In this Q&A, Rob Smith, manager of the Barings German Growth Trust, shares his thoughts on how German equities are placed amid potential headwinds that include trade disputes with the U.S., Brexit and continued pressure on the autos sector.
What could be the biggest potential long-term impacts of a more protectionist trade position by the U.S.? How is the strategy positioned to combat this?
The German autos sector is by far and away the biggest segment of the German economy. It’s also the one that gets the headlines as some of the brands are known globally, and sell in the U.S. Before all of this trade war rhetoric, we had picked up that the new emissions testing procedures in Europe were causing a bottleneck in terms of testing all of the different model variants, simply because there are not enough testing facilities to deliver what is required after the emissions scandal began in 2015.
We concluded that there would be some significant issues, especially in the third quarter of this year, so we dramatically scaled down our exposure to the autos sector. Going into 2018, we didn’t hold any Volkswagen or BMW, and we sold our Daimler holding early in the year on ESG grounds. On the back of this new emissions testing issue, we cut back on the parts suppliers as well. So, when President Trump started threatening tariffs, we had minimal exposure to the sector.