Barings’ Rob Smith sees strong benefits to owning German equities
German companies continue to benefit from strong domestic economic fundamentals, and global demand for goods and services, according to Rob Smith, manager of the Baring German Growth Trust.
Our outlook for German equities continues to be supported by what we see as improving economic and corporate fundamentals for the continent’s biggest economy. This is despite a generally tougher environment for European equities in 2012.
From where we stand, Germany benefits from a number of positive macroeconomic drivers, including strong employment data, a high savings ratio, well-maintained corporate balance sheets, and competitive in-demand exports which are increasingly directed towards a recovering US economy and improving Chinese economy. On this last point, Germany’s share of exports to markets outside of Europe compares favourably against rival economies on the continent. This upward trend is based, amongst other things, on the competitiveness, quality and desirability of what it exports.
Looking at the past five years, German exports as a share of total EU-17 exports have grown from around 31% as of Q1 2007 to a third (33%) as of Q1 2012. Similarly, Germany’s share of EU-17 exports to countries outside of the EU has risen from 23% in Q1 2007 to over 25% as of Q1 20122. The signs indicate that this growth is set to continue as German goods continue to be in demand from customers in both developed and developing economies.
Evidence of a better outlook for German equities can be found in the performance of the country’s equity market against a broader index for European equities. Over the three months to November 23 2012, the DAX 30 index gained 5.1% in euro terms, against 3.8% for the MSCI Europe ex-UK index over the same investment period3.
Within the Baring German Growth Trust, we invest in large, medium and small-sized companies and argue the portfolio continues to be more diversified as a consequence. We believe our stock specific skills have come to the fore during times of general investor aversion to European risk assets. Here, we have actively-shifted from focusing on very large companies to more nimble medium and small companies. In terms of sectors, we see attractive opportunities in Financials, Healthcare, and Information Technology.
Looking to 2013, there are some key themes that we find attractive especially within the context of an improving US and Chinese economic outlook. We like the increasing trend of German suppliers in the automotive industry developing their products within an emerging markets context, especially China, as it makes the production process more cost-efficient with the help of new robot technology made in Germany. Portfolio holding Duerr AG is one example of a German niche manufacturer with a strong footprint in China, and looking to capture rising demand for its labour-saving products. Another theme identified through our detailed stock research is what we see as the potential benefits of a reindustrialising US economy for specialist German companies.