Germany’s Worthless Stock Market

Daimler AG Chairman Dieter Zetsche needs to answer to workers, too.

Photo by Thomas Lohnes/Getty Images

Jack Bogle, founder of the Vanguard Group, drew attention to this chart showing the long-term ratio of U.S. stock prices to the “book value” of the companies listed on the exchange. There is quite a lot of fluctuation here, but an interesting fact is that the German stock market is structurally cheaper than the American market by this measure.

Here’s the U.S.:

I can’t find a pretty chart of Germany’s DAX. But I do have some text from Hans-Jörg Naumer (PDF) at Allianz Global Investors.* Talking about conditions as of May 2013, he writes that “the price/book ratio has fallen from 3.3 back in 2000, to a current figure of 1.4” in the spring of this year. That’s the same general up and down swing that you see in the United States, but it’s at a systematically lower level.

Why might that be?

One possibility is risk. Every so often, Germany is conquered by foreign armies. This doesn’t really happen in American history. But honestly I doubt that’s right. Germany is a very nice stable country. My guess is that Germany’s cheap stocks reflect the fact that owning shares in a German firm just give you fewer rights than if that exact same firm were an American firm. The most salient difference is that not only are large German firms heavily unionized, but the labor unions get seats on the boards of directors. This system of co-determination often seems to make less difference in practice than you might think, but this seems to be a clear manifestation of it.

In both Germany and the United States, the nonhousing capital stock is overwhelmingly owned by a small share of the population. In the United States, that same slice of the population shares control over the capital stock with a class of elite managers whose compensation packages (in terms of stock options, etc.) are designed to align their interests with the owners. In Germany, that control is split by a third group—labor representatives—and therefore the financial value of the capital is lower.

To the extent that you care about the inequality between workers and owners rather than the Gini coefficient, this Germany system is going to look very appealing. Conversely, it suggests that German stock holders could conceivably obtain an enormous financial windfall for themselves by seizing control of the political system and changing corporate governance rules.

*Correction, Dec. 18, 2013: A previous version of this blog post misspelled the name of Hans-Jörg Naumer.