Investing.com - Germany’s mid-cap MDAX index has become the "investment of choice" after legislators in the country unveiled new plans to pursue increased defense and infrastructure spending, according to analysts at UBS.
In a note to clients, the analysts led by Gerry Fowler argued that the MDAX is "more cyclical" than its larger DAX average and stands to benefit from a potential "manufacturing-led growth acceleration" in Germany sparked by the expenditures.
The MDAX, which includes 50 companies that immediately rank lower in size than those included in the 40-stock DAX, has risen by almost 11% over the past one-month period and more than 15% so far this year.
Still, the UBS analysts said the MDAX is relatively "cheap" after having underperformed in recent years, adding that the index also includes several names it rates as "conviction buys," including Lufthansa, Leg Immobilien, Delivery Hero and Knorr-Bremse.
"It isn’t a lot more exposed to Germany than the DAX but there’s a lot to like anyway," the analysts wrote.
The comments come after German parties currently in talks to form a coalition government agreed earlier this week on a deal to loosen the country’s traditionally strict borrowing limits.
The move to ease Germany’s so-called debt brake -- a key sticking point that partly led to the collapse of current Chancellor Olaf Scholz’s government late last year -- also came with a deal to create a new 500 billion-euro fund aimed at bolstering infrastructure and defense spending.
Friedrich Merz, the leader of Germany’s Christian Democratic Union and likely Scholz’s successor, is set to present a joint bill in the country’s outgoing parliament next week. The Goldman Sachs analysts led by Sven Jari Stehn estimated that that it will be approved by lawmakers before the new parliament convenes on March 25.
Merz said the agreement between the CDU, its Bavarian sister party and Scholz’s Social Democrats was in response to recently growing fears over Europe’s defense capabilities.
"In view of the threats to our freedom and peace on our continent, the rule for our defense now has to be ’whatever it takes’," Merz said.