"Interview with Dr. Jens Ehrhardt, CEO of DJE KapitalAG"

Consequences for cost of living, agricultural as well as commodity markets - questions and answers

Russia's war in Ukraine in addition to all the human suffering is causing major global economic challenges - especially noticeable with regard to energy, commodity and agricultural prices. An overview for investors and consumers:

Inflation is rising steadily. Nevertheless, the ECB has decided to leave the key interest rate at zero percent, but to reduce bond purchases faster than planned. What does this mean for companies, for example in the sectors of "agriculture" and "food", what are the ways out?

In view of the current economic risks, interest rate increases are probably counterproductive and could further depress the stock market. It would therefore be positive if politicians would take swift action to minimize the loss of purchasing power caused by inflation. The strategic course set in energy and agricultural policy will be crucial in this respect. In any case, the former " tank or plate" discussion is likely to come back into focus in this context. In view of the shortage of agricultural goods and energy, however, we are in a completely different starting position today. In addition to solar and wind energy, biomethane from fermentation residues and liquid manure should therefore be promoted more strongly again. In general, food production needs to be supported significantly in this environment. This should also provide a tailwind for shares in this sector. 

Wheat prices on the world markets are chasing one record after another. Fertilizers are also becoming more expensive. In addition we hear about shortages in corn, rapeseed and sunflowers. What does this development mean for food prices in the coming weeks and months?

The decisive factor will be how long the conflict in Ukraine lasts. At present, there is a shortage of diesel for agricultural machinery in particular, but also of employees who would actually have to manage the upcoming sowing. As a result a 30 to 40 percent drop in harvest volume for the 2022/23 marketing season is not unrealistic. Due to seasonal factors it will not be easy to compensate for this crop shortfall at the same time with supplies from other regions. The African countries in particular will therefore now try to cover their additional requirements in Australia, India, Argentina or the USA. In this context the behavior of some countries to completely stop exporting their own grain is driving up prices.

Rising gas prices in turn are making mineral fertilizers enormously more expensive so that many farmers will try to curb their use of fertilizers or switch to organic materials such as liquid manure in this growing season. As a result crop losses of up to ten percent cannot be completely ruled out even here.

What are the implications for individual sectors and the capital markets?

The foreseeable shift in trade flows in agricultural goods should ultimately provide some additional business for internationally active agricultural traders in particular. In the fertilizer sector US producers in particular will benefit from comparatively better gas supplies. The food sector, on the other hand, is struggling with rising raw material costs.     

High energy prices can have an indirect impact on the economy. If consumers have to spend more money on energy, they have less money for other goods. Which industries are particularly affected by this drop in demand?

In general, consumer spending on non-essential goods and services, such as travel, will tend to fall. Some people are also more likely to postpone their planned car purchases. Tthe food retail sector and discounters in particular should be far less affected by the loss of purchasing power.

Are value stocks better "protected" against such repercussions than growth stocks?

Rising interest rates are fundamentally negative for growth stocks. Due to the U.S. economy and the Federal Reserve's interest rate hike policy, interest rates are likely to continue to rise - which favors cyclically sensitive value stocks more than growth stocks. However the massive losses in growth stocks in the months before have meant that some growth stocks are no longer expensive, but look promising in terms of growth and superior market position. However as long as the global economy continues to develop positively value stocks are likely to have the better risk/reward ratio. Quite in contrast to the past 13 years.

In January, the market has already gone far this year, especially for palladium, but also for gold. Is gold still an option, after all? And are there alternatives to it, e.g. silver or platinum?

In dollar terms gold is no higher today than it was in 2011. In view of the recent inflationary trends and those of the past eleven years gold should be able to rise in the medium term.  In the short term we are in overbought territory with too many optimists, but after the recent five percent setback gold also looks promising again. In general all precious metals should be promising in light of growing investor interest as well as increased industrial and jewelry demand. Gold is now represented in investor portfolios at an average of less than two percent. In the post-war period these percentages were much higher on average often around ten percent.

Is the current situation comparable to the first major oil crisis in 1973 and the stagflation at that time?

The dependence of the global economy on the price of oil has steadily declined in recent decades. At the moment there is no danger of stagflation. Although the inflation rate in the USA and Europe is high compared to the past 40 years growth rates are likely to remain high. This is partly due to less dependence on oil and partly because oil prices are still not too high in real terms. If the U.S. central bank raises interest rates for a longer period of time the risk of stagflation will grow - but this is not yet visible today. In fact US interest rates are still very low by historical standards. And even an increase of one percent in a year would still be low especially against the backdrop of high inflation.

The U.S. is significantly less dependent on Russian energy supplies than Europe, especially Germany. Are U.S. stocks the better choice now?

European stock corporations are likely to suffer considerably in some cases from the high energy prices. Even before the embargo, the USA imported far less than one percent of its oil requirements from Russia. The U.S. economy is benefiting from the crisis in the sectors of armaments, the oil industry and the agricultural sector.

The sharp rise in food prices and the rising prices of artificial fertilizers indicate substantial profit increases for agricultural stocks. Oil stocks benefited even before the crisis due to very low depreciation (few exploration expenditures). Defense stocks have risen by 15 percent since the crisis and are also benefiting from German rearmament.

What is recommended for investors to counter inflationary monetary depreciation with positive performance?

Due to the latent risks outlined above, investments in broader-based equity funds are preferable to direct equity investments. Our DJE - Agrar & Ernährung and DJE - Gold & Ressourcen can offer investors a certain degree of inflation protection.


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