Domestic demand drives booming German economy
Baring Asset Management (Barings) believes the booming economic conditions in Germany are set to continue and investors would do well to recognise the potential to be found in Europe’s largest economy. Indeed, the German market widely outperformed the rest of Europe in recent months and over the course of 2010, the Dax 30 Index returned 16.1% for investors, compared to just 8% generated by the MSCI Europe.
Robert Smith, manager of the Baring German Growth Trust, explains: “We believe there is more outperformance to come and while German exporters continue to fare well, it is the domestic economy that will really take centre stage. Indeed, market data shows that all constituent parts of German GDP are positive. Even retail sales hit hard by severe winter weather, have bounced back over the first quarter of 2011 in the wake of sustained and strong domestic consumption.
“Against this backdrop, consumer and business confidence surveys are flying high. The IFO Business Climate Index is at the highest level registered since its launch in January 1991, while February alone saw the creation of more than 50,000 jobs, meaning that unemployment is at its lowest since the fall of the Berlin Wall.
“We believe that these conditions are creating a virtuous circle in the German economy with falling unemployment driving consumer confidence and domestic demand. At the same time, the government’s fiscal position is also improving as benefits decline and tax revenues increase, making any UK-like-anti-growth spending cuts unlikely.”
A combination of low interest rates, job creation and robust domestic consumption would usually lead to fears over economic overheating. However, Barings believes wage inflation will be kept in check with Germany set to lift all labour restrictions on EU-8 economies, meaning workers from countries such as Hungary and Poland will be free to seek employment.
The Trust takes a fundamental bottom-up stock selection approach - current top overweights include Aareal Bank, Bayer, Rheinmetall, Daimler Chrysler and SAP. On a sector basis, the largest exposure is to Healthcare, followed by I.T and Consumer Discretionary. Barings does not believe the rotational trend into financials will last and therefore, remains underweight to this sector.
Robert concludes: “Over the coming months we believe that investors will continue to recognise the strength of the economic recovery and the potential to be found in Europe’s largest economy, both in absolute terms and relative to the prospects for many economies in the Eurozone periphery. More than this, we believe that our commitment to companies with good growth prospects and strong balance sheets will lead to superior risk-adjusted returns for investors over the course of 2011.”
The Baring German Growth Trust was launched in the second quarter of 1990 and aims to achieve long-term capital growth through investment in German markets. Since inception, the Trust has outperformed the HDAX benchmark index, generating annualised returns of 11.2% for investors. Recent performance is also impressive with the Trust significantly outperforming over the course of 2010, returning 20.1% against the benchmark return of 13.4%.2 Performance relative to the peer group is highly favourable. As at the end of January 2011, the Baring German Growth Trust was ranked top quartile in its peer group over one year, three years and five years.