Time to look for value in Germany

PHOTO: Time to look for value in Germany

SINGAPORE - The outlook for the world's largest economies is looking increasingly uncertain, with investors spooked by China's growth slowdown on one side of the globe and the threat of the United States tapering its ultra-loose monetary policy on the other.

But amid the global jitters, a bright spark is emerging from a previously gloomy corner of the world: Europe.

The euro zone cheered investors last week when a monthly survey of thousands of firms showed that the region's economic activity expanded this month for the first time since January last year.

"This is in line with our view that the euro zone economy has seen the worst of the recession," said ABN Amro economist Joost Beaumont.

"We expect a modest economic recovery in the second half of this year, as exports should benefit from the global economy gaining momentum, while the pace of fiscal austerity in the euro zone will slow down considerably in the coming months."

Of course, not all countries in the region are equally robust. But pockets of strength may present opportunities to investors seeking value in today's volatile world.

Growth in Germany, for example, is expected to outpace that of the euro zone this year, with its economy expanding 0.3 per cent compared with a contraction of 0.4 per cent for the region as a whole, according to projections by Allianz Global Investors (GI).

The euro zone's largest country is also forecast to grow faster at 1.7 per cent next year - in line with the rest of the region - while inflation will remain benign at 1.8 per cent this year and next, said the investment management firm.

This will favour equities in Germany, said Mr Stefan Rondorf, capital market strategist for global economics and strategy at AllianzGI.

Between 2003 and November last year, German equities outpaced pan-European indices by more than 30 per cent, Mr Rondorf noted.

"We expect this engine to continue to run smoothly for quite some years to come, supported by low interest rates, the country's outstanding ability to compete and the growing propensity to consume as employment levels increase," he added.

German stocks are also attractive because of the economy's strength in exports, cost advantages and corporate earnings, said AllianzGI.

On top of that, they are still reasonably priced, it added. Their cyclically adjusted price-earnings ratio is currently at 16, below the historical average of about 21.

German companies are also profiting from faster growth elsewhere in the world. About 70 per cent of revenue for the companies in Germany's benchmark DAX index comes from outside the country, said Mr Hans-Jorg Naumer, global head of capital markets and thematic research for AllianzGI.

Some 22 per cent is from Europe excluding Germany, another 22 per cent comes from the Americas, and 14 per cent is from the Asia-Pacific region, he said.

"The dividend yield makes it clear: At 3.3 per cent, it is around twice as high as the yield on the 10-year government bond" as at the start of last month, Mr Naumer said.

In terms of picking winners in Europe, the best bets are companies with operations in fast-growth emerging markets, small- or mid-caps with an edge in specific market segments, or well-known global firms, said Mr James Cheo, investment strategist for HSBC Private Bank.

"We would play Europe through First World-rated companies with exposure to emerging markets, small- and mid-cap companies that cater to niche markets, and global brand names that continue to do well," he said.

One German firm that fits most of these criteria is SAP, the world's largest software application company.

Sixty per cent of its revenues come from high-growth segments, enabling the group to achieve stable double-digit growth rates for sales and operating profits, said AllianzGI.

SAP is one of the companies featured in its Allianz Europe Equity Growth fund, which has an overall 11.7 per cent exposure to Germany.

The fund invests in European equities and adopts a "growth investment" style, selecting stocks that are in an early stage of "undiscovered" structural growth. The top 10 holdings of the fund have an average weighted exposure of 51 per cent to emerging markets.

"The golden rule of a growth strategy or approach into Europe is to look for superior earnings growth dynamics, cash-flow growth and sustainable returns on equity," said Mr Thorsten Winkelmann, director and senior portfolio manager for the Allianz Europe Equity Growth fund.


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