German Equities: Navigating Trade War Risks and Structural Challenges for Strategic Opportunities

The German economy, long the engine of European growth, now faces a crossroads. Stagnation looms, with GDP projected to grow just 0.1% in 2025 amid escalating trade wars and structural headwinds. Yet, beneath the surface of slowing exports and rising unemployment, pockets of resilience emerge. For investors, the key lies in identifying sectors insulated from global turmoil and poised to benefit from domestic policy shifts.

The Stagnation Context: Trade Wars and Structural Shifts

Germany's economy has been buffeted by U.S. tariffs on steel, automotive exports, and Chinese retaliatory measures, which have slashed industrial output and trade balances. Exports are expected to contract by 1.9% in 2025—the third consecutive annual decline—while the current account surplus shrinks to 5.1% of GDP. The automotive sector, a cornerstone of German manufacturing, faces existential pressures, with tariffs forcing costly supply chain reconfigurations.

Sector Resilience: Where Growth Persists

While manufacturing sputters, select sectors exhibit surprising durability:

1. Consumer Services: Retail sales (excluding vehicles) grew 4.4% year-on-year in early 2025, driven by high consumer savings rates (14.8% in 2024). Firms in non-discretionary sectors—pharmaceuticals, healthcare, and utilities—benefit from stable demand.

2. Healthcare and Public Services: Employment in healthcare and education rose even as manufacturing shed jobs. Aging demographics and government spending on public health systems ensure long-term demand.

3. Construction Turnaround: Residential construction is set to bottom out in 2025, with rising mortgage lending and public infrastructure projects boosting activity. Non-residential construction, supported by government investment, is already rebounding.

4. Utilities and Renewables: Cheaper energy imports and a stronger euro have eased input costs, while domestic renewable energy projects—critical to Germany's climate goals—provide a buffer against export declines.

Policy-Driven Stimulus: The Hidden Tailwind

Germany's fiscal strategy offers a critical tailwind. While the deficit is projected to widen to 2.7% of GDP in 2025 due to social spending, the government is leveraging flexibility under the Stability and Growth Pact to boost infrastructure and defense spending.

This spending will favor firms in:
- Engineering and Construction: Companies like Siemens or ThyssenKrupp, which bid on public transit, energy grid, and defense contracts.
- Renewables: Firms involved in wind, solar, and grid modernization, benefiting from Germany's €100 billion+ climate plan.
- Healthcare Infrastructure: Private hospitals and medical tech firms serving an aging population and expanding public healthcare budgets.

Risks and Considerations

• Trade Tensions: Further U.S. tariff hikes could deepen manufacturing woes. Investors should prioritize firms with diversified markets or tariff exemptions.
• Labor Market: Unemployment is projected to rise to 6.3% in 2025, potentially dampening consumer spending. Monitor wage trends and savings rates for early warnings.
• Inflation: While headline inflation is easing, persistent service-sector inflation (2.4% in 2025) may limit ECB policy flexibility, keeping rates elevated.

Investment Strategy: Target Resilience and Stimulus Plays

1. Consumer Staples and Healthcare:
2. Focus on firms with strong domestic ties, such as L'Oreal (consumer goods) or Fresenius (healthcare), which benefit from stable demand and high savings rates.

4. Infrastructure and Renewables:

5. Allocate to construction and engineering firms tied to public projects. Siemens' energy and mobility divisions, for instance, align with green infrastructure goals.

6. Utilities and Energy Transition:

7. Utilities like RWE or E.ON, which profit from renewables expansion and lower energy import costs, offer steady dividends amid volatility.

8. Avoid Tariff-Exposed Sectors:

9. Automotive and steel stocks remain vulnerable to trade shocks. Instead, seek automotive firms pivoting to domestic EV manufacturing or aftermarket services.

Conclusion: A Selective Bull Market in a Stagnant Economy

Germany's equity market is bifurcated: sectors exposed to trade wars face headwinds, but those insulated by domestic demand or policy stimulus offer asymmetric upside. Investors should focus on healthcare, infrastructure, and renewables while avoiding export-heavy industries. The path to outperformance lies not in betting on broad recovery but in identifying companies that thrive in a fragmented global economy.

As Frankfurt's skyline reminds us, resilience often emerges where others see stagnation.