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Market Insight 2011 Q4 Munich

It will be no surprise to hear that German investors have significant doubts over the future of the eurozone. The general view is that the currency will not be falling apart as it is more than a simple question of whether there is a currency and monetary union or not. However, the concern over any investments linked to the sovereign debt crisis in Europe has been mentioned during every interview.

Confidence in politics has been damaged and investors increasingly refer to a paradigm shift in the role of politicians. From now on they will feel able to make far bolder interventions in the economy and in monetary and fiscal decisions.

However, this change is combined with the opinion from most of our interviewees that the politicians are out of their depth when it comes to these areas of policy.


News Roundup
• The resignation of Jürgen Stark at the European Central Bank has been interpreted as a German vote of no confidence in EMU management.
• Exiting the euro is not only nearly impossible, but will also be the most expensive solution for Germany a report from the Otto Beisheim School of Management has found.
• Germany and France are looking to finalize a package to fight the euro debt crisis and to support European banks by the end of October.
• The German government is looking for new ways to support Greece and has started an initiative to get small and mid-size companies to invest in Greece.
• Michael Kemmer, head of Germany’s banking federation, said banks should first take a 21% loss on Greek debt already agreed before further measures are discussed.
• Local elections in Berlin have confirmed Klaus Wowereit is to remain the mayor, with either the Green Party or Merkel’s CDU looking to form a coalition with him. The FDP missed the 5% hurdle and the biggest surprise was the 9% won by the liberal, anti-censorship Pirate Party.

Hot Topics
What everyone is talking about
• Are European equities bouncing back?
• Emerging Markets – still more to come!
• Which currency can deliver?
• Has Absolute Return a future?
• Private Equity opportunities

Fixed Income

Traditional fixed income products, in particular bonds, have not delivered over the past months and no interviewee intends to make significant amendments to their allocation any time soon. A particular shift can be noticed in the duration of the bonds investors are looking at – the shorter, the better.

The consequences of supporting the PIIGS states and in particular Greece mean that a default or exit from the euro will impact on many levels, reaching into many balance sheets in financial institutions, and possibly other sectors also.

When considering the alternatives, risk-averse investors don’t see many other opportunities. According to the investors we spoke with, the safest bet is still with emerging markets. Government or corporate debt is still favoured in local currencies, especially since the dollar is generally expected to carry on losing value.


The asset class with the highest expectations in the long run is still equities.

No investor has made particular suggestions on regional bets, although the opportunities found in the Scandinavian countries have been noted.

Overall it seems sector bets are favoured, with energy and technology having been mentioned. In addition, it was mentioned that exporting companies will be faring best as they benefit from weaker currencies in their home markets.



Alternative investments have enjoyed more and more interest – it’s a long-term trend toward more sophisticated portfolio construction techniques – although the trend is still toward the simpler end of the hedge spectrum: long/short funds and funds of hedge funds, for instance.

Regulation still plays a role when it comes to asset allocation decisions, but it remains to be seen how soon institutional investors will start to significantly look into various opportunities in the hedge fund and private equity sector.

Absolute Return

Absolute return has more and more been a strategy many investors favour. The multi-asset approach essentially means more power and responsibility for the fund manager when it comes to asset allocation. Our interviewees do understand the value of this, although a question mark remains of whether institutional investors will want to relinquish that much control.


Commodities are expected to climb with gold leading the pack. Whether this growth is sustainable remains to be seen, but according to the investors we spoke with, the asset class will continue to benefit from the global trend of investors increasing their allocations to real assets.


Overall, the challenge remains to deliver the sought returns to clients, in particular for pension funds and insurance schemes. Risk budgets are very strict, making it more difficult for investors to try out newer strategies. A review of the way risk is being calculated seems unavoidable, with some investors suggesting that the herding culture needs to come to an end.

A solution however, doesn’t seem to be available just yet, which means for the moment, the focus for investors will remain on existing asset classes and product types.

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