German fund selector pessimism is at its lowest in over six years as its economy looks to have narrowly dodged a technical recession in the final quarter of 2018, according to Last Word Research.
The latest asset class research found German pessimists were the largest group with 38% negative on their macroeconomic sentiment, while only 8% were positive, 38% were neutral, and 17% were uncertain.
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Source: Last Word Research
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Source: Last Word Research
Figures from the Federal Statistics Office, released this week, showed that the German economy grew by 1.5% last year, its weakest rate since 2013. Bloomberg has forecast that this indicates German growth reached 0.4% during the fourth quarter of last year, narrowly avoiding a technical recession as the economy had shrunk by 0.2% in the third quarter.
Alternatives favoured
According to Last Word Research, German fund selectors are now looking towards illiquid assets and liquid alternatives over the 12 months to December 2019 to boost returns.
In the Q4 survey, property jumped 17 places in popularity to first place out of 26 since Q3, hedge long/short equity was second most popular moving up from fourth, and infrastructure came in at third dropping one place.
On the other side of the spectrum, the least popular asset classes were developed market corporate bonds, US equities, and developed market high-yield debt.
The head of portfolio management at Frankfurt-based Vermögensmanagement Euroswitch, Thomas Böckelmann, said he was negative on both the German and global macroeconomic outlook.
“In general the global economy is in big trouble but this is not caused by the economy or market participants, it’s caused by politicians worldwide,” he said.
“Brexit, [Donald] Trump, and the trade war have changed normal circumstances completely. Instead of uncertainty that we can quantify, we have unpredictability in the market outcomes as they are politically dominated.”
Optimism
Despite being surprised with the country’s poor economic figures for 2018, investment firm Titus Gesellschaft für Finanzdienstleistungen’s managing director, Stefan Schrader said he was still positive on the macro side.
Munich-based Schrader pointed to a similar situation during 2013 when Germany’s GDP grew by 0.6% and then accelerated by 2.2% in the following year.
“The economy will be strong again this year but Germany is suffering a bit right now. The equity market will depend on the outcomes of Brexit, Italy’s economy, and China’s slowdown and trade war with the US,” Schrader said.
“If you’re looking long term then it’s time to buy because Europe is cheap, but short term it’s difficult to say because the country is suffering. But I predict a 10% to 20% upside on equities this year and more downside and drawdowns because rates are so low.”
European fund managers are also positive, indicating that their highest equity market allocation was towards Germany at 19%, despite a 10% drop since December, according to Bank of America Merrill Lynch’s (BofAML) January survey.
Auto issue
Schrader noted that Germany’s car sector was struggling but said the companies that were in trouble did not have much connection to the economy but rather had made some wrong decisions. He said that the sector had also been overvalued.
The BofAML research said that the auto sector in Europe had taken the biggest beating of all sectors this month.
“Historically autos have outperformed market 75% of the time on a three to four week basis when positioning has been this low,” the firm said.
In January almost 40% of fund managers said they would be underweight the sector, compared to 12% in December 2018.
Böckelmann said the automobile industry was a major issue for the country that had been caused by politics dominating Germany.
“What we did over the last couple of years is pretty phenomenal – we just destroyed our energy industry by cutting off nuclear plants and now we have no reliable power support to our industrial sectors. Big firms were forced to cut down production because of this,” he said.
“Even more disastrous is the automobile industry where you have a German government being open minded to destroy or put in danger 10 million employees and one of the biggest tax payers in our country just to fulfil strange limits on air pollution.”
Böckelmann said the result of unpredictability in politics led to chief executives losing confidence in politicians finding the right answer and thus stopping investments to develop power plants and manufacturing plants.
“Right now there is a window of opportunity for three to six months where politicians can fix the major problems. The election campaign in the lead up to the EU elections will see new debates on euro targets, what is needed for oil support, economics, and so forth, and this might help,” he said.
“If this window over the next three to six months is not used to regain confidence within the industry and market participants, a recession is more and more likely.
“We are a believer in common sense and as soon as politicians will accept reality they will come up with a solution.”
Liquid alts over bonds
With this tricky environment, Böckelmann said regular diversification methods through the use of bonds did not work.
He said in normal circumstances bonds could be used as a diversification method when equities were in trouble as fixed income product prices would rise.
“This diversification mechanism doesn’t work anymore for Europe-based investors as interest rates are at zero or negative so there is no positive diversification effect by bonds anymore. So, you need to have a bond replacement,” he said.
“We think that liquid alternatives such as hedge long/short strategies are the right assets to replace bonds in particular typical euro denominated sovereign bonds in a multi-asset portfolio.”
The portfolio manager said one of his top five funds was Pitet’s liquid alternative Agora I fund. While equities had a difficult 2018, the Pitctet fund made a return in 2018 at 4.1%, according to FE Analytics.
The only other fund in Böckelmann’s top five that made a return last year was equity fund BB Adamant Med Tech and Services I at 18.3%.
Thomas Böckelmann top fund returns three years to 31 December 2018
Source: FE Analytics
Böckelmann said his other top equity funds at the moment included AB Global Core Equity Portfolio I and Hermes Global Emerging Markets F Accumulation.
For bonds he liked Degroof Petercam Asset Management Bonds Emerging Markets Sustainable F.
All the funds over the three years to 31 December 2018 made returns between 45.6% to 7.6%.
Infrastructure, EM, and gold
For Schrader, infrastructure, emerging markets, and gold mining funds were at the top of his list.
He said he liked the infrastructure story in the US as he believed the US would be net exporting energy in the next couple of years and infrastructure still needed to be build to deliver oil and gas resources to refineries.
On emerging market equities, Schrader said he had direct exposure to India, Latin America, and Russia as performance drivers.
Schrader said he liked gold mining funds as a leverage for when equity markets dropped.
“The valuation of gold mines have become cheaper since the industry deleveraged their balance sheets and they have less downside than equity markets,” he said.
“While I think equity markets will be stable this year and we’ll see positive performance I will buy goldmines because I’ll take the upside from equities but if I’m wrong I’ll have less downside than the rest of the equity markets because gold mines already had a big crisis for almost 10 years so they’re cheap.”
