German equities have strong fundamentals, says Barings

Fundamentals in German equity market remain strong, despite falling valuations, said Rob Smith, investment manager at Baring Asset Management.

“The decline in the German equity market is not justified by either economic or corporate fundamentals,” said Smith, manager of Baring’s German Growth Trust.

Since the end of March, the DAX 30 Index has declined by 9.2% in euro terms in an environment where the broader European market, as represented by the MSCI Europe ex UK Index, has fallen by 10.6%. However, German economic growth in the first quarter of the year recently came in at 1.7% year-on-year, significantly ahead of expectations, driven by robust export growth in the wake of euro devaluation.

Smith believes that the gap between the superior earnings environment in Germany and the valuation of the market relative to European peers represents an attractive opportunity for investors.

“German markets performed strongly earlier in the year, particularly in March, so perhaps a degree of profit-taking was to be expected. However, while we appreciate that many investors are in “risk off” mode at the moment, we believe the decline in the German equity market is not justified by either economic or corporate fundamentals,” said Smith.

Although Smith expects markets to remain vulnerable to the newsflow in the short term, he believes that as German companies continue to deliver strong earnings results the fundamentals will reassert themselves.

“Our assessment of the situation at the moment, from the companies we have met and the earnings statements we have analysed, is that it remains very supportive for German corporates, with earnings likely to surpass last year’s level, in our view, and come out considerably ahead of the rest of developed Europe,” he said.

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