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German consumer behavior change provides attractive investment opportunities

GermanAccommodative monetary policy is reducing debt costs, enhancing businesses’ ability to reinvest. Meanwhile, shifting consumer patterns in Germany provide attractive investment opportunities, says investment director of European equities.

Many European companies are now benefiting from reduced debt servicing costs, allowing companies to invest in future growth and offer returns to shareholders.

German auto supplier and tyre company Continental AG is in the process of refinancing €3 billion of debt with an average cost of 7.5% into new debt at a cost of 3%. The significant decrease in cash interest expenses will allow Continental to fund future research and development, improve margins and expand its market share. Dutch cable company Ziggo NV is also in the midst of a major refinancing programme. Having already reduced the cost of €750 million of debt earlier this year from 7% to 3.6%, further restructuring over the next two years should provide a potential 15% accretion to free cash flow. Furthermore, Ziggo is keen to maintain its competitive advantage, investing 20% of sales into maintaining higher internet speeds and development of a wi-fi service.

Is the German consumer becoming more European?

German consumers are starting to show changes in their behaviour, developing a willingness to pay for technological improvements.

Sky Deutschland has benefited from this trend by increasing subscribers by 27% in the last two years. The key drivers of increasing expenditure on technology are the advent of high definition (HD) TV, PVR (the ability to record TV) and Sky Deutschland’s sports channel, most notably its football coverage. With pay TV penetration in Germany at 16% compared to 55% in the UK, Sky Deutschland is well positioned to take advantage of the potential growth in this area and further increase its market share.

Another recent change in consumer behaviour is the increase in online shopping.

Although the UK leads by a significant margin, Germany is ahead of the average in Western Europe, with internet retailing becoming increasingly popular. This is proving advantageous for Deutsche Post. As the world’s leading postal and logistics services group, its mail network provides the scale and capability to benefit from the increase in business-to-consumer parcels. With its existing infrastructure, Deutsche Post could accommodate a significant increase in parcel volumes driving future growth potential.

Jaime Ramos Martin, Investment Director, European Equities, Standard Life Investments.

Source: Starndard Life Investments, Global Outlook, Fourth Quarter 2013