dollar.

Such rapid profit growth puts investors in a buying mood, triggering speculation in the markets. This is especially beneficial to the DAX, with its many industrial companies with strong export businesses.

Germany’s most important market barometer has been reaching new record highs since the beginning of the year. After many futile approaches, it already significantly exceeded the 10,000-point threshold last year.


Ulf Sommer is an an editor with Handelsblatt since 1996, covering finance and company news. To contact the author:

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