In this Q&A, Rob Smith, Manager of the Barings German Growth strategy, shares his thoughts on how German equities are positioned to combat various headwinds, and which sectors the team expects future growth to come from.
Concerns are increasing about whether the global economy may be approaching a recession. Do you share such sentiment, and how do you think the German economy is positioned?
There have been plenty of dramatic headlines regarding the growth prospects of the global economy, but there are reasons to remain positive. The latest manufacturing data from China indicated expansion, beating forecasts. The U.S. PMI numbers have also been higher than expected as the U.S. government shutdown effects disappear and sentiment continues to be supported by the Federal Reserve’s accommodative monetary policy. In our view, recent economic lows are merely reflective of a mid-cycle adjustment, rather than heralding a protracted global economic downturn.
Specifically for the German economy, it’s important to stress that the second half of 2018 was impacted by some significant one-time events which are estimated to have reduced German GDP by around 0.5%. Auto production was reduced due to delays in passing vehicles through the new Worldwide Harmonised Light Vehicle Test Procedure (WLTP) emissions testing regulation, and water levels in the Rhine River fell to such low levels that shipping products in and out of the chemical and steel plants became impossible—this was unprecedented. Both of these events are highly unlikely to be repeated in 2019, so just going back to a normal level of production should generate some useful year-on-year growth.
German Equities Typically Have Greater Earnings Growth Compared to European Peers1
Keeping on the topic of headwinds, the issue of Brexit remains prominent. How do you see the various scenarios impacting the German economy?
If an agreement is made that allows the exchange of goods with no hard border with Europe, there will be no change at all, in theory, so soft Brexit would mean a limited impact. With a hard Brexit, it all depends on whether the U.K. would start imposing tariffs to protect its own companies from competition. The current rhetoric seems to endorse free trade, in which case the country should remain fairly tariff free.
1. SOURCE: Thomson Reuters Datastream. As of March 31, 2019. Institutional Brokers’ Estimate System (IBES) is a database that gathers and compiles the different estimates made by stock analysts.