NESTOR Europe - Quarterly Report 3/2022

Markets price in recession

Construction and retail suffer from higher interest rates and high inflation

With a decline of -34.97% (V share class), the NESTOR Europa fund performed similarly weakly to the S-DAX (-36.21%) and M-DAX (-36.31%) in the first three quarters, while the benchmark index MSCI Europe lost -17.08%. Construction and retail in particular suffered from higher interest rates and high rates of price increases.

Inflation politically induced?
In the run-up to a recession, the sky often shines brightly on the markets. Companies have full order books, are posting record profits and are expanding. But suddenly the prices of supplier parts and raw materials rise. In addition, there is a lack of skilled personnel and production is delayed. These phenomena are not new, they are in every textbook. However, many of the current bottlenecks seem somewhat strange and apparently unnatural. This is especially true of the abstruse zero covid tolerance in China, since it is actually common knowledge that you cannot eradicate seasonal cold viruses. Consequently, the tensions created by this have a very negative effect on international logistics flows and thus a strong inflationary effect. The consequences of the war of the former communist empire Russia against Ukraine have the same effect. Both sparks ignited the danger of inflation, which has been laid for years, but for which the major Western central banks also bear responsibility. "Nous sommes en guerre", said French President Macron at the start of the Covid measures. But who is actually fighting whom here? Because the big loser, as always, is the world's population, which is being successively expropriated by the effect of "measures" and "sanctions". But the middle classes are also being deprived of their livelihoods. This is especially true in Germany due to the destructive energy policy, which in large parts almost seems like sabotage.
Germany is sawing off its own branch - Scandinavia is leading the way
The fact that national economies can also be developed wisely and with foresight is shown by the very high share of renewable energies in the Nordic countries. In Norway, for example, about 92% of the energy comes from hydropower and in Denmark about 50% from wind power. Sweden, on the other hand, gets about 46% of its energy from hydropower and about 17% from wind power. The figures make it clear that these countries obviously thought about the future in good time. Unfortunately, Germany was driven to wear and tear during the Merkel era, which can be easily seen in the disastrous appearance of the German Federal Railway. In this respect, we will continue to keep a closer eye on the far north. Since these countries have also seen sharp price declines and currencies have also weakened noticeably, we see many great opportunities for our portfolio here.

Glimmer of hope on the horizon?
So far, the environment for equities still looks quite modest. High inflation is forcing central banks into overdue interest rate hikes and "hawkish" statements. However, the bond markets have already reacted violently, leading to a veritable bond crash. In unison, the outlook for many sectors has cooled. As a result, numerous negative factors, such as supply bottlenecks, should weaken noticeably. In 2023, the inflation rate will also be relieved by the so-called base effect. As gas prices in particular and also the important container freight rates have already fallen sharply, positive news could come from this side in the first quarter.

The environment for equity investments is likely to remain bumpy. However, in such an environment, we have already sown the seeds for significant outperformance several times in the future. Our preferred competitive value builders are extremely flexible and adapt quickly to new situations. They also offer opportunities for acquisitions and market share gains for which weaker competitors lack the capital strength. Smart investors should also think long-term and use periods of stress for acquisitions.

Dirk Stöwer, Kontor Stöwer Asset Management GmbH