Recon Capital CIO Kevin Kelly On Investing In German Blue Chip Equities

May 19, 2015 11:33 am
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“They're kind of the economic locomotive over in Europe,” said Kevin Kelly, CIO of Recon Capital Partners.

Kelly was talking about Germany’s top blue chip equities when he spoke with Benzinga on a subject he knows very well. Recon Capital, it turns out, offers the only US-listed ETF to track the DAX – Recon Capital DAX Germany ETF (NASDAQ: DAX)

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Benzinga:  What are some of these top German blue chip stocks and what puts them in that class?

Kevin Kelly: Looking at the top 10 holdings in the DAX ETF index, you have household names with which US consumers and investors are going to be very familiar.

The top holding is actually like Germany's Apple. It’s Bayer AG (OTC: BAYRY). Bayer makes the iconic aspirin.

What American investors aren't very familiar with is Bayer is actually a good biotech company, as well.

Bayer is a very big company that trades at a higher multiple than a lot of its competition and that's why it's the top holding in Germany.

Another big name, the second largest holding, is Daimler AG (OTC: DDAIF).

Daimler has probably been one of the best-performing automakers this year, because they refreshed their entire lineup and because they've grown significantly, especially in China and the United States.

Another name that is good for US investors to look at and concentrate on is SAP AG (NYSE: SAP). They're a giant technology company based in Germany.

BEN:  What makes German blue chips in general such a good investment right now?

KK: What makes German blue chips a good investment now is the fact that they are trading at value levels.

If you look at the entire German blue chip index, its PE ratio is less than 15. Moreover, you're getting growth.

It's trading at a cheaper valuation than its US counterparts, but it’s actually growing faster than its US counterparts are. That’s because it is located in the heart of Europe.

Most of the companies forecast between 12 and 16 percent growth in this year alone. That's off the heels of ECB quantitative easing and with the entire euro-zone rebounding.

The German economy is actually looking to grow 1.8 percent this year. That's a stark contrast to the United States, which is growing at 0.2 percent, and really missed the 1 percent number we were hoping for in the first quarter.

Another great aspect of German blue chips is that dividend yields are 2.7 percent. They're not only growing, they also sport a healthy yield.

That's in comparison to the United States, where the yield is about 1.9 percent.

These companies are growing, and Germany alone is 30 percent of the euro-zone GDP. They're kind of the economic locomotive over in Europe.

BEN:  How can investors invest in these companies?

KK: To get exposure, you can obviously trade them overseas. Some of the names traded ADRs. SAP is one of them. They do trade on the New York Stock Exchange, as well as Georgia Bank. Georgia Bank obviously trades over here as well.

Some of the names even trade on the over-the-counter market.

For trading these, to get proper exposure and to diversify your portfolio, we launched the DAX Germany ETF. That's probably the best direct way to do it, because we denominated in U.S. dollars and it's during U.S. trading hours.

You don't have to worry about buying an over-the-counter stock and having to worry about that. For 45 basis points, which is the total expense cap, you get direct access into the actual, ordinary shares that are over there.

BEN:  You specifically mentioned US trading hours for the ETF. Is there some special advantage to that other than the convenience of not getting up in the middle of the night to do your trading?

KK: The U.S. Exchange offers the most deep and liquid market in the entire world. Investors can actually do it during our hours, and they don't have to worry about trading at European hours.

Another aspect is that a lot of US policy dictates what happens around the globe. We're inter-connected.

What's nice is that, when their markets close, there are futures that trade for ADN and that's what helps guide the after-hours trading for the European markets.

Now, we are an after-hours trading vehicle. The ETF tends to trade with the futures and the currencies movements.

Related: Kevin Kelly Discusses Option Strategy For WisdomTree Japan Hedged Equity Fund

BEN:  What else makes DAX a good vehicle for getting involved in the German blue chip market?

KK: It’s a passive-based ETF meant to track the main index over in Germany.

Investors are able to get easy access to the German market without having to trade Europe, buy each name individually, reweight it and follow it.

They get exposure. What's nice about ETFs, especially the DAX ETF, is that, before, if you were a U.S. investor, you wouldn't have an ETF to buy if you just wanted the German DAX. You would have to buy another ETF that included Germany in it.

It's mostly the access, as well as the ease of implementing it in strategies.

At the time of this writing, Jim Probasco  had no position in any mentioned securities.

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