The New Germany Fund, Inc.
The New Germany Fund, Inc. (NYSE:GF)
Annual Fund Overview:
As of December 2015
For the year 2014, the New Germany Fund, Inc.’s total return in U.S. dollars was –6.16% based on net asset value (NAV) and –8.35% based on market price. During the same period, the total return of the Fund’s benchmark, the Midcap Market Performance Index, was –8.06%. The Fund discount to NAV averaged 9.56% for the year 2014, compared with 10.07% for the year 2013. The year was characterized by two very different halves. In the first half, equity markets reached new all‐time highs on another package of expansionary measures from the European Central Bank (ECB), the
ongoing recovery of the U.S. economy, and brisk merger and acquisition (M&A) activity. In the second half, volatility returned to markets with two hefty corrections in October and December. Nonetheless, the Midcap Market Performance Index was able to gain slightly in the second half,
adding up to a positive year in local currency terms. Private consumption continued to be the main driver for the German economy, while corporate investments, against a backdrop of political uncertainty in the European Union (EU) and volatile currency markets, remained subdued.
According to the German Consumer Confidence Index, consumers assume that the current phase of economic weakness in Germany will be
temporary and are expecting the domestic economy to return to growth over the coming months. This is reflected in the considerable increase
recorded in economic expectations in December. The willingness to consume has also once again risen slightly, further improving on its already extremely high level. The propensity to save has plummeted to a record low. This contributed to further improvement in the consumer climate in the last quarter of the year. The consumer climate indicator, while dropping 7.5 points, is still at an extremely favorable level.
The decrease is most likely attributable to the volatile international situation rather than framework conditions in Germany. From consumers’
standpoint, the latter continue to be extremely favorable. Month after month, employment is rising to new record highs. Incomes of both employed Germans and pensioners are developing positively, boosted by the very low rate of inflation of well below one percent.
Overall, it appears that the consumer climate is strong entering the new year and is an indicator that economic development should be good in
2015. Accordingly, we believe that private consumption will continue to play a major role in the German economy in the coming year. However,
any potential escalation of international crises may pose a threat to the consumer economy and, therefore, to economic development in Germany
as a whole.
After a period of weakness from March to October, December saw the second successive monthly increase in Germany’s Ifo Business Climate
Index, which strongly suggests the end of the economic rough patch. The confidence shock caused by the conflict in Eastern Ukraine has faded
since October. Sharply lower oil prices boost hopes for stronger growth in 2015. The headline Ifo Business Climate Index rose from 104.7 in
November to 105.5 in December. Most importantly though, the index’s expectations component, which typically correlates closely with
machinery investment activity, rebounded sharply to 101.1. As we expected, the manufacturing sector, which was the key factor for the 2014 downturn, is now becoming the key driver of the rebound. Resilient export expectations, not least supported by the weakness of the European currency, a strong competitive position, and cheap oil boost the outlook for Germany’s industrial backbone. Meanwhile, the domestic‐oriented services and retail trade sectors also improved, leaving construction with a slight weakening in confidence as the outlier. All in all, the German economy grew measurably in 2014, with gross domestic product (GDP) notching up real growth of 0.8%. In our German mid‐cap stock portfolio, taking into account the above global macroeconomic background, we have become slightly more constructive again. We added to several industrial names in the expectation that the weakening euro should eventually become a strong ilwind for several of the strong, export‐driven companies. We continue to remain positive regarding the strong German consumer, with exposure to select retail stocks and media stocks (subsegments of consumer discretionary) as well as German residential real estate stocks (subsegment of financials).
Within the Fund, positive contributions to performance were generated by LEG Immobilien, Deutsche Annington Immobilien and RTL Group, while
detractors included Freenet, Gerresheimer and Sto. On December 19, 2014, the Fund announced that its Board of Directors declared distributions per share of $0.369 and $3.166 of ordinary income and capital gains, respectively. These distributions were largely paid for by selling a pro rata slice of the portfolio in January 2015.
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The New Germany Fund, Inc. (NYSE:GF)