Market developments have made the ‘human factor’ indispensable for asset management

April 18 2014

Fund Manager Dr. Jens Ehrhardt: Continental companies at historically low valuations.

At present, mathematically modelled performance plays a more secondary role within the financial and capital markets. Other factors are being pushed to the fore by political decision making, and this is having an impact: “Psychological factors can only be assessed subjectively. The human factor in the form of an active portfolio manager is thus gaining ever greater importance for the asset management industry”, says Furio Pietribiasi, Chairman of the Board of Directors of GAMAX Management AG. Dr. Jens Ehrhardt, CEO of DJE Kapital AG (DJE), sees a good time to get into equity markets, despite the ongoing battle against the European debt crisis. Continental companies are now at historically low valuations comparable to levels seen in the wake of the 2008 financial crisis, but on considerably sounder footing. Asian markets continue to offer the best long-term risk/return profile.

“Interconnections between global capital and financial markets have grown enormously. The complex dynamics cannot be understood using mathematical models,” according to Furio Pietribiasi, Chairman of the Board of Directors of GAMAX Management AG (GAMAX).

Pietribiasi says that pure quant models are insufficient to deal with the psychological factors that have dominated the markets, especially recently. The ‘human factor’, meaning the subjective assessment of market development by one or more portfolio managers, he says, is an indispensable element for success. 

“Sentiment indicators are a proven tool when it comes to better grasping the often emotional rather than rational decisions made by market participants. Of course evaluating macroeconomic factors still remains the key basis for investment decision making,” says Pietribiasi.

Ehrhardt: Solving the Sovereign Debt Crisis will require Political Intervention

Markets continue to watch with bated breath the attempts to tackle the sovereign debt crisis facing the eurozone countries. The main danger lies in the risk of contagion throughout the Mediterranean region, including France. 

“Political intervention currently seems to be the only answer to counter the turmoil facing financial and capital markets, however, the indeterminable nature of political decision making is an obstacle to effective fund management,” according to Dr. Jens Ehrhardt, CEO of DJE Kapital AG, which handles fund management for GAMAX Management AG. Yet, he says, if politicians were to stay out of the matter altogether, this would undoubtedly lead to a natural, yet chaotic, winnowing out of the debt-strapped economies – which would make a collapse of the euro highly probable.

European equities: favourable valuations, excellent fundamentals

The continuing uncertainty has resulted in attractive stock valuations on European equity markets.

“As was the case in the wake of the 2008 financial crisis, there are many bargains to be had looking at current valuations of many stocks,” says Ehrhardt. “The difference between then and now, however, is that many companies today are on a more solid footing as a result of past restructuring and deleveraging, giving rise to greater upside potential in the event of positive news,” he explains. Then, the key is: to have the right investments in place.

In Europe, the key sectors to target are those profiting from the global megatrends, such as increasing consumption and demographic growth, or rising demand for food and healthcare. Ehrhardt sees good prospects for some cyclicals, such as food manufacturers (e.g. Unilever) or healthcare providers (e.g. Fresenius). Investments in the European periphery, on the other hand, he avoids. The fund manager is also careful when it comes to companies with excessive exposure to bonds from these countries, such as French commercial banks.

USA: election-year risks and opportunities

Campaign season is in full swing this year in the US. A new President will be chosen in November. There a varying opinions with respect to the economic implications of a US election year. The incumbent President, Barack Obama, is currently favoured to win another term. One effect of his intended tax reforms is to subdue investor optimism. The targeted reforms would initially have a negative impact on economic performance. However, they hold out promise for the economy over the long term. “The long-term effects of the liquidity measures implemented to bolster the US economy are currently almost impossible to foresee. They were, however, essential to prevent a stalling of the system or even a system collapse,” says Ehrhardt. In this respect, every measure that served to keep the motor running was beneficial.

Emerging markets offer the best long-term risk/return characteristics

“After the flight of capital in 2011, there is a good chance that emerging markets will make a comeback among investors this year. The largest emerging markets are already driving expansion of worldwide GDP,” according to Ehrhardt. 

Asian markets offer the best long-term risk/return characteristics. In its current five-year plan, the government of China is focussing on growth in domestic demand, and away from its former emphasis on fixed asset investment. This should provide for new impetus. Another source of growth could be the start of monetary policy loosening in China, which is probable given the decline in inflation.

For now, smaller emerging markets have not gained the same importance as their larger counterparts like China, India and Brazil, but DJE’s Erhardt is convinced that these will continue to grow in the future, especially the frontier markets in Asia which he believes, will develop to become a major force behind growth over the coming decades.

Given the grim state of many national budgets, investors must reassess the risk/return profile of sovereign bonds with respect to their role in asset allocation. Another topic of debate is the loss of confidence in paper money. 

“In addition to the proven method of shifting investments to gold and other real assets like real estate, investors should also look into solid, actively managed equity investments as an alternative way not only to protect their wealth, but also to build it,” says Furio Pietribiasi.