Robert Smith, investment manager at Barings German Growth Trust, argues that while the Volkswagen emissions scandal caused an indiscriminate sell off in German industrial companies, it has now created more attractive valuations for German stocks.
The dust has yet to fully settle from the emissions scandal that hit Volkswagen in late September. That caused the company’s share price to fall by more than 30% and prompted a widespread sell off in the German automotive sector.1
At first, investors indiscriminately cut exposure to automotive companies. Not us. Of course, we have not been invested in Volkswagen since October 2014, but we reasoned that as the controversy had to do with a single model of VW’s diesel engine, there was a higher probability that it was a company specific issue, rather than industry wide. The recovery in share prices for German carmakers at the beginning of October suggests that others may be starting to think along the same lines.
We do not think that the actions of a single company should tarnish the image of Germany’s entire industrial sector. We are confident that companies with solid fundamentals, strong branding, diversified product portfolios and with exposure to the recoveries in the US and Europe will see a better performance come through as the market fully digests the VW scandal and stabilises.
Opportunity out of adversity
For us, the market dip has been an opportunity to buy into the companies that we believe have excellent growth prospects but at more attractive valuations. This includes Daimler, the luxury and commercial vehicle manufacturer. The company enjoyed exceptionally strong sales in the third quarter and we think it might even gain market share as the VW issue alone is unlikely to dampen overall demand for car purchases.