Barings’ Rob Smith highlights divergence in German investor setiment and reality
While investor sentiment regarding European equities has been generally negative, demonstrating pronounced levels of risk aversion, we believe the economic and corporate fundamentals for Germany – the continent’s biggest economy – are broadly encouraging and supportive for its equity market in the coming months.
As a result of the perceived risk of an intensification of the eurozone crisis, German equities have seen some selling pressure along with the rest of the European equity markets, especially since the end of March.
However in recent weeks, there has been evidence of a partial switch in sentiment, with the DAX 30 Index up 5% over one month to 11 July 2012 in euro terms against 4.9% for the MSCI Europe ex UK Index over the same investment period in euro terms.
We believe several conditions are in place in Germany for a recovery.
Firstly there is an underlying positive trend especially for German exporters as they continue to see strong order flows and strong results. Exports increased by 3.9% in May compared to the previous year and reversed a 1.7% decline in April, according to official figures.
From the companies we have met and the earnings statements we have analysed, this turnaround is not unsurprising.
Again, we argue that recent economic data releases reveal a divergence between investor sentiment, which continues to be below par, and reality.
The balance sheets of both German corporates and households remain
healthy, new figures suggest. According to the Federal Statistics Office’s published figures on 9 July 2012, there was a 0.5% decline in the number of business insolvencies in April, compared to the same period last year, with a 4.5% decrease in the number of consumers declaring bankruptcy over the same period.
With reference to the Baring German Growth Trust, we continue to favour small and medium-sized companies and areas such as exports. We have also moved away from a concentrated portfolio where we favoured the very largest companies.
We believe this demonstrates the flexibility of having an all-cap investment strategy and the portfolio is more diversified as a result as we continue to build from the bottom-up, using stock liquidity as an important portfolio construction parameter.