Top fund manager Klaus Kaldemorgen: "The German economy must change its business model"

Created: 08/21/2022, 09:50

By: Thomas Schmidtutz

Klaus Kaldemorgen: The DWS fund manager sees German companies at a turning point.

© DWS

Germany's best-known fund manager, Klaus Kaldemorgen, sees great dangers because of the dependence of German companies on China and calls for a realignment.

Munich/Frankfurt - The financial expert Klaus Kaldemorgen (68) has asked the German economy to change course in view of the Ukraine war and the West's conflict with Russia.

The dependence of the German economy on China has "reached levels that lead to major dependencies," Kaldemorgen warned in an interview with

.

The "mystification of globalization" must "come to an end now".

In the future, Germany will have to “do a lot of things itself again,” said the investment expert.

Kaldemorgen is considered the best-known German fund manager.

With a volume of around 13.5 billion euros, the fund he manages, DWS Concept Kaldemorgen, is one of the largest investors in Germany.

Mr. Kaldemorgen, Russia is gradually turning off the gas supply to Germany and other European countries because of the Ukraine war.

How dangerous is the development for the German economy?

The significantly reduced gas supplies from Russia hit German private households and companies alike – but with different consequences.

When it comes to heating, this will certainly become a problem for many consumers.

But many companies would be faced with a complete production stop in the event of a delivery failure - and Germany would therefore face a recession.

What would that mean for the stock exchanges: Is there a scenario like that at the beginning of the corona pandemic in spring 2020, when the virus paralyzed the German economy and the Dax crashed to around 8400 points?

There are certainly parallels to the Corona crisis.

This applies above all to the business operations of many companies.

Here again, there could be a complete shutdown practically overnight, but this time mainly in industry and not in services.

But there are also differences: In the case of Corona, the central banks and the state were able to step in.

At that time, the central banks pumped massive amounts of money into the market.

The states then redistributed the money and kept the economy going.

Added to this was the plentiful supply of money, which was also a blessing for the capital markets.

We won't have that anymore.

Rather?

Unlike 2020, we currently have a certain lead time.

So I can hardly imagine that this time we will panic like at the beginning of the Corona crisis.

But yes: If the Russian gas deliveries fail, the Dax should fall significantly again compared to the current level.

However, a gas stop would be considered a temporary problem.

In 2023 there will certainly also be plenty of gas flowing from other sources.  

Concerns about energy security in Germany are by no means the only reason for the growing nervousness on the financial markets.

Many investors are also concerned about the rising inflation and the reaction of the central banks.

Is the correction of the loose interest rate policy for the financial markets possibly even the greater danger?

Energy is essential for the economy.

Therefore, stopping Russian gas supplies would probably be the greater catastrophe.

Rate hikes, on the other hand, are part of an economic cycle.

However, the last major round of interest rates was in the 1970s.

At that time, the stock markets also slumped in double digits, but then recovered again the following year, despite significantly higher interest rates.

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After initial hesitation, the US Federal Reserve is now taking radical action in the fight against high inflation.

Only on Wednesday did the Fed raise its key interest rate by 0.75 percentage points for the second time in a row.

Given the tough course, many economists fear that Fed Chairman Jerome Powell could stall the US economy and plunge the world's largest economy into a recession.

Do you share this concern?

Central banks have almost never managed to achieve a soft landing when raising interest rates.

Instead, rate hike cycles have resulted in recession in most cases.

Unfortunately, this scenario has to be seen as the most likely one now.

In the US, the economy could slide back into recession in the fourth quarter of 2022 and the first quarter of 2023.

Should that happen, however, the Fed is likely to put the brakes on interest rates again and take countermeasures.

The US dollar has recently appreciated significantly against the euro.

The development makes our energy imports more expensive and thus drives inflation.

Conversely, companies from the euro zone are becoming more competitive.

In your opinion, which effect predominates?

That depends on the respective industry.

It used to be said that a strong dollar and a weak euro are good for an export nation like Germany.

I no longer believe that, because such a currency development means that there is less incentive to further improve one's own competitiveness.

At the same time, energy is becoming even more expensive for companies in the eurozone.

The bottom line is that I see this development as rather negative.

But the central question in this context is: why is the dollar appreciating so much?

And there is your explanation?

We believe that it is currently simply more lucrative to move assets to the safe haven of the US dollar than to leave them in the euro area.

For US bonds with a two-year term, there are currently around three percent interest, two-year Bunds yield 0.2 percent.

That's why many investors are switching to the dollar.

In the fight against inflation, the European Central Bank has taken much more time than the Fed.

This has earned the ECB some harsh criticism from many economists.

How do you rate the interest rate policy of the ECB?

Have the currency watchdogs shown too much consideration for highly indebted countries like Italy?

The ECB is certainly faced with a delicate balancing act here.

It is obvious that the ECB has waited longer than the Fed to raise interest rates - out of consideration for weaker countries in the euro zone.

It is all the more to their credit that they have now unexpectedly raised interest rates by 50 basis points.

However, the ECB has watered down this step somewhat with the new TPI programme, which is primarily aimed at propping up countries like Italy and holding the euro zone together.

But the step was overdue.

DWS fund manager Kaldemorgen: "We have to reduce our dependence on China"

The Russian attack on Ukraine has raised many questions, including how we intend to deal with the authoritarian regime in China in the future.

This is a completely different order of magnitude.

Volkswagen makes about 40 percent of its sales in China.

BASF is planning a plant there for 10 billion euros.

Isn't there a much greater danger for the German economy here?

In fact, I see the situation as very problematic.

China has its own agenda, which is not ours.

Anyone reading the latest signs correctly should recognize that we need to significantly reduce our dependence on China, both for exports and imports.

We have reached levels there that lead to great dependencies.

The German economy must therefore start changing its business model.

Namely?

So far it has been like this: Germany imported cheap gas from Russia in order to use it to produce goods that we sell to China at high prices and to import other goods into Germany that were manufactured there at low labor costs.

This division of labor will no longer work.

In the future we will therefore have to do many things ourselves again.

This applies to sustainable energy production, but also to other goods such as semiconductors.

We have seen how vulnerable our global supply chains are.

The mystification of globalization must end now.

We will not fall back into the Stone Age.

But we have to turn globalization back a bit.

In the USA, has the debate about economic decoupling from China been going on for some time?

We have this discussion too.

The USA and Europe are already moving closer together again.

This is mutually beneficial.

For example, Germany obtains LNG gas from the USA, and Intel is building a semiconductor plant near Magdeburg for 17 billion euros.

Conversely, there is also a risk of stronger polarization with China and Russia.

What does that mean for investors?

Investors should be cautious, but not fearful.

Because when you're scared, you're selling at the wrong time.

Anyone who is already invested in the stock market should not sell now.

I doubt whether now is the right time for new engagements.

Perhaps it's better to keep the powder dry, watch the situation through the third quarter, and then get back on track with the stock market.

I could imagine that buying opportunities will then arise again – also on the domestic market.

Klaus Kaldemorgen (68) is the best-known German fund manager.

© DWS

DWS fund manager Kaldemorgen: "Keep the powder dry"

You are pursuing a balanced investment strategy in the DWS Concept Kaldemorgen fund you manage.

However, the stock market environment is currently extremely turbulent.

How should medium-risk investors position themselves now? 

The DWS Concept Kaldemorgen fund reflects a relatively low risk preference.

We strive to allow no more than single-digit losses within a calendar year.

At the end of June, we had 43 percent of our investments in equities, seven percentage points of which are price-hedged via derivatives.

27 percent of the portfolio is in bonds, mainly US government bonds, 20 percent is cash.

In view of the range of fluctuation, we currently do not want to enter into a higher proportion of equities.

In the medium term, however, stocks remain more attractive than bonds.

Which stocks are you keen on right now?

The two largest sectors are currently pharmaceuticals and telecoms.

If we add utilities and consumer stocks to that, that's more than half of our entire equity portfolio.

How do you see the stock markets for the next few months?

The outlook for the stock exchanges in the coming months is not particularly promising.

Because the decline in profits and the falling margins have probably not yet been sufficiently taken into account by many analysts in their estimates.

Take the US stock exchanges, for example: the analysts' consensus estimates on average still assume that profits will rise in the current year.

On the other hand, we expect a decline in profits.

What does that mean for investors?

Investors should be cautious, but not fearful.

Because when you're scared, you're selling at the wrong time.

Anyone who is already invested in the stock market should not sell now.

I doubt whether now is the right time for new engagements.

Perhaps it's better to keep the powder dry, watch the situation through the third quarter, and then get back on track with the stock market.

I could imagine that buying opportunities will then arise again – also on the domestic market.