This is a golden age for investing in value- adding German companies, says Barings’ Rob Smith
Rob Smith, manager of the Baring German Growth Trust on why fundamentals are still compelling for German equities: "The enduring strength of Europe's biggest economy which has been demonstrated by the latest business sentiment surveys and an improved growth forecast for 2011, underlines our view that we are in a golden age for investing in value-adding German companies.
"For the first time since February, the results of the IFO Business Climate survey showed an improvement on the preceding month, from 114.2 in May to 114.5 in June. Companies are more positive about the business climate and the mood among manufacturers is upbeat, while construction and wholesalers are similarly optimistic. GDP growth is forecast to be 3.3% this year boosted by strong exports, an important driver of Germany's recent recovery, and rising domestic demand now that locals are spending more and saving less.
"From an investment perspective, we believe long-term value can be found within midsized companies. We favour companies like H&R Wasag, a fourth generation family-run chemicals specialist with a global footprint, or Wirecard, the electronic payments provider. These companies have long-term investment decision-making horizons and are examples of the value which we think can be found further down the market cap spectrum and away from mega cap stocks."
Rob concludes: "Balance sheets have also been well-managed with less of an emphasis on leverage during the recovery period. Added to this, unit labour costs remain well-positioned relative to the European average, and as long as German labour is adding more value relative to cost, which it currently is, German companies will continue to take market share from their competitors."
STRONG OUTLOOK FOR INVESTING IN INDONESIA - BARINGS' ROBERTO LAMPL
Barings believes that Indonesia exhibits many of the positive characteristics associated with a young and vibrant emerging market economy. Along with China, it is one of Barings' most significant overweight positions in our Global Emerging Market Equities portfolio.
Says Barings' Head of Emerging Market Equities Roberto Lampl: "First, Indonesia has a favourable macroeconomic outlook: Inflation eased to 5.54% in June from 5.98% the month before, which is the fourth consecutive month price rises have slowed. Core inflation, which excludes food prices, reached 4.63%, slightly lower than May's 4.64%. We think these sorts of numbers lessen the pressure for the central bank to raise interest rates in the near term, and especially if the rupiah continues to gain in value during the latter half of the year, a trend suggested by Bank Indonesia Governor Darmin Nasution's recent comments to investors.
"Next, the rapid growth in population and a young and educated workforce continue to underscore the strong demographics of Southeast Asia's largest economy. An expanding middle class with increasing purchasing power has supported domestic demand and banks and financial services have benefited from this positive trend. For instance, loans to consumers grew 32% for the end of 2010, compared to the previous year.
"We also believe that Indonesia's macroeconomic fundamentals are sound enough to see its sovereign rating upgraded to investment grade and possibly within the next year. It is currently rated BB+ by Fitch which is just one step below the investment grade BBB-. This will be part of the process that should see the country's interest rate trend lower, while recognising that rates move on a cyclical basis.
"In our view Indonesia's credit profile has also been supported by a government committed to moderating inflation and driving down debt-to-GDP levels, while careful not to stymie GDP growth which is currently running at 6.5%. Resource-rich, the economy has also been insulated from recent volatility in soft commodity prices because it has a rich commodity base of its own. For example, Indonesia remains a leading rice producer and is a major exporter of crude oil and gas, especially to markets like Japan, China and India. In terms of hard commodities, Indonesian coal miners are benefiting from rising thermal coals exports and by 2015 this industry could account for 39% of global increases, making it the largest producer ahead of Australia."
Roberto concludes: "From an investment perspective, we currently favour local banks that are benefitting from growing interest from an expanding middle class, and companies like Astra International, which has exposure to diversified sources of revenue including financial services, farm machinery and automobiles."
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