Across the German equity market, small and medium-sized companies that are leaders in their fields, and have access to innovative technologies, look well-positioned for long-term growth.
Following a volatile and unpredictable 2020, German equities have been on a steady rise this year. Overall, the asset class remains supported by the recovery in both the German and global economies, which have been underpinned by the release of pent-up demand post-lockdown, robust public sector investments and a more optimistic export outlook. In fact, German manufacturing has significantly rebounded since the onset of the pandemic, with the Manufacturing Purchasing Managers Index remaining in expansionary territory since July 2020. At the same time, progress in vaccine deployment across Europe and the resultant reopening of economies have been supportive.
Despite this positive backdrop, there are a number of risks on the horizon. Inflationary pressures are increasing, driven by strong demand and global supply constraints—such as in the energy sector, where oil and gas prices have risen significantly. Markets are also contending with the prospect of monetary policy tightening, as a number of developed market central banks look to taper asset purchase programs and begin to think about raising interest rates in response to robust demand and inflationary pressures. There is also some uncertainty around a new government in Germany, following the General Election at the end of September. As a result, pockets of volatility are likely to impact markets in the near term.
However, we believe the German equity asset class remains supported and will continue to present long-term opportunities for investors. In particular, we see value in small and medium-sized companies with a strong long-term growth potential and exposure to innovative technologies—which we believe are attractively valued in the current environment.
Attractive Valuations & Robust Earnings
Since the second half of 2020, the relative valuation of German equities versus the broader European market has been on a downward trend. And earlier this year, the relative valuation fell below its long-term (5-year) average—suggesting that the asset class is undervalued by the market. At the same time, German corporate earnings are expected to experience a strong rebound this year, from the pandemic-affected lows of 2020. In fact, over the next couple of years, German corporate earnings growth is forecast to continue to outpace Europe. As a result, we believe the German equities asset class looks attractive.