While market volatility has risen at the start of 2018, Barings continues to see attractive investment opportunities in German equities. In this viewpoint, we tell readers why and where we see the greatest investment potential.
A supportive environment
The German equity market posted strong gains during 2017, with total returns in euros of 12.5% for the large-cap DAX Index and 14.8% for the mid-cap HDAX Index.1 Notwithstanding the recent market volatility, we believe the favorable conditions that underpinned German companies’ positive performance last year will continue throughout 2018. Our outlook is based on our on-the-ground company research and expectations that earnings growth will remain strong amid an environment of buoyant business activity. In our view, the fundamentals are solid, with the world currently enjoying its strongest wave of economic growth in 10 years.
In Germany, business confidence and the pace of economic activity have remained robust, despite the ensuing political gridlock in the Bundestag following the September 2017 elections. Nowhere is this more apparent than in the leading indicators for the economy. In January, the German ifo Business Climate Index hit a record high of 117.6,2 while the German Manufacturing PMI edged down to 61.1 after its record high of 63.3 in December.3 The data are consistent with the strong sales and orders figures we are seeing in our company-focused research and in the optimism we have heard expressed by corporate management teams.
With the acceleration in growth, companies are investing to ease capacity constraints. Hiring is on the rise—unemployment is low at 5.8%4—and we expect capital investment to increase as well. That paints a bright picture for domestic demand, but strengthening global activity should also provide a spur for exporters. Germany is the world’s third largest exporting country—after China and the U.S.—and we expect sales to rise to its largest foreign markets, where activity is also strong.
- Thomson Reuters. As of December 31, 2017.
- ifo Institute. As of January 2018.
- HIS Markit. As of February 1, 2018.
- Bundesagentur für Arbeit. As of January 31, 2018