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Europe: German companies to pull through political uncertainty

Europe: German companies to pull through political uncertainty

German chancellor Angela Merkel faces a battle to form a stable government, but it has not affected how the country’s equities are viewed.

The leader of the Christian Democratic Union (CDU) secured her fourth term in office. She now, though, faces months of coalition talks as the CDU/Christian Social Union bloc suffered heavy losses in the election.

Left unscathed

Yet European equity managers are unfazed by the political fallout. Tim Stevenson, director of Pan-European Equities at Janus Henderson, does consider the situation unsettling.

Even so, he thinks it is unlikely to change the broadly consensual nature of German politics. ‘In Germany, politicians of whatever hue have done their best to run the economy in a way that preserves jobs and improves the wellbeing of people,’ he said.

Stevenson believes the challenge facing Merkel is to find coalition partners that will enable Germany to pull its weight in the EU, but without fuelling the growing protectionist forces. ‘The result means the task ahead is more difficult. But, rather than run away from the challenge, she’s more likely to form a consensus to address the issues,’ he said.

Global outlook

Frédéric Guignard, a European equities fund manager at Aviva Investors, does not expect Germany’s largest listed companies to be affected by the election, due to their global nature. ‘They are more industrial-focused and big exporters,’ he said. ‘For instance, they are more sensitive to the Chinese economy.’

Guignard looks for good businesses to keep for the long term and does not change exposure based on particular events. ‘We hold companies like Bayer, Infineon, SAP, Deutsche Börse and Fresenius,’ he said. ‘It’s a stock picking decision each time.’

For example, he sees Infineon as a well-run company benefiting from good positioning in the semiconductor industry. ‘Electric vehicles and power management are, in our view, two of its main drivers,’ he said.

Fresenius is a conglomerate of various non-cyclical growing healthcare businesses.

‘It’s a very well-managed company with an excellent track record in terms of execution,’ explained Guignard.

Looking ahead, he sees the biggest concerns for the country will be a stronger euro versus the dollar, as this would hurt competitiveness. ‘This is true for any Eurozone country but, as a strong exporter, this is especially the case for Germany,’ he said.

Land of opportunity

Germany has always been an important story for Tim Crockford, manager of the Hermes Europe Ex-UK Equity fund. ‘It has lots of good companies, innovation, and is very much tapped into the global market,’ he said. ‘The talent pool has resulted in many high-quality businesses.’

Crockford believes its background in automotive and engineering helped German firms when Europe was stagnating as a region following the financial crisis. ‘They already had a foothold in emerging markets, which they built on to drive revenue growth,’ he said.

Exciting innovation

Alongside many large international names, Germany also has plenty of exciting growth companies, across several sectors. ‘It’s always been a very interesting space to find new companies innovating in their markets,’ said Crockford.

Pharmaceutical and laboratory equipment supplier Sartorius has been a core holding for the fund since the end of 2014. ‘It makes equipment needed to manufacture biological drugs,’ said Crockford. ‘It’s been an innovator in a key growth market.’

Another interesting stock is forklift manufacturer Kion Group. ‘It doesn’t sound particularly sexy, but it’s a global player in the intralogistics market, which basically means warehouse automation,’ he said.

Crockford said many mid-cap German companies are exposed to exciting themes that will grow, regardless of what the European or worldwide economy is doing. ‘If growth rates slow and we have another crisis, it will affect their sales. But, relative to other companies that are pure cyclical bets, they should continue to do well,’ he said.

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