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The big issues: German veterans go head-to-head

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Four of Germany’s veteran managers answered questions from leading fund selector Eckhard Sauren at the Fonds Professionell conference in Mannheim. Here is an overview of the highlights...

Click on the quotes below to read more on the managers' views

Dr. Jens Ehrhardt Dr. Bert Flossbach Peter E. Huber Klaus Kaldemorgen
Euro debt crisis
'The Achilles heel is in the economic recovery of southern Europe...' 'The whole debt crisis is a worldwide phenomenon...' 'You can imagine another haircut à la Greece...' 'Draghi has managed very successfully to take the risks out of the system...'
The 'great rotation' 'Higher yields from central banks can’t be good for the economy...' 'I think we can rely on central banks not to raise rates this year...' 'The risk of low yields was really underestimated...' 'The central banks won’t allow yields to rise...'
Inflation 'Germany will suffer from increased trade protectionism...' 'Inflation comes when there is a loss of trust in assets...' 'You can’t manufacture inflation...' 'In currency union you can’t please everyone...'

'All Draghi said was that the ECB will buy everything, which he really couldn’t have said without the backing of the Bundesbank. It was, fundamentally, a guarantee by Germany that it will pay for the euro. The Achilles heel is in the economic recovery of southern Europe where we still have 55% youth unemployment. The central banks can’t prevent countries going bankrupt or even create jobs. The only way is through currency devaluation – and a devaluation may come with an exit.'

'We also took a position into Spanish bonds in autumn of last year on the back of Draghgi’s comments in the summer. I think that the whole debt crisis is a worldwide phenomenon and that it is not being solved but is actually getting a lot worse.'

'We are in a transfer union. You can see that in the tightening spreads this year between Spanish and German government bonds. The dumb thing about investing in bonds is that the end result is always going to be a either a restructure or inflation. You can imagine another haircut à la Greece. Cyprus could well be the next.'

'Draghi has managed very successfully to take the risks out of the system. You can see that in the convergence of yields in European government bonds. I don’t think the debt crisis is over in Europe. Unless we see a stronger than expected economic recovery in South Europe, I think that countries will continue to struggle to meet their debt obligations this year.'

'One year ago, you could still say that corporate bonds were a good buy, now it’s even more difficult to find yield. It’s probable that we might even see a rotation from corporate bonds into dividend-paying equity strategies. Higher yields from central banks can’t be good for the economy and it won’t allow countries to repay their mountain of debt.'

'I think we can rely on central banks not to raise rates this year. I think that spreads will come down even further and that the year of the Great Rotation will come. The quotas with institutional investors in equities are still very low and has some way to go. Sentiment is still much worse than what we read in the press.'

'I think the risk of low yields was really underestimated. The phase of investing in bonds is running out but sentiment is really still very low and I don’t think a great rotation is taking place.'

'The central banks won’t allow yields to rise and I think we can expect investors to shift out of bunds and treasuries this year. There may still be opportunity to get into corporate bonds with longer duration but there you have some interest rate risk.'

'Nationalism is a risk. As an export-orientated economy, Germany will suffer from increased trade protectionism. It’s really necessary for Japan to devalue now and I think that looser monetary policy can only support our equity market.'

'Inflation comes when there is a loss of trust in assets besides real value assets. Then the only currency that is left with value is gold. People are pleased when they have somewhere to put their money. Whoever holds their money in bank savings accounts these days, can only expect to lose assets in the coming years.'

'You can’t manufacture inflation. You can try to produce as much as you like in steel or anything else but you won’t get inflation without a drastic currency devaluation. The only way you can get inflation is through a currency war. I’m of the opinion that we do not have inflation. Property prices are rising because people are buying properties because they are afraid of inflation. It’s a circular argument and will lead to false asset allocations.'

'I think it’s very difficult to argue that we are seeing inflation. The euro has strengthened recently but it’s hardly still a bomb-proof currency. For Germany the euro is too weak whilst for other countries it’s clearly still too strong. That’s what you get in currency union – you can’t please everyone.'

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