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Comment: Germany’s prospects remain strong

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Strong exports, a stable financial sector and a low budget deficit will help Germany see economic growth of more than three per cent for the second year ruinning, says Oliver Maslowski (pictured), fund manager, JB German Value Fund, Swiss & Global Asset management…

We expect that the German economy will grow by more than 3% for a second year running as it sustains a robust recovery from the global financial crises, driven by strong exports, its stable financial sector and a low budget deficit. Its deficit compares favourably to other European nations, for example, in 2010 Germany had a budget deficit of just 3.3% of GDP, while the UK figure stood at 10.4%.
 
Germany, whose exports make up almost 50% of total GDP, is Europe’s largest exporter of manufactured goods and the second largest in the world behind China. Its ability to supply high quality and innovative products has made German engineering sought after worldwide and an attractive investment opportunity for investors. The demand for German products has seen exports rise from 33% of GDP in 2000 to 46% of GDP in 2010, whereas the rest of Europe has experienced declining export levels.
 
Leading indicators suggest that German exports should continue to prosper as companies look to profit from growing middle classes in emerging markets. For example, German car manufacturers such as Volkswagen are extremely popular, with Audi now expecting to sell more cars in China than domestically. Investors could also consider the telecoms and technology sectors, as booming demand for smartphones and tablet personal computers continues to gather pace. Telecom re-sellers such as Drillisch and Freenet demonstrate strong potential in a competitive market environment.
 
German utilities such as RWE and E.ON, the energy service providers, face numerous headwinds on generation spreads and a tighter CO2 regime, making them less attractive. The new energy policy in Germany is problematic for investors as energy companies face a continuance in the nuclear fuel tax, despite a rigorous nuclear closure plan, which could cut profits at E.ON and RWE by an additional 10% in the coming years. It is very unlikely that dividend commitments can be maintained, which will be a major drawback to investors as dividends are viewed as the main investment opportunity for utilities.
 
The proposed Greek bailout should restore investors’ confidence regarding the Eurozone and shows that a default is not an option. The main concern is still that the debt crisis could spread beyond Greece. As risks have shifted from the private to the public sector country allocation is of utmost importance for performance.
 
With attractive stock valuations and positive earnings revisions investors can obtain exposure to Germany’s export growth story at relatively low costs. Although the sovereign debt crisis remains, German debt levels are considerably lower than other European nations and investors should factor this into allocation decisions.

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