The investment opportunities
“European equities feature in our portfolios, and in the past we gained exposure to German equities through the MDAX Index rather than the DAX, the country’s main index,” Von Auer said. “However there are significant differences between the two. The DAX has underperformed Europe’s other leading indices over the start of 2016, mostly because of its heavy weight in financials, 19 percent.”
Given that the DAX has exposure to regulated sectors, such as utilities, global investment banks and global insurance companies, JP Morgan believes the MDAX is a better way to gain exposure to the strength of the domestic consumer. Overall, the MDAX capitalizes on the strength of the German economy and has a particularly attractive mix of aerospace, real estate and consumer discretionary stocks.
Diverging fortunes - a proxy for European
“Our European equity exposure is neutral relative to the benchmark,” Von Auer added. “We would not start differentiating between countries yet, especially while the ECB is in the middle of easing. Until the central bank starts buying investment grade corporate credit and banks begin to take up the new targeted longer-term refinancing operations (TLTROs), we forecast growth in the region at around 1 per cent to 1.5 per cent.”
“In this environment, Germany is well placed for maintaining its trend growth from the past few years. The German stock market is often considered a proxy for European equities, especially by foreign investors,” Von Auer said. “Our perspective is more nuanced and we believe equity selection is key for German stocks. Those that provide exposure to domestic consumers can avoid global risks and offer potential upside to domestic demand.”
Germany’s economic and political climate provides the basis for understanding Europe’s future. Germany has insisted over the past few decades that it wants to help European development from an integrated perspective and not as an individual effort. Similarly, JP Morgan has diversified its European equities exposure throughout the region because we believe the ECB’s efforts are aimed at both the core and periphery, and drive toward a convergence of economic development across the euro area.
Opportunities in German financial assets – across the capital structure, both in equities and corporate credit – should be approached selectively from a bottom-up perspective, especially in an environment where sovereign yields are negative at the longer end of the yield curve.