The German economy recorded a healthy 3% growth in 2011, propelled by competitive exports and rising consumer spending. This might be a slower rate of expansion than the 3.6% recorded in 2010, but against a challenging backdrop we believe it's a good out-turn and still twice the pace experienced in the US or elsewhere in the Eurozone.
The German economy recorded a healthy 3% growth in 2011, propelled by competitive exports and rising consumer spending. This might be a slower rate of expansion than the 3.6% recorded in 2010, but against a challenging backdrop we believe it’s a good out-turn and still twice the pace experienced in the US or elsewhere in the Eurozone.
In spite of this, after outperforming the rest of the region in the first half of the year, the German market sold-off from August as investors lost confidence in the ability of the political leaders to resolve the European debt crisis.
Many of the medium and smaller-sized German companies we held in the Baring German Growth Trust were particularly affected as sentiment deteriorated.
After a good start to the year, this left the Baring German Growth Trust behind the benchmark for 2011, with a loss of 18.4% in sterling terms against a 16.8% loss for the benchmark HDAX 110 Index.
Today, we believe the consensus is unduly pessimistic about the outlook for the German economy and market.
We see a significant disconnect between the buoyant results many of the companies we meet are reporting and the extremely pessimistic view prevailing in the market.
With two-thirds of the portfolio trading at a price/earnings ratio of 11 times or less – close to historic lows in some cases – we believe the valuation case for these well managed but overlooked companies has become compelling, and more than reflects negative newsflow about the eurozone.
Within the portfolio, we have a bias towards medium and smaller companies, many of which are well positioned, in our view, to capitalise on this investment environment and surpass earnings expectations.
We see particular opportunities amongst exporters and likely beneficiaries of consumer spending with good prospects for earnings growth and strong balance sheets.
We believe the recent decline in the euro on the foreign exchanges will increase the price competitiveness of German manufacturers, many of which are already enjoying excellent trading conditions.
Results in the automobile sector have been particularly strong, with BMW, for example, recently reporting sales of 1.67 million vehicles in 2011 – a record for the company.
With economic data coming out of the US starting to improve, and China apparently on-target for a “soft landing”, we believe 2012 should be a good year for German manufacturers selling into emerging markets or the US, and their suppliers.
At the same time, the number of people employed in Germany reached a new high at the end of 2011 at 41.1 million, which should provide for a positive environment for consumer companies.
Rob Smith is investment manager of the Baring German Growth Trust.