Barings praises German growth, but downbeat on its banks

Ongoing issues at German banks are causing more asset managers concerns, but not deterring them from upbeat assessments of the economy’s outlook nor of expecting outperformance from its equities.

Baring Asset Management is the latest with an optimistic general prognosis for Germany, but an admission of being underwhelmed by its troubled public sector banks.

Robert Smith, manager of Barings’ German Growth Trust, said: “There is more [economic] outperformance to come and while German exporters continue to fare well, it is the domestic economy that will really take centre stage.

“Over the coming months we believe that investors will continue to recognise the strength of the economic recovery and the potential to be found in Europe’s largest economy, both in absolute terms and relative to the prospects for many economies in the Eurozone periphery.”

During 2010, the Dax 30 index made 16.1% for investors, over double the 8% from MSCI Europe.

Smith noted muted retail sales in winter bounced back last quarter, while wage inflation pressures – which would typically accompany low interest rates, job creation and high domestic consumption – will be kept in check because Germany is lifting some labour restrictions allowing workers from some eastern European countries to seek employment there freely.

Smith said a “virtuous circle in the German economy” is being created by the IFO Business Climate index sitting at its highest level since launching in 1991, and unemployment at its lowest since 1989.

At the same time, the government’s fiscal position is also improving as benefits decline and tax revenues increase – making austerity cuts unlikely.

Smith’s favours Bayer, Rheinmetall, Daimler Chrysler and SAP, and Aareal Bank.

He said, however, the “rotational trend” into financials would not last, hence an underweight position in banks.

Veteran investor Crispin Odey is similarly downbeat on Germany’s banks: “The German banking system is completely bust.”

Ratings agency Moody is reassessing support public-support assumptions it made for Germany’s public sector banks and their subsidiaries, and has warned on how a mishap among one could affect Germany’s banks more generally.

It cited new global risks and regulation, sustained fragility in financial markets, and the “new, as-yet untested resolution regime introduced in Germany in January 2011” as spurring its review.

As well as central support, its review will also take into account regional government aid and co-operative support.

“Ratings for the public sector institutions of Germany’s banking system have benefited to date from support assumptions significantly exceeding those in ratings of the private bank sector, as well as the general support levels included in its ratings before the financial crisis,” Moody’s said in a statement announcing the review, which could last for three to four months.

The financial institutions it will cover are Bayerische Landesbank; Bremer Landesbank Kreditanstalt Oldenburg GZ; DekaBank Deutsche Girozentrale; Deutsche Hypothekenbank; HSH Nordbank AG; Landesbank Baden-Wuerttemberg; Landesbank Berlin AG; Landesbank; Hessen-Thueringen GZ; Landesbank Saar; Norddeutsche Landesbank GZ; and WestLB AG.

David Walker

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