Best German Equity Funds to invest

We have analysed some of the best funds with better returns 5 years annualised as per Morningstar, from DWS, Allianz Global Investors, and Fidelity.

Investor Relations Specialist

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Investing in German Equity Funds could be a good option for investors as Germany is the top economic power in Europe and the fourth globally. Unemployment rose 0.8% between February and July 2020 and was estimated at 4.2% in 2020. The industrial sector amounts to about 26.8% of GDP and employs 27% of the country’s workforce. Germany is Europe’s most industrialized country, and its economy is well diversified.

We have analysed some of the best funds with better returns 5 years annualised as per Morningstar, from DWS, Allianz Global Investors, and Fidelity.

Source: Morningstar 28/07/2021

DWS Aktien Strategie Deutschland

Hansjoerg Pack, Portfolio Manager, Aktien Strategie Deutschland

The German economy, German exports, international trade and German consumer and producer confidence rebounded strongly from the 2020 crisis.  As always, the stock market was the best leading indicator for the real economy and anticipated the rebound, climbing c. 66% until December 2020 when the market reached the pre-pandemic highs from February 2020. As of today, the market climbed almost another 20% to date, and is trading near its all-time high. This development was driven by a strong rebound in corporate earnings of the DAX members.

DAX earnings (Factset Data)  in 2020 fell sharply to 718 points. This year the Q1 earnings season was already very strong. Consensus’ earnings estimates for 2021 are currently standing at 1048 points, which would imply a 45% rise in earnings.  Global PMIs also shot up and may have peaked. Therefore, the momentum for the cyclical end of the market faded in recent weeks after these stocks showed the strongest rebound coming out of the crises. For 2022 consensus earnings estimates are at 1141, implying another 9% rise in earnings.

After the comeback of the industrial cyclicals, mainly the automobile and chemical industry, we should now expect the consumer to continue to support the market. German households have over 200 billion Euro in excess savings in their bank accounts. The labor market was supported throughout the crisis by the short-time work scheme, as well as by tax benefits from the government to support the domestic consumption. On 2021 consensus’ earnings estimates the market currently has a 15x PE multiple, which will fall to 13.7x in 2022.

The book value of the index stands at an all-time high of 9000 points, which implies a price to book ratio of 1.75 which is clearly above the 10-year average of 1.45x. While the market looks still ok on a PE level, the high price/book ratio points to a rather elevated valuation. However, the peak valuation during the technology bubble was over 3.2x. The far more important driver of the market in the second half of the year will probably be the monetary side. M1 in Europe, M2 in the US have been coming down a bit as of late but are still supportive for the market. Another important factor are the massive capital flows into the equity market.

Global equity funds have enjoyed nearly 600 billion US Dollar in net inflows in H1 of 2021. This is not just retail money. More and more institutions are raising their risk tolerances in order to achieve the required returns to meet their liability commitments. In early 2021, the market was spooked by an inflation spike and sharp sell-off on the long bonds. However, the 10 and 15 year inflation expectations did not alter much. Consensus and our house view is for inflation to recede again in Q1 2022. As long as the US 10 year treasury yield does not surpass 2.5%, there will be little alternatives for asset allocators to the equity market.

Allianz Global Investors Fund – Allianz German Equity

Christoph Berger, Portfolio Manager Allianz German Equity Fund and Head of German Equities at Allianz Global Investors

Europe’s largest economy is casting off the crisis and returned to the growth path supported by vaccination in combination with supporting policies such as a strong fiscal support. In addition the German economy should feel clearly an ongoing positive effect of Biden government’s economic stimulus program as one of the largest export nations. Germany’s relative resilience during the crisis shows that investors in German equities can indeed benefit of the structural strength of Europe’s largest economy. 

Many companies benefit from long-term trends but also a strong economic recovery – after a strong Q1 earnings season we observe further positive earnings revisions. We are convinced that equity markets remain well supported due to the progress on vaccination campaigns, a structural re-rating due to lower for longer interest rates/tight credit spreads and – most importantly – structural themes and trends accelerating such as the rise of electro mobility, the trend towards platform economy, digitized industrial processes and sustainable development/climate solutions. The shift in the political agenda in the US will support the prospects for sustainability leaders and companies that offer solutions to tackle climate change.

The improving sentiment, however, is only a snapshot of the recent economic conditions. Due to the new developments around virus mutations the forecasts are still very vague. If it just looked as if Europe would be half on its way to a normalization with traveling in summer some countries are already had to tighten again the recently relaxed regulations due to mutations of the corona virus and experts and politicians started to raise the warning bells. German economic institutes lately revised their economic forecasts for 2021 downward. It is now expected 3.3% growth this year, 0.4%3 less than in March. In return the forecast for the coming year has been significantly increased to 4.3%.3 Although we see the German stock market currently in good shape, we assume the ongoing pandemic conditions will probably postpone the expected strong upswing to some extent. Nevertheless, of course, not all German stocks can be classified as equally promising.

Against that background we continue to be convinced that stock picking and individual stock analysis is key to create value. Some cyclical companies have recovered strongly from depressed valuation levels last year, some structural growth stories have lagged recently due to rising inflation expectations and some companies continue to face structural challenges that will persist in a post pandemic world. Hence theme, sector and individual stock analysis is key to our investment strategy.

Fidelity Funds – Germany Fund 

Fund analysis and strategy source: Factsheet Fund 30th June 2021

Strategy: Christian von Engelbrechten believes a good investment is a favourable combination of quality and the price you pay for it. He defines quality as high return on capital turning into above-average profit growth and payouts. He uses in-depth fundamental research to analyse the profit and return drivers of each company across regions, divisions and products.

Christian draws extensively on Fidelity’s in-house research and emphasises contacting companies, visiting their operations as well as looking at customers, suppliers and competitors. He focuses on identifying companies whose profit growth is likely to sustainably exceed the overall economic growth not yet priced in by the market. Underestimated small cap stocks are an important part of the portfolio.

The fund aims to provide long-term capital growth with the level of income expected
to be low. The fund will invest at least 70% in shares of German companies, and has the freedom to invest outside its principal geographies, market sectors, industries or asset classes.
The fund may invest in assets directly or achieve exposure indirectly through other eligible means including derivatives. The fund can use derivatives with the aim of risk or cost reduction or to generate additional capital or income, including for investment purposes, in line with the fund’s risk profile.

The fund is actively managed. The Investment Manager will, when selecting investments for the fund and for the purposes of monitoring risk, reference Deutsche Boerse HDAX Total Return Index (the “Index”). The fund’s performance can be assessed against its Index. The Investment Manager has a wide range of discretion relative to the Index. While the fund will hold assets that are components of the Index, it may also invest in companies, countries or sectors that are not included in, and that have different weightings from, the Index in order to take advantage of investment opportunities.

If you want more insights about Equities, check out our Equities section

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Best German Equity Funds to invest