How will the next big event in Germany impact markets?

I attended a rather fabulous wedding near Chemnitz in Eastern Germany over the August bank holiday. It was the first time I’d been to this part of the country and I fell in love with it. Beautiful scenery, friendly people and a lot to see and do. As a holiday destination it has a lot more to offer than I’d realised (if you want a fairy tale venue, I can recommend the Wasserschloss Klaffenbach and ‘Miniwelt‘ is great for young children!).

There are parallels with the German stock market. When we think about German companies, the first to spring to mind are usually the largest – the global household names like BMW and Siemens. Both are fine examples of Germany’s strength in technical and engineering expertise.

Finding the perfect partner

However, as Aberdeen’s Ben Ritchie highlighted recently, 99% of Germany companies fall into the ‘Mittelstand’ category. This is a deep pool of small and medium-sized companies, which are less well covered by analysts and often overlooked. However, there are some gems amongst them, which have played a significant role in the country’s economic success.

These companies are spread across a variety of regional hubs, with different specialities and strengths. Berlin’s world-class education system and young and multicultural population is creating a surge in innovation and the emergence of a new generation of start-up tech companies. Heidelburg and Munich are home to some software development companies and Hamburg is where you’ll find Xing, the leading social network for professionals in German-speaking countries.

The big day approaches

This Sunday marks a big day for Germany, as its population goes to the polls. Elections have become a worry for investors over the past couple of years, following the Brexit and Trump surprises. And while recent Dutch and French election results have calmed nerves, we’ve learnt not to take predictions for granted.

If Merkel remains in power, it should be good for European fundamentals and the euro, as well as the German economy. If she loses, there may be some short-term volatility. However, as all major parties are proposing a pro-European agenda, the market impact should be more negligible over the longer term.

A happy future

The current political and economic backdrop remains positive for German companies. The domestic economy is healthy, with growth expected be 2% this year. Employment is strong, the current account is in surplus and, as with many developed countries, bond yields are extremely low. This means companies can access cheap finance. While the euro’s recent strength against the pound has hurt a little (Germany is the world’s second largest exporter after China), the ongoing economic recovery in the eurozone is supportive and company earnings are improving.

A number of Elite Rated managers agree that German companies offer growth potential. Examples of funds with more than 20%* invested in German businesses are GAM Star Continental European Equity (21.47%) and Jupiter European Opportunities trust (26.9%).

The German commercial property market and related shares also offer investment opportunities, according to Alex Ross, manager of Premier Pan European Property Share, which has 28.8% invested in the country. And last, but by no means least, there are opportunities in the German fixed income market. M&G Optimal Income has a 24.7% allocation.

*Source: FE Analytics as at 20 September 2017

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Remember, all investments can fall in value as well as rise, so you could make a loss. Before you make any investment decision, make sure you’re comfortable and fully understand the risks.Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.