DJ Kapital, a German investment fund manager, entered Spain in March 2019, adopting the FMM method. Invented by founder Jens Ehrhardt, FMM rests on three pillars: fundamentals (how the business activity of the world’s largest economies is evolving); markets (momentum, trend, and direction in equities); and money flows (the amount of capital available in financial markets to move into equities). The firm has 17 billion euros under management, and its best-known fund is the mixed DJE Zins & Dividende.
What is their view on the macroeconomic situation after the recent European Central Bank rate cuts?
We maintain a positive outlook on the global economy. The cornerstone is the United States and the American consumer, who accounts for roughly 70% of US GDP. Tracking US consumer activity is essential for predicting future moves in equities, fixed income, and high-yield bonds. The euro area economy, while weaker than the US, is improving compared with six or twelve months ago. Strengths are visible in southern Europe’s tourism sector, early signs of improvement in Germany, and a more favorable European outlook than a year ago.
Beyond that, India has stood out as one of the strongest economies in recent years and is expected to continue growing solidly; even China remains a key unknown, particularly regarding its handling of its real estate crisis. Still, we believe that even amid a real estate downturn, growth near 5% is possible, and investors may find opportunities in China’s equity market, albeit not easily.
In response to your question, we think rate cuts are not yet essential. Inflation remains elevated in both the US and the euro area, so policy should be data-driven, and imminent rate reductions are unlikely. Even if growth slows, this rate cut cycle and potential ECB moves later this year could provide stimulation for the euro area and, by extension, the global economy.
Are concerns rising about inflation in the eurozone?
We see structural factors keeping inflation higher than in 2019. The main driver continues to be wage growth in recent years, but there are inflationary elements across most developed economies, summarized by three “D”s of inflation. First, demographics: aging populations in the US, Europe, Japan, and China reduce the labor supply and push wages higher.
Second, deglobalization. The current trend toward protectionism and relocalizing supply chains means extra costs for keeping a second supply line. Firms still produce in China but want an additional, localized chain as a precaution. This costs money up front and translates into higher prices over time.
The third “D” is decarbonization. The world has committed to rapid emissions reductions, which requires large-scale investments in new supply chains and power generation. This is costly and will show up in consumer prices and in the goods people buy, given energy-intensive transport and manufacturing. Inevitably, energy prices affect many facets of daily life.
And perhaps another “D” would be debt. Japan has faced a long debt challenge, but the US and the euro area, especially France and Italy, also carry higher leverage. With higher rates, servicing this debt becomes more expensive, feeding through to corporate costs and higher prices.
What are their expectations for US elections?
US elections carry substantial significance for the global economy and geopolitics. The polling shows Donald Trump leading nationally and in several key states. The team believes a high likelihood of a Trump reelection exists, though he faces ongoing legal issues. This scenario would affect foreign policy, China, Mexico, Europe, NATO, and tariffs. From a European perspective, a Biden administration might be preferable for economic policy given evolving deficits. If Trump returns, tax cuts could reappear, similar to 2016. In either case, fiscal policy is unlikely to swing dramatically in a single direction in January 2025, which shapes market expectations.
And how do they view European election results?
The shift to the right had been anticipated. Compared with recent elections dominated by green policies, recent results emphasize migration policy. France’s early elections surfaced as a notable development, mirroring events in the United Kingdom. This year is intensely busy with elections in India, the US, and Europe. Yet markets have largely ignored these political shifts, focusing more on external policy than on fiscal matters.
What is their view of Spain’s economy?
What matters most are inflation dynamics and how the ECB sees inflation across individual countries, not just the euro area as a whole. In Spain, inflation has risen to around 3.6%. With the ECB cutting rates, reducing this level remains a challenge. Overall, southern European countries benefit from tourism and a weaker euro. Spain, in particular, appears on a healthy trajectory, though high inflation will pose a challenge as ECB cuts take effect.
Where do they see opportunities in equities?
At present, the largest exposure in equities is to technology. Valuations are a concern, but they are offset by strong earnings growth, high margins, and abundant cash flow. Technology remains a structural driver of organic growth for the group. The financial sector, encompassing banks and insurers, is benefiting from higher rates. Insurance companies, in particular, are well positioned: they are raising premiums to offset inflation while investing new premiums to generate high returns.
And in fixed income?
The US dollar curve looks compelling right now. When investing in euros, higher US rates create a yield carry. Currency risk also matters, and the euro has benefited from this dynamic. In terms of risk, sovereign duration versus credit risk is considered. Corporate bonds are preferred, and a three-to-five-year window is viewed as a comfortable period to assess issuers.
What is DJ Kapital’s investment philosophy?
They describe themselves as highly active managers. They do not buy into the notion that capital markets are always efficient, nor that consensus about fundamental data remains correct over time. Consequently, value can be added through both asset allocation and stock selection.
Are they contrarian investors?
They are tactically contrarian but not by definition. Some claim contrarian performance is about being right rather than being rewarded for going against the crowd. If the consensus is right, they want to be part of it; if not, they are comfortable deviating. They do not chase benchmarks or competitors; they pursue their own path. If that happens to be contrarian, so be it; if it aligns with the consensus, that works too.