The London-headquartered firm says German equities have outperformed the rest of Europe in recent months and that throughout 2010 the Dax 30 Index returned 16.1 per cent, compared with just 8 per cent generated by the MSCI Europe.

“We believe there is more outperformance to come and while German exporters continue to fare well, it is the domestic economy that will really take centre stage,” says Robert Smith, manager of the Baring German Growth Trust.

Domestic retail sales in the country have bounced back since being hit hard by severe winter weather, says Smith, and consumer and business confidence surveys are “flying high”.

The jobs market in Germany is also healthy - unemployment is at its lowest level since the fall of the Berlin Wall, with 50,000 jobs created in February alone.

“These conditions are creating a virtuous circle in the German economy with falling unemployment driving consumer confidence and domestic demand,” says Smith. “At the same time, the government’s fiscal position is also improving as benefits decline and tax revenues increase, making any UK-like anti-growth spending cuts unlikely.”

A combination of low interest rates, job creation and robust domestic consumption can lead to economic overheating, but Barings believes wage inflation will be kept in check by a proposed relaxation of labour restrictions, which will allow workers from countries such as Hungary and Poland to work in Germany.

Barings says its German growth trust takes a fundamental bottom-up stock selection approach. Current top overweights include Aareal Bank, Bayer, Rheinmetall, Daimler Chrysler and SAP. In terms of sectors, the trust's largest exposure is to healthcare, followed by IT and consumer discretionary. Barings does not believe the current rotational trend into financials will last and remains underweight to this sector.

“Over the coming months we believe that investors will continue to recognise the strength of the economic recovery and the potential to be found in Europe’s largest economy,” says Smith.