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Global equities: Should investors be worried about Germany?

Europe’s biggest economy is in the news for the wrong reasons. But Germany’s underlying economic picture still looks robust, says Pendal fund manager Paul Wild

SHOULD global equities investors be worried about the headlines coming out of Germany?

For a country dubbed the economic engine of Europe, Germany is in the news for all the wrong reasons at the moment, hit by rising energy prices, threats to gas pipelines, slowing production and a trade deficit after decades of surplus.

But the underlying economic picture for Europe’s largest economy still looks robust, says Paul Wild, who manages a European equities fund for Pendal’s UK-based J O Hambro asset manager.

Investors should look beyond disruptions caused by Russia’s invasion of Ukraine and cuts to gas supplies — and instead focus on longer-term fundamentals, says Wild.

“Put it in context. Germany has a fairly unparalleled track record of growth.

“Unemployment is much below European levels, the Bundesbank has always been very conservative, debt-to-GDP ratios are very low.”

Even the May trade deficit — the first for Germany since the 1990s recession — is not something investors should fear.

“The US has run a trade deficit for a very long time and done very, very well — so I don’t think a short-term deficit is going to be the death of Germany.

“And don’t forget that all these issues have helped weaken the euro. You could argue that Germany is the single biggest beneficiary of a weaker currency.”

Energy crisis impact

Still, Europe’s energy crisis is spooking investors in German companies.

The May trade deficit came almost entirely on the back of the rising cost of energy imports.

Germany’s domestic energy capacity is carbon heavy, with large deposits of dirty, lignite coal and it has no LNG terminals or regasification capacity. Instead, it imports some 40 per cent of its gas from Russia, principally through the Nord Stream 1 pipeline.

In June, Russia cut volumes in Nord Stream 1 by 60 per cent in retaliation for Western Europe’s support for Ukraine in the war. It followed that with a further cut in July.

“Now Nord Stream 1 volumes are about 20 per cent of what they were pre-war,” says Wild.

“So, there is a small short-term possibility that there might have to be some kind of industrial rationing of gas over the winter period.”

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Should global equities investors be worried?

Wild says it is important to look to the past for clues as to how things might play out.

“Germany has always been dependent upon Russian imports of oil and gas including through the Cold War — and through all of it, the gas has flowed.

“The question mark here is how long is the Ukrainian war going to last? If the war ends, we will likely see a normalisation of gas volumes.

“And in the shorter term, Germany will be dragging in gas through the interconnected pipelines with the rest of Europe and starting to build its own LNG terminals.

“It also has three remaining nuclear plants which are due to be shut down but could be prolonged. And they can generate more energy from coal.”

From an investment perspective, Wild says Germany offers much to like.

A strong industrial focus, open economy and expertise in autos, chemicals and machinery means it is fundamentally a play on global GDP growth.

“Frankly, none of that has actually changed,” says Wild.

“Remember if you buy shares in Siemens, it might be quoted in Germany but it gets most of its revenue and profits from overseas.”


About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at June 29, 2022. PFSL is the responsible entity and issuer of units in the Pendal Concentrated Global Share Fund (ARSN: 613 608 085) and Pendal Global Select Fund (ARSN: 651 789 678). A product disclosure statement (PDS) is available for each fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the funds is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 from 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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