Fund manager Peter E. Huber: This is how investors can benefit from a recession – an eye on China stocks

• Negative economic data
• Three phases of a recession
• Thinking outside the box is recommended

Peter E. Huber: This is how investors should react now

Peter E. Huber has become an integral part of the German stock market landscape. The “old master” of the German fund industry, as he is called on the website of his financial advisory company Taunus Trust, can look back on more than 50 years of experience in the market. He has also been active as a fund manager for 30 years. With the Huber Portfolio SICAV, the stock market expert offers an asset management fund that aims to increase assets as part of a countercyclical investment strategy.

Anyone who, like Huber, has seen all the crises on the market come and go will probably be surprised by only a few developments. And so he recently gave an assessment of the current situation on the trading floor, which is currently particularly marked by monetary policy measures and geopolitical uncertainties – and revealed which countercyclical investment strategy he is pursuing.

Recession can only be detected with a delay

Although the US Federal Reserve Bank, the European Central Bank (ECB) and the Swiss National Bank (SNB) recently left the key interest rate untouched in view of declining inflation rates, interest rates are still at a high level. So far, the monetary authorities have not announced any interest rate cuts very soon. Accordingly, there are still concerns on the market about an economic slowdown in the Western economies, which could lead to a recession.

For Huber, too, the economic downturn is not yet off the table, as he explained according to “Institutional Money”. The problem: Recessions can only be recorded statistically with a delay and only come to light when the country has been in a weak phase for a long time. “So when the FAZ or the NZZ announce on the front page that Europe is in a recession, we are usually already in the middle of it,” said the market observer.

Purchasing manager indices paint a bleak picture

Various economic data can be used as an indicator of whether a recession has occurred, but Huber named one data source separately. “Purchasing manager indices (PMIs) are also a good indicator,” says the expert. The index for the manufacturing sector in the Eurozone has shrunk significantly over the past few months and stood at 43.1 points in October.

According to Huber, central banks would normally react quickly to such a level of data and reduce interest rates sharply in order to counteract the economic downturn. Instead, the ECB is continuing to actively slow down economic development, which Huber believes is a risky undertaking. “Firstly, the inflation rate is already declining, and secondly, the main drivers of inflation (energy and food) cannot be influenced by interest rate policy. And the higher interest rates rise, the fewer apartments are built and the more rents rise. This cannot happen in the future the ECB’s intentions,” criticized the market veteran.

Favorable entry opportunities

Nevertheless, a market environment affected by a recession could be worthwhile for investors, as Huber further explained, according to the online portal. If the purchasing manager indices are well below 50 points, this could be an indication of an attractive entry point. According to the expert, a recession can be divided into three phases, which are differentiated by price movements on the stock market. “In the first third of a recession, prices often decline significantly, in the second third there are only slight price losses and in the third third there are often the strongest price gains within a stock market cycle,” says the fund manager. “The challenge is to detect a recession, and you don’t know how long it will last.”

Uncertainty in the market – but no sell-off

However, such a sell-off as can be seen in the first phase of a recession has not yet taken place, said Huber. The “Magnificent Seven”, as Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla are currently called due to their future viability on the stock market, have still been in positive territory since the beginning of the year. Although there is certainly a sense of uncertainty among investors, there is still a sense of relaxation, which can also be derived from the lack of crisis protection for many investors, said Huber. In addition, analysts continue to assume a year-end rally.

The Huber Portfolio SICAV is also still heavily invested in stocks. The proportion of the entire portfolio is approximately 65.6 percent, followed by approximately 16.1 percent bonds, 10.4 percent foreign currencies and 7.7 percent commodities.

Unpopular, undervalued and underweight: Chinese stocks have fallen in favor with investors

According to Hubert, a classic, countercyclical investment is investing in Chinese stocks that meet the 3-U criteria. The stocks from the Middle Kingdom are currently unpopular, undervalued and underweighted. The reason for the lack of popularity of China stocks is, on the one hand, the weak real estate market, but also the general weakness of the economy, the development of which fell significantly short of expectations after the end of the Corona measures. Other problem factors include the high level of over-indebtedness of Chinese shadow banks and the high level of debt Youth unemployment. “It’s no wonder that the experts almost unanimously declare Chinese stocks uninvestable and that investors are throwing their securities onto the market in droves and fleeing,” said the asset manager, with a view to the declining direct investments in China from abroad.

Forward-looking stocks in the Middle Kingdom

In fact, the People’s Republic’s economy has significantly more to offer than the market currently gives it credit for, Huber continued. “The Middle Kingdom is not only the absolute market leader in solar panels, but also a leader in battery technology and has become the world’s largest car exporter,” he praised. “Numerous patents are held in the field of artificial intelligence.” In addition, according to official data, the country can boast economic growth of five percent and an inflation rate of zero percent.

Just as Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla represent the “Magnificent Seven” of the US tech industry, Chinese tech giants with strong future viability can also make a name for themselves. Here, Huber named Amazon competitor Alibaba, internet giant Tencent, online retailer JD.com, search engine operator Baidu.com, Tesla rival and electric car manufacturer BYD, and drug researcher WuXi Biologics as positive examples. These also have the advantage that they are “valued significantly lower” than their US counterparts.

Risks remain

Nevertheless, investing in Chinese stocks also brings risks, as Huber admitted. Some Chinese shares are already not tradable abroad due to the country’s trade conflict with the USA. “Perhaps our American friends will at some point ban the buying and selling of Chinese stocks, as they have already done with Russian securities,” said the fund manager. “Nevertheless, the risk-reward ratio on the Chinese stock market has rarely been as favorable as it is today.”

Editorial team finanzen.net

This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.