The DAX's Dip Highlights Germany's European Problem


Europe's economic plight lingers on as many of the continent's peripheral nations remain mired in recession, but even core economic powerhouses such as Germany are feeling the pain. Germany's DAX stock index fell 1.5% this past week as investors closely watch how Europe's top economy will handle the Eurozone's ongoing crisis. Countries such as Italy and Greece don't feel any love for their stronger northern neighbor, and managing to put aside lingering resentment will be a key for the region as it tries to find its footing. Let's take a look at what's going on across the Atlantic.

The European nightmare slogs on
If Germany wants to solve the European economic mess -- and alleviate its fears about whether the contagion will spread to its own struggling economy -- the nation will have to start by patching up relations with its harder-hit southern neighbors. While average Germans haven't fared badly through the region's recession, unemployment has soared to mind-boggling levels in Spain, Greece, and other countries.

The OECD has reported a recent influx of immigration from the peripheral countries to Germany, particularly from Greece, as down-on-their-luck Europeans search for better job prospects. German immigration hit a 17-year high in 2012, and only by solving problems like Spain's 27% unemployment rate will Germany solve its own immigration mess.

German chancellor Angela Merkel's plan to solve Europe's crisis hinges on increasing the competitiveness of the region, and Germany recently agreed to begin negotiations on a European Union-U.S. free trade deal that it had previously objected to. But its highest hurdles will be closer to home, as Italy in particular continues to hold out against Germany's austerity-laden leadership tactics. Former Italian Premier Silvio Berlusconi recently called for Italy to confront Merkel over her fiscal conservatism as the Italian economy falls deeper into recession, and many Italians are buying into the rhetoric. A recent Pew survey showed that 75% of Italians feel their integration into the EU has hurt Italy's economy.

It's that kind of belief that will snuff Germany's hopes of a stronger EU economic engine. Stocks may not be under pressure so much as the broader economies in Europe, but make no mistake: So long as Europe remains stuck in neutral, the German companies most reliant on European sales will struggle.

If investors want to find the best German stocks, they should look for the most global firms. Take Bayer , for example. The German chemical and pharmaceutical maker has pivoted toward globalization in order to counteract Europe's crunch, which has slammed hospital budgets and health care spending. Bayer recently picked up a majority stake in California-based birth-control maker Conceptus -- a buy that capitalizes on Bayer's own birth control business -- and the firm's North American business has surged recently, posting a 17% revenue gain in 2012. Meanwhile, Bayer's European sales flattened last year. Geographic diversity will win the day for Germany's top stocks, and Bayer's shares have pulled in double-digit gains year-to-date.

Firms across Germany's DAX have caught on. BASF shares haven't had a great year so far, but the world's largest chemicals firm is looking around the world for growth. The company seeks to double its customer base in the Asia-Pacific region by 2020 in its chemicals and materials business, projecting sales in Asia to double from last year's 12.5 million euros to 25 million euros by that year. That kind of global growth will benefit investors, and the less BASF and other German stocks rely on Europe for sales, the better shareholders will do.

Is a global turnaround in the cards?

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

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