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Barings sees strong buying opportunity in German equities


The decline in German industrial production in August and subsequent fall in market sentiment towards the country’s economic strength was the result of one-off events and presents a strong buying opportunity for German equities. 

That’s according to Baring Asset Management, which notes that German equities are still trading at a discount to European peers.
Barings believes there were two key reasons for the recent fall in production.  Firstly, changes to the school holiday calendar in key industrial zones, which Barings believes would have affected productivity during the period. Many firms, such as Volkswagen, for instance, switched their holiday period from July to August in line with changes to the school calendar.
Secondly, the instigation of more stringent emission standards on truck sales.  This year’s introduction of tougher standards has spurred a ‘pull-forward’ of purchases in 2013 as buyers moved to lock in savings before the release of more costly engines under the new emissions regime.
Robert Smith, investment manager of the Baring German Growth Trust, says: “The decline was surprising and was not consistent with the ‘on-the-ground’ information we gather in our conversations and meetings with corporate managers.  Indeed, in many of these meetings, managers have told us that they are similarly surprised by the data and turn in sentiment.”
In the near future Barings believes that there is data to suggest positive surprises in earnings performance, particularly evident in the automotive sector.
Smith says: “The automotive sector is the backbone of German industry, but one that has recently fallen out of favour with investors.  As we look at the more than 5% increase in car sales in Germany in September, which beat market expectations, we consider that current sentiment is perhaps overly downbeat.  In addition to domestic sales, we expect strong global demand for cars, which should benefit the German automotive industry. Our strategy is positioned to benefit from this.”
Turning to the broader market context, Barings expects the European Central Bank’s monetary stimulus programme, which includes lower interest rates and asset purchases that began in September, will help weaken the euro.  In turn, it believes that this should provide a boon to corporate earnings for exporters and companies repatriating profits from abroad.
Smith says: “We expect to see the benefits of a weaker euro flow through to earnings in the first half of 2015.  That said, the actual earnings environment for German companies is already superior to that of the wider European equity market.  Yet this is not necessarily being translated into higher equity valuations. We, therefore, believe that this offers opportunity for investors as, all else being equal, superior earnings growth should translate into higher share price valuations over time, with investors prepared to pay more for future cash flow.
“In the medium to longer term, if German corporates continue to deliver strong earnings, as we expect, then we believe the fundamentals will reassert themselves to the benefit of investors.”

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