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Angela’s ashes

Angela Merkel’s failure to win a mandate in the German general election has sent ripples through the investment community.

A week before the election, commentators were optimistic about Merkel’s planned labour reforms.

Despite leading Gerhard Schroder by 12 points in the opinion polls, Merkel’s Christian Democrats secured only 225 seats in the German parliament compared with 222 for Schroder’s Social Democrats. The two parties have a month to reach coalition agreements with other parties so the lower house of the parliament can elect a leader.

Invesco Perpetual head of European equities Jeff Taylor says the fear is that any emerging coalition will be unworkable or will result in watered-down measures for reducing high unemployment and stimulating growth.

But he is confident that the situation will not impact too much on the construction of his portfolios, as his stockpicking has focused on companies which are undervalued relative to their restructuring potential. He feels that these companies are likely to restructure regardless of the election result.

Taylor says: “We have been underweight in German stocks relative to the benchmark for some time, given sluggish consumption and overall economic growth relative to other parts of Europe. However, earlier this year, we increased our German weighting through the addition of companies such as Siemens and Henkel. Indeed, Siemens chose to announce the acceleration of the pace of restructuring the day after the elections.”

Other investors in the country are keen to emph- asise the importance of company-driven reform, rather than reform driven by the government.

Foreign & Colonial Eurotrust manager Davina Curling says selective fund man- agers will still be able to do well in German equities. She warns investors to beware of “negative noise” as a result of the election.

Curling says: “Reform was unlikely to have been swift and radical and there is still reason to believe that, at an albeit slower pace, it will continue. Parts of corporate Germany will push forward with their own initiatives in the drive to survive in the ever more competitive global environment. Many are well ahead of their counterparts in Italy and France.”

Scottish Investment Trust investment manager Martin Robertson says firms have been alive to their plight and are struggling to get their house in order. He says when the “hot money” that was buoying Germany before the election leaves, these “right-minded companies” will still exist.

Frankfurt’s benchmark Dax index lost 2 per cent the day after the election results were announced and the euro fell by more than 1 per cent against the dollar.

Charteris chairman Ian Williams says uncertainty following the election has caused a flight to quality, with a positive impact on the German gilt market. He says: “The saying goes that no government is good government but uncertainty in the market has engendered a mini-flight to quality, with German investors selling equities and buying bonds. Stagnation politically often means stagnation economically in the mind of investors although the initial effect of such shocks often does not continue.”

Baring German growth manager Gianluca Giardina feels the fall in German confidence following the election is the worst possible short-term outcome for investors in the region. He says international investors are likely to take some profits in the coming weeks, particularly in utilities and restructuring stories. But Giardina believes the country has good long-term prospects and even thinks the likely short-term fall in valuations could provide cheap entry to the market.

Giardina says: “The German market may underperform in the short term but the medium and long-term prospects should be much more positive. We believe the market weakness being experienced in German equities could be a good entry point for investors who missed the recent market rally.”

RLAM head of equities Jane Coffey says the firm is using the short-term weakness in the market to rebuild its overweight position in German equities. Coffey points out that both parties campaigned to reduce expensive employee benefit packages and feels the need for reform has widespread acceptance. With the market trading on attractive price/ earnings ratios relative to history, Coffey is investing in stocks such as Siemens, Daimler, VW, MAN and Bayer.

For IFAs, selling Germany has never been easy, when the performance of UK equities is so strong by comparison. Hargreaves Lansdown investment manager Ben Yearsley says investors just do not buy German funds and are often wary of Europe as a whole. He thinks their negative perception of European economics will be reinforced by the murkiness of the election result.

Yearsley says: “It would have been good for Germany and Europe if Merkel had won by a huge majority. European politicians do seem to sit on their hands and it is rare that they will have the courage to make the necessary reforms – reforms which are much needed in Germany.”

Investors in Germany would no doubt have been pleased if Merkel had won by 12 per cent or more. However Germany seems destined to remain a slow-and-steady investment story, with companies continuing to have to drag the government along.


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