Germany’s unloved stock market has an ally in the euro

German equities have been beaten up for more than a year. The seemingly endless travails of Deutsche Bank and the latest blow to chemicals group Bayer highlight the cracks in some of the country’s best-known corporate names. But Swiss bank UBS, for one, believes it may finally be time to give Germany a break.

Since the start of 2018, German stocks have been comfortably the worst performing in Europe, lagging major markets in the rest of the region by about 9 per cent, the bank notes. That means stocks from this supposed eurozone economic powerhouse, which led the rest of the continent in the immediate aftermath of the financial crisis, have trailed even behind those of the Brexit-hobbled UK.

Before unloading industrial quantities of Schadenfreude, it is worth bearing in mind that UK stocks are supported by the long spell of Brexit-induced sterling weakness, which flatters the overseas revenues of some FTSE 100 blue-chips. Nonetheless, the scale of the German market’s woes is impressive.

The heavy skew towards cars, technology and materials has proven to be a heavy drag, and earnings have suffered more than the rest of Europe for 20 months, eroding half of Germany’s outperformance since 2008 in a little over a year.

Several factors suggest, to UBS at least, that it is potentially time for a turn. One is the weaker euro. Earlier this month, the European Central Bank effectively kicked any expectations for a switch to higher benchmark interest rates well into the future. It also sparked off a new programme of cheap loans for banks to help smooth over an economic rough patch. That sent the euro falling sharply and is not an obvious recipe for a strong recovery over the coming months — “a tailwind”, UBS said, for German corporate earnings.

Another could come from a more constructive tone in trade talks between the US and China. Investors see the issue “as one of the biggest downside risks to Europe, and Germany in particular,” the bank said, based on its survey of more than 100 fund managers.

In addition, a pick-up in the economic performance of China would help.

Perhaps ironically, given the ECB’s latest barrage of measures to prop up the economy, the bank also believes the eurozone economy “may be turning” for the better, pointing to a small pick-up in the eurozone’s purchasing managers’ index in February — the first monthly rise in this gauge of corporate health in six months.

Clearly, there is a lot that can go wrong with each of these supportive factors. US-China trade talks are not noted for their easy predictability, for example, and while the weight on the euro is substantial, that could be wiped out by a grim outcome to Brexit talks that hammered the pound, or a change in direction from the dollar. Still, the smell test suggests that Germany may well look unduly unloved and cheap.

katie.martin@ft.com