Your questions, our answers

Ongoing inflation and a (possibly) imminent interest rate peak continue to influence markets. In our third quarterly update of the year, the portfolio managers responded to the following questions from participants and explained their views.

MaCRO

• Currently, many experts believe that the long end of the US yield curve will not continue to rise. How do you see this?

Ethna-DEFENSIV

• Do you already see the interest rate peak?
• With the end of the growth cycle approaching, are you considering a further increase in duration in the Ethna-DEFENSIV portfolio?

Ethna-AKTIV

• What contributes to the positive development at Ethna-AKTIV? Have there been adjustments to the process or the team around Luca Pesarini?
• Is the Ethna-AKTIV invested in China? What is your assessment of the renewed turbulence in the Chinese real estate market?

Ethna-DYNAMISCH

• Do you currently prefer American or European individual stocks?
• What are your current sector preferences?

MACRO

Currently, many experts believe that the long end of the US yield curve will not continue to rise. How do you see this?

Obviously, for once our view is in line with that of the experts. Joking aside, we do indeed believe that the long end of the yield curve, like the short end, has already peaked or is close to it. Unlike short-term interest rates, which are strongly influenced by central banks, the long end of the yield curve depends on growth and inflation expectations. Although we expect moderate growth in both the US and Europe now that growth has bottomed out, we believe this is sufficiently reflected in interest rates. The relatively constant long-term inflation expectations also do not justify a further rise in interest rates. Of course, in the event of an extreme surprise on one of the factors mentioned, this view would have to be questioned. If we are looking for asymmetries, this would be a classic example. Of course, interest rates could rise infinitely more than they fall from current levels. But if you ask the more realistic question of where the next 100-150 basis points of movement will come from, we think the probability of falling rates is much higher.

Ethna-DEFENSIV

Do you already see the interest rate peak?

In our view, we are very close to the peak in interest rates, but it is not impossible that the central banks in the US and Europe will raise rates again.

There are many reasons for a possible further tightening of monetary policy. In the US, while there are signs that labour market conditions have improved and inflationary pressures have eased, other factors point to the risk of persistent or even recurring inflation. The rise in crude oil prices, the Atlanta Fed's estimate of 5.8% annual GDP growth, recent retail sales data and the increased power of unions (and hence higher wage demands) could all contribute to rising prices and prompt the Fed to raise interest rates further.

In Europe, economic growth has been weaker than expected, but both core and headline inflation are currently running at 5.3%. Even the ECB's inflation forecast, published on 14 September, predicts a rate of 5.1% in 2023, 2.9% in 2024 and 2.2% in 2025, still well above the central bank's 2% target. Wage growth in Germany, Europe's largest economy, is also a contributing factor. It has accelerated and recently exceeded 6%, leading to real wage growth for the first time in a long time. We can therefore well imagine a further rate hike.

With the end of the growth cycle approaching, are you considering a further increase in duration in the Ethna-DEFENSIV portfolio?

We recently built a tactical long position in Bund futures and increased the duration to 4. Meanwhile, as the pendulum swings upwards in Europe, driven by stubborn inflation and a possible further rate hike by the ECB, we have closed the futures position and reduced the duration. The portfolio duration in Ethna-DEFENSIV is currently 3.1. Although we have recently taken tactical steps and adjusted our duration profile from time to time, our strategic outlook has not changed as we still expect slightly higher returns at the long end of the curve, especially in Europe. In the US, the situation is more complicated, with much lower inflation and strong economic growth. Even Fed Chairman Powell has made it clear that the central bank's job is not done and that a renewed acceleration in economic activity could force the Fed to raise rates further. Therefore, we will increase portfolio duration if we see stronger signs of weaker economic performance and slowing inflation, but for now we think such a move is premature.

Ethna-AKTIV

What contributes to the positive development at Ethna-AKTIV? Have there been adjustments to the process or the team around Luca Pesarini?

Basically, there have been no fundamental changes in the team or the process in the last three years. From our point of view, several factors are currently having a positive effect. Firstly, the focus - the concentration - on fewer positions, which are therefore invested with greater conviction, is having a positive effect. An example of this is the reduction of the currency position to just the US dollar and the Swiss franc. Smaller positions, which make a negligible contribution to performance, if any, but consume effort and, above all, attention, are no longer taken into account. The same applies to the implementation of the US-dominated core equity portfolio. Stable performance with less turnover and therefore more time for the crucial questions of individual allocation ratios. Second, the fact that the big macro calls of the last couple of years have been broadly correct. The resulting attractive risk-adjusted return has placed the fund in the top third of its Morningstar-rated peer group for three years running.

Is the Ethna-AKTIV invested in China? What is your assessment of the renewed turbulence in the Chinese real estate market?

The aforementioned turbulence in the Chinese real estate market, which has the potential to far exceed the scale of the Lehman bankruptcy, is worrying, but of course it also offers opportunities. At the moment, the whole economy and many individual companies are being taken in kin custody. Given that the Chinese government is well aware of the problem and has already launched a number of stimulus measures, there could be attractive opportunities in the short term. We deliberately take only a tactical position, which can amount to up to 5% via an index investment. Strategically, however, we rule out an investment in China, mainly because of the political uncertainty, but also because the long-term growth story is no longer right for us.

Ethna-DYNAMISCH

Do you currently prefer American or European individual stocks?

The US equity universe is fundamentally more attractive. Today’s most successful companies in the world have emerged from this huge domestic market with high levels of innovation. Many of them are global leaders and operate in sectors that should continue to benefit from structural growth trends (see next question). This is why our flagship fund - Ethna-AKTIV - focuses on this market.

In principle, we look for similar company characteristics in the Ethna-DYNAMISCH: a strong market position in a structural growth market with a robust balance sheet. However, we are somewhat more flexible in terms of market capitalisation preference and geographical focus. We are therefore also invested in European stocks that are on average smaller, but also market leaders. For us at Ethna-DYNAMISCH, the question of geographical selection remains a case-by-case decision. There are still attractive candidates on both sides of the Atlantic. However, the number of US companies on our watch list is significantly higher.

What are your current sector preferences?

In principle, our sector allocation results from individual stock selection. In stock selection, we focus on companies with structural growth. In other words, companies that benefit from long-term trends. Many of those - and also most of our portfolio stocks - are concentrated in the technology, pharmaceutical and consumer sectors, which benefit from structural developments such as digitalisation, demographics and wealth growth.

We generally avoid sectors with no structural growth or with excessive cyclicality. However, we do occasionally make tactical moves when there are significant divergences between price and fundamentals. This has been the case in the past, for example, with European banks. As we do not currently see any compelling or tradable divergences in these tactical sectors, we continue to favour the structural growth sectors of technology, pharmaceuticals and consumer staples.