As we view the world today, sentiment towards European equities remains generally subdued, largely as a result of ongoing levels of risk aversion stemming from the sovereign debt crisis.
Turning to Germany, however, we see the economic and corporate fundamentals for the continent's biggest economy broadly encouraging. In addition, we believe the European Central Bank's announcement last month that it is ready to buy the bonds of fiscally-troubled eurozone countries, as well as the third instalment of quantitative easing from the Federal Reserve, as generally supportive of the German equity market in recent weeks.
Certainly there has been evidence of a modest uplift in sentiment towards German equities, with the DAX 30 index up 5.8% over one month to October 1 2012 in sterling terms, against 3.4% for the MSCI Europe ex UK index over the same investment period. Year to date, the DAX 30 index is up 18.8% versus 6.4% for the MSCI Europe ex UK index, in sterling terms and across the same investment period*.
Within the Baring German Growth Trust, we continue to utilise an all-cap investment strategy and we argue the portfolio continues to be more diversified as a result. In terms of portfolio positioning, we are relatively defensively positioned within larger companies in the Fund, favouring small-cap names and those operating in niche industries instead. One example of a company we particularly like is Jenoptik, which makes specialist laser products out of its factory in central Germany. In recent periods it has been very successful at selling interesting products across a number of diverse markets/industries like the US/medical and the Middle East/infrastructure.
Overall, we continue to see a compelling earnings environment, as the chart below demonstrates, yet this is not necessarily being translated into higher equity valuations. In this regard we believe this presents an attractive opportunity for investors, especially given the valuation of the German market relative to European peers.
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