Germany’s “Whatever It Takes” Moment Has Been Announced — German Equities Have Started to Take Off
The Big Wheel Has Been Set in Motion – Germany Has Woken Up to a Harsh Reality
Most people would probably agree that the world is in a rather unsettled state at the moment. Various dictators, or dictator-like figures, dominate the headlines and make decisions that seem extreme. From Europe’s perspective, however, there is at least one very positive consequence of Trump’s chaos: Europe has been forced to get its act together and lift itself out of the deep swamp of bureaucracy, inertia and decline. In recent weeks, Germany has finally emerged as one of the leaders of this European push — and Germany is, after all, one of the key engines of the European economy. For years, Germany has been in a very sleepy state as a country, somewhat like Finland, but the direction now looks highly encouraging.
After Scholz’s Extremely Weak Leadership, Merz Is Saving Germany and Europe
Olaf Scholz’s time as Chancellor will go down as a clear failure. In the eyes of public opinion, he was anything but a strong leader, and Germany’s ability to reform and respond has been catastrophically poor. During Europe’s difficult times, Germany has been unable to pull its weight, while excelling mainly in dithering.
Friedrich Merz, who is now taking the helm, has already shaken Germany significantly: the debt brake has been relaxed and massive investments are being made in infrastructure and defence. The Bundestag approved legislative changes related to loosening the debt brake, a EUR 500 billion infrastructure package and substantial increases in defence investments. Europe’s defence situation changed permanently and irreversibly when Trump — and therefore the United States — turned its back on Europe. We can no longer rely on US support and firepower.
According to estimates from various research institutes, the investments mentioned above could add as much as around 2 percentage points annually to Germany’s GDP over the next decade. Germany’s public finances have been in a “German-style” conservative position, both in absolute terms and relative to other major European countries: Germany’s debt-to-GDP ratio has been around 64%, leaving considerable room to increase debt.
It is difficult to describe just how significant this shift in Germany’s approach really is. The German state has been running on a tight budget, companies have barely invested, and consumers’ savings rates have effectively been at levels last seen during the financial crisis. In other words, the state, companies and consumers have all kept their purse strings tight. Now the state is starting up a gigantic stimulus machine, which will be reflected across many corners of the corporate world. All of this should also lead citizens to start believing in a brighter tomorrow. Germany is a highly important trading partner for numerous European countries, so a significant increase in German activity will gradually begin to spill over more broadly into Europe as well.
Winners and Losers from Hundreds of Billions in Investments
Where, then, will the hundreds — or over time even thousands — of billions be spent? The most obvious beneficiary is the defence industry. This is a sector that has been rising since Russia’s brutal war of aggression began in Ukraine in February 2022, but it has gained further momentum in recent months due to the United States’ change of direction. Germany has several listed companies linked to the sector, one of the main engines of the entire European defence industry being Rheinmetall AG, which manufactures, among other things, ammunition and tanks. The company’s share price has risen strongly again this year, around +125% at the time of writing. According to Bloomberg, the total return of the stock over the past five years has been as much as 3,351%. These are starting to look like NVIDIA-level numbers. Rheinmetall’s market capitalisation is over EUR 60 billion, and valuation multiples have expanded. The forecast 2027 P/E multiple is now around 23x and EV/EBIT around 16x. It remains to be seen how quickly the company can ramp up additional production, but demand is currently not the problem.
Proprius Partners’ DACH Value fund holds Rheinmetall at around 3.7% of fund assets. In addition, the fund holds Renk Group AG, which is directly linked to the defence sector and produces, among other things, various transmission solutions and other technologies for defence vehicles such as tanks. Renk’s share price is up around 138% year to date, and it is now DACH Value’s largest holding, with a weight of approximately 9% of fund assets. However, we have not been invested in these companies for very long, so measured against our average purchase prices, both have risen “only” around 105–115% in the fund so far.
There are also other listed defence companies in Germany, such as sensor technology specialist Hensoldt, where we do not have a position. In any case, the defence industry is a clear and direct beneficiary of both Germany’s stimulus package and the change in Europe’s defence situation. This trend will continue for at least a decade from here — unfortunately. That does not mean that the shares of Renk and Rheinmetall will continue rising forever, as the recent pace is not sustainable. However, looking further ahead, it is easy to construct scenarios in which materially higher share prices can still be justified.
One clear beneficiary of Germany’s infrastructure package is the IT sector. Germany is a country where the fax machine still sings and cash remains king. While software giant SAP accounted for as much as 41% of the total return of the DAX Index in 2024, many smaller IT players have been treading water or even declining in share price terms. The infrastructure package also targets the digital world, so we expect companies such as Bechtle, Cancom, Adesso and Nagarro to benefit clearly over time. These four names are also included in the DACH Value portfolio.
It is also easy to identify beneficiaries in the construction sector. Many German brokers have highlighted companies such as Bilfinger and Hochtief. We do not, however, like the sector or its longer-term value creation prospects, so we are not currently looking for winners there. By contrast, Swiss construction chemicals specialist Sika AG is in the portfolio and has been since the fund’s inception. On the other hand, the company is highly global, so the effects are not as direct or significant for the company. Certain chemicals companies have also been seen more broadly as beneficiaries, but we do not like that sector overall either, because pricing power is limited for most companies and, according to the old wisdom, good times in chemicals always end in overcapacity. Just look, for example, at BASF’s share price development: the stock is at the same level as in 2007 — its ability to create value has been unacceptably weak. Admittedly, there have been various spin-offs and dividends along the way, but the result is still poor.
Which industries or sectors suffer from Germany’s stimulus billions? One clear loser so far has been the real estate sector. The yield on Germany’s 10-year government bond rose by practically 40 basis points immediately after the proposed package, as investors assumed the stimulus would lead to higher inflation. As investors have once again been reminded in recent years, whether they like it or not, the real estate sector is highly sensitive to changes in interest rate expectations. In the DACH Value portfolio, we only hold residential real estate companies: Vonovia, TAG Immobilien and Grand City Properties, but all of them have recently taken a hit on the stock market. We nevertheless continue to believe in this sector and these companies.
Overall, however, Germany’s actions clearly appear to create more winners than losers, which suits a fund investing in German-speaking Europe very well.
The DAX Has Been Pulling for Years – Will Mid- and Small-Caps Now Start Running Too?
In case it has gone unnoticed, large German companies have been rising rapidly for several years already. Also in early 2025, while US equities have started to stumble unpleasantly, the rally in Germany and Europe has continued.
Figure 1. Performance of the DAX, MDAX and SDAX equity indices over three years.
Source: Bloomberg, 19 March 2025
Over the past month, we have begun to see signs that German small-cap stocks, represented by the SDAX, and mid-cap stocks, represented by the MDAX, which have been badly stuck, may be starting a new rise. One could argue that this would be justified, as valuation levels are in many places very attractive and these company categories may be clearer beneficiaries of Germany’s support packages, since many of their businesses are more local in nature than those of DAX companies. In other words, small and mid-sized companies are on average more tied to the German economy than global giants. Germany is, of course, famously the promised land of so-called Mittelstand companies, as Figure 2 shows.
Figure 2. Germany has many high-quality small and mid-sized companies that fly under the radar.
Source: Berenberg.
DACH Value Has Also Begun to Show Signs of Life
DACH Value is an all-cap fund, meaning that it can hold listed companies of all sizes from German-speaking Europe. So far, small and mid-sized companies have mostly acted as a handbrake in the fund, while large companies have performed significantly better. Figure 3 shows the fund’s performance from inception on 31 March 2023 to the latest valuation date, 18 March 2025. The chart also includes the STOXX Europe 600 Net Return EUR Index, which broadly represents European equity markets. Since inception, DACH Value has now returned around 24.5%, which is a reasonable absolute return, but relative to the broader development of European equity markets, it is not yet a reason to gather in the town square.
Figure 3. Performance of DACH Value and the STOXX Europe 600 from 31 March 2023 to 18 March 2025.
Source: Bloomberg.
However, Figure 4 already clearly shows how DACH Value’s engine has begun to warm up during 2025, partly supported by Germany’s major investment packages and defence spending. Even on this basis, we are not calling people to the town square, but the direction is right. If interest in German companies — and increasingly also in small and mid-sized companies — continues, DACH Value may continue to enjoy a favourable tailwind. Since the beginning of 2025, the fund has outperformed broader Europe by around 7.7 percentage points. It is worth noting that around 78% of the fund’s assets are invested in Germany, with most of the remainder in Switzerland. Only one Austrian company has ended up in the portfolio. In addition, the median market capitalisation of the fund’s holdings is around EUR 3 billion, meaning that rising popularity among small and mid-sized companies would likely also be reflected in the fund’s performance. Incidentally, we have recently received excited messages from our German partners about inflows into products such as MDAX ETFs.
Figure 4. Performance of DACH Value and the STOXX Europe 600 in 2025.
Source: Bloomberg.
Conclusions
Germany’s actions are extremely important, naturally for Germany itself, but they may also prove more important for Europe as a whole than currently assumed. Incoming Chancellor Merz is a former BlackRock banker who understands the market economy. He does not appease Russia. He intends to reduce the endless flood of regulation that weakens Europe’s competitiveness, reduce Europe’s dependence on the United States, and it can already be said that Germany has seen a massive change in posture overall. Germany has not exactly been known for its ability to change, but now change is necessary — at least to some extent — and that change even appears to be happening.
One of Proprius Partners’ key areas of expertise is German-speaking Europe. As we hope has come through in this text, we view the new winds in Germany very positively. Jonas Koivula has followed the equity markets of the German-speaking region for more than 20 years, and Olli Viitikko for around 14 years, so Proprius has long-term experience of the region and its equities. The starting point is now significantly better than it was just a few months ago, making the road ahead rather enjoyable.
As is typical for a value-oriented fund, the fund’s valuation level is moderate. For example, the median EV/EBIT forecast for the portfolio companies is around 13x for 2025 and around 11.7x for 2026. The forecast return on equity for this year is around 15%, while earnings growth is expected to be around 10% and 15% for 2025 and 2026, respectively. We therefore continue the approach we already applied at our previous employers: trying to buy good business quality at a sensible price. Source for key figures: Bloomberg, Proprius Partners Oy, 19 March 2025. DACH Value’s assets under management have recently exceeded EUR 30 million.
Our CEO Niko Fagernäs wrote a text about Germany in October 2024, which remains very much relevant and does not look foolish even after the major recent news: Market Letter VII – Ende gut, alles gut.
Portfolio Manager Jonas Koivula’s interview on Germany in Kauppalehti on 20 March 2025 (for subscribers).
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