KENFO-Segment Investment Committee Meetings November 6-16, 2023

The KENFO Annual Asset Manager Conference took place again in late fall 2023. This year's theme was influenced by the global geopolitical crises and their consequences for the global financial markets and trade relations: The era of globalization is now being followed by a re-focus on national security through derisking and friend-shoring. Other topics included the transformation process and investors' need for reliable sustainability-related information.

Dr. Ndidi Nnuoli-Edozien: "The ISSB Standards: Better information for better decisions"

Dr. Ndidi Nnoli-Edozien kicked off the event with an overview of the new investor-oriented sustainability reporting standards (ISSB Standards) introduced this summer. She is a board member of the International Sustainability Standards Board of the IFRS Foundation, where she is involved in the development and application of the ISSB Standards. She has more than 20 years of experience in promoting and implementing sustainable development initiatives in the private, public and not-for-profit sectors in Africa and beyond.

Ndidi Nnoli-Edozien begins by explaining the motivation and objectives of the new ISSB standards:
The need of international investors with global investment portfolios for high quality, transparent, reliable and comparable reporting by companies on climate and other environmental, social and governance (ESG) issues has increased significantly. For this reason, international political decision-makers such as the G7, G20 and the Financial Stability Board have called for the development of a global "baseline" for sustainability reporting for capital markets in order to end the coexistence of voluntary initiatives and obtain comparable information.

The aim of the ISSB standards is to help companies publish their sustainability information in a robust, comparable and verifiable manner. The first two standards, which were published in July 2023, are IFRS S1 and IFRS S2: IFRS S1 contains a series of reporting requirements that should enable companies to inform investors about sustainability-related risks and opportunities that they expect in the short, medium and long term. IFRS S2 also sets out specific requirements for climate-related reporting and is designed to be applied in conjunction with IFRS S1. Both standards contain the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD).

The ISSB standards are designed to ensure that companies provide sustainability-related information alongside their financial reports. The standards have been developed for use in conjunction with any accounting standards. They are based on key principles of IFRS accounting standards, which are required in more than 140 countries. The standards are suitable for worldwide use and thus create a genuine "global baseline". This qualification was further confirmed by the recognition of IOSCO, the International Organization of Securities Commissions, in July of this year.

Dr. Ndidi Nnuoli-Edozien: "The ISSB Standards: Better information for better decisions"

Dr. Ndidi Nnuoli-Edozien, board member of the International Sustainability Standards Board of the IFRS Foundation


Joachim Fels: "From the savings glut to the shortage of capital: consequences for the economy, interest rates and financial markets"

Joachim Fels, who analyzed the global macroeconomic situation for more than 30 years as Chief Economist at Morgan Stanley and most recently at PIMCO, believes that society is experiencing a fundamental turning point. This also has noticeable consequences for the financial markets. 

Several drivers are responsible for this: geopolitical upheavals such as the Cold War between the USA and China, which has now been going on for several years, Russia's war of aggression against Ukraine and the recent outbreak of conflict in the Middle East following Hamas' attack on Israel. The advancing climate change. But also factors such as people's changing preferences regarding work and leisure.

These would have different consequences, which Joachim Fels summarizes in three theses:

1. The era of the savings glut was followed by the return of the capital shortage
In the last ten to twenty years, there has been a large supply of capital for various reasons, which is now being replaced by a new shortage of capital: The numerically large baby boomer generation has saved additionally for their old age. They will now retire in the next ten years and "de-save" their accumulated assets (demographics). After the financial market crisis and during the pandemic, central banks around the world supported governments with a policy of cheap money (quantitative easing). As a result of the rise in inflation, central banks are called upon to return to their core task - monetary stability. The transformation process towards a sustainable economy (decarbonization) is triggering a high need for investment in the public and private sectors. Deglobalization as a result of the significant increase in geopolitical risks is also expensive: building resilient supply chains, for example, is very capital-intensive. The resulting shortage of capital is now leading to a return to positive real interest rates.

2. Return of inflation
The inflation rate is significantly higher than before the pandemic and the Russia-Ukraine war as a result of the aforementioned 3D - demographics, decarbonization, deglobalization - and is well above the central banks' previous target. Labor would become scarcer and therefore more expensive. Trade unions will find it easier to enforce their wage demands in the coming years. The transformation process towards more sustainable energy sources will, in case of doubt, take longer than expected - with higher energy prices in a longer transition period. Derisking and friend-shoring, in turn, mean that the relocation of upstream and intermediate production to countries with comparable values and standards will lead to rising prices. Fels sees only limited relief effects from AI and robotization.

3. Revival of higher nominal interest rates
As a result of high inflation, central banks have raised interest rates significantly. In order not to stifle the economy and avoid high unemployment, most central banks would probably accept a higher inflation rate than before the pandemic. The higher real and nominal interest rates have several implications for the capital markets and asset allocation:
-    A higher proportion of cash in the portfolio makes sense in order to take advantage of good entry opportunities as a result of rising market volatility.
-    Caution is advised against products with a lot of leverage: liquid and listed asset classes should be given preference over illiquid assets.
-    Global diversification makes more sense again after years of often similar risk patterns between countries: due to the geopolitical environment, risks are distributed more diversely globally.

Joachim Fels: "From the savings glut to the shortage of capital: consequences for the economy, interest rates and financial markets"

Joachim Fels, former Chief Economist at PIMCO and Morgan Stanley, Anja Mikus, CEO/CIO KENFO; source: KENFO


Dr. Josef Lakonishok: "Equity markets: Current landscapes"

Josef Lakonishok, founding partner, CEO and CIO of LSV Asset Management, classifies the current situation on the financial markets with a view to past market phases and outlines starting points for investments.

LSV Asset Management, which was founded in 1994 by Josef Lakonishok, Andrei Shleifer and Robert Vishny, specializes in value equity management for institutional investors around the world. The founders are well known for their academic work in the field of behavioral finance. 

A central approach and basic philosophy of LSV Asset Management is to systematically exploit behavioral biases that influence the decisions of many investors for their own investment model.

Lakonishok begins by outlining the current situation on the stock markets: Currently, the markets are very much focused on a small number of companies that dominate the share indices, particularly in the US, and whose extremely high valuations reflect the high growth expectations for these companies. As an example, 32% of the market value of the top 500 US companies is concentrated in the ten largest companies.

Valuations were similarly high in the early 2000s during the dotcom bubble, when the future growth rates of certain technology companies were significantly overestimated. History has shown that these high growth rates are not sustainable and weaken after some time. The current picture raises the question of whether a similar irrational exaggeration is present in the equity markets today.

The current market constellation is also unusual in the sense that there is a very large discrepancy between expensively valued and cheaply valued companies: Compared to their relevant historic means, cheap companies are particularly cheap and expensive companies particularly expensive.

Lakonishok believes that this large discrepancy is also due to the strong shift by investors from actively managed funds to passive products in recent decades. The high inflow of funds into products that track market value-weighted indices is likely to have reinforced this trend. In any case, it is expensive to rely on passive management at the moment, as this often means buying into the most highly valued companies.

In contrast, the current market situation offers the opportunity to identify plenty of attractively priced companies. It is worth being patient until valuations normalize. One has to hold on to value stocks in order to benefit from the long-term performance potential of the strategy - especially when it is emotionally uncomfortable. 

Lakonishok summarizes his experience in the following recommendations:
1.)    Don’t overestimate your ability to predict growth.
2.)    Don’t ignore valuations.
3.)    Being contrarian is a difficult but proven strategy.
4.)    Investments require patience.

Dr. Josef Lakonishok: "Equity markets: Current landscapes"

Josef Lakonishok, founding partner, CEO and CIO of LSV Asset Management (top right); Anja Mikus, CEO/CIO KENFO; Patrick Busch; source: KENFO


Larry Fink: „Impacts of Trends and Transitions on Financial Markets

Larry Fink, Co-Founder, Chairman and CEO of BlackRock spoke at the KENFO 2023 Annual Asset Manager Conference on November 9th about the impacts of trends and transitions on financial markets. While national security concerns over trade, energy supplies and capital flows received renewed focus in most countries, the impact of globalization and populism has taken different forms and prompted investors to rethink their long-term strategies.


  • Larry Fink sees a prolonged period of higher inflation. Government debt has reached a worrying level in many countries. There is a risk of a crowding-out combined with a decline in private investment activity and persistent inflation rates in the long term.

  • Larry Fink notes that the sanctions on Russia have triggered a push towards decarbonization in countries that are heavily dependent on oil and gas imports, such as Germany, Japan, China and India. This has increased awareness of the need to expand wind and solar energy and develop affordable hydrogen. However, fossil fuels such as gas and coal will continue to play an important role for longer.  The latest wave of decarbonization was not launched in the name of climate protection, but in the name of national security. Development banks are not in a position to cover the enormous financing requirements of the emerging countries for decarbonization. This is where investors are needed. To that end, on behalf of its clients BlackRock - in cooperation with the German, French, and Japanese governments - has initiated major decarbonization projects, such as investments in solar fields in Kenya.

  • Larry Fink sees artificial intelligence as a significant megatrend; it will change the economy and offers real opportunities for investors. Artificial intelligence differs from other new technologies in that it is not start-ups but corporate giants that are driving this technological development, as it requires billions in investment. Large cloud operators will benefit. AI’s impact will vary globally. Economic development in Europe, for example, will suffer from lacking a major AI player. 

  • Artificial intelligence will also significantly change asset management. Investment decisions will increasingly be made based on big data analysis. BlackRock is developing new analysis tools for this - with the support of Stanford University.

  • Larry Fink is convinced that the advance of ETFs will continue, as ETFs deliver all kinds of investment strategies to investors in a more accessible and more affordable way. 

  • Another megatrend is that many countries have recognized the need to make their pension systems more resilient, for example by introducing more pre-funded elements to their pension scheme.

Global Economy:

  • Larry Fink rules out a U.S. recession in 2024, estimating 2025 at the earliest. He believes the US economy is strong, resilient, and robust. As most real estate financing is in the form of 30-year mortgages, the sharp rise in interest rates will have no short-term impact. In addition, the Inflation Reduction Act and the CHIPS Act under President Biden have created many jobs. 

  • The emerging markets generally remain attractive for investors.  Japan has the best economic situation it has had in the last 30 years. India is developing well, and Mexico’s economy is also growing quickly. 

  • By contrast, there is a greater likelihood of a recession in Europe in 2024, not least because the European economy is much more dependent on China.

Larry Fink: „Impacts of Trends and Transitions on Financial Markets

Larry Fink, Co-Founder, Chairman and CEO of BlackRock; Anja Mikus, CEO/CIO KENFO; source: KENFO


Timothy Geithner: "World View Talk"

Timothy Geithner, former U.S. Treasury Secretary in the Obama administration and current Chairman of private equity firm Warburg Pincus, spoke at the KENFO 2023 Annual Asset Manager Conference on November 11th. 
Mr. Geithner began by sharing his insights from the global financial crisis, in which he played a central role devising the policy response to stabilize the U.S. economy. The ensuing discussion largely focused on the economic and strategic positions of China and the U.S. Mr. Geithner discussed the evolving growth paradigm in China, as well as the continued potential for attractive investment returns. Warburg Pincus has focused its investments in China across a variety of sectors, including healthcare, financial services and logistics, areas with strong fundamentals and growth potential. Mr. Geithner also commented on the entrepreneurial talent and technological innovation potential in China before discussing the varying components and dynamics of the U.S. / China relationship. 
Mr. Geithner also mentioned that Warburg Pincus sees robust growth potential in India and other Southeast Asian countries such as Indonesia, Vietnam and the Philippines. Mr. Geithner touched on the tailwinds for growth in these markets, including shifting supply chains, stable macroeconomic policies, favourable demographics and technological innovation. 
Mr. Geithner concluded by discussing the outlook for the U.S. economy, including the current interest rate cycle, long term fiscal trajectory and the potentially disruptive impact of advances in artificial intelligence. 

Timothy Geithner: "World View Talk"

Timothy Geithner, Chairman of private equity firm Warburg Pincus; Verena Kempe; source: KENFO


Dr. Christoph Heusgen: Germany's strategy in an environment of overlapping crises

The head of the Munich Security Conference and former foreign and security policy advisor to Chancellor Merkel and Permanent Representative of the Federal Republic of Germany to the UN, Ambassador Dr. Christoph Heusgen, put forward the following theses in his presentation:
1) Germany must take on more responsibility internationally - including militarily;
2) many certainties no longer apply

He expressed the conviction that the USA would significantly reduce its military support for Europe after the end of the presidency of the staunch transatlanticist Biden - regardless of party affiliation. One reason for this is that the USA will focus on Asia due to its rivalry with China and another is that the USA is no longer prepared to co-finance Europe's military expenditure. Germany would therefore be well advised to permanently adhere to the commitment it made at the NATO summit in Wales in 2014 to spend 2% of its GDP on the Bundeswehr from 2024 - even after the 100 billion euro special fund has been exhausted. This would require an additional 25 billion euros to be allocated to the defense budget from 2027. By way of comparison, Ambassador Heusgen pointed out that the USA spends 3.5 - 4% of its GDP on the military.

He recommended that German companies reduce their strong dependence on China ("derisking instead of decoupling"). As part of the necessary diversification, it made sense for the German economy to show greater interest in smaller markets in Asia, Africa and Latin America and to be prepared to take greater risks than in the past. Christoph Heusgen pointed out that Africa would account for 25% of the world's population by 2100, while Europe's share would fall to 5%. Ambassador Heusgen called for development policy, foreign policy and private investment in these regions to be pooled more closely so as not to leave them to China with its Silk Road initiative. KfW could play an important role in pooling funds.

As far as China was concerned, Heusgen believed that it had the long-term goal of incorporating Taiwan and was just waiting for an opportunity. The issue is serious, but is currently somewhat exaggerated, as President Xi has ordered the People's Liberation Army to be ready for a military "solution" from 2027. At present, China has neither the military means for such an operation nor the economic problems to allow itself an open confrontation with the USA and economic sanctions from the West. However, it is to be expected that the Chinese leadership - like other authoritarian governments - will incite nationalism when faced with internal problems.

According to Heusgen, Vladimir Putin has already failed to achieve his goal of restoring Russia's former greatness on the world stage by attacking Ukraine. Instead of being an equal world power, Russia is merely a junior partner of China, on which it is heavily dependent. As Senator McCaine once said: "Russia is China's gas station".

Russia is currently in a bad economic situation, as the sanctions imposed by the West are having an overall effect despite some violations. Nevertheless, Putin has Russia under control, having systematically shut down the (social) media, the opposition and civil society. Ambassador Heusgen was convinced that Putin's aim at the beginning of his term of office was to gain recognition for Russia on the world stage through a strong economy. However, he had to realize that raw materials alone were not enough to achieve this. Since 2011/2012, Putin has relied on nationalism instead.  China has an interest in maintaining the status quo in Russia. His declarations of friendship towards Russia are more than just lip service. China supports Putin's war against Ukraine because it wants to prevent Putin from falling and chaos breaking out in Russia or it democratizing.

With regard to the Middle East conflict, Ambassador Heusgen took the view that the two-state solution, which actually made sense, was practically no longer feasible now that 700,000 Israeli settlers had settled in the West Bank. The shift to the right in Israeli politics and the strong position of the settlers make a constructive solution difficult. At the same time, 6 million Palestinians have no prospects for the future, which creates a breeding ground for terrorism. This situation can only make you depressed.

Dr. Christoph Heusgen: Germany's strategy in an environment of overlapping crises

Dr. Christoph Heusgen, head of the Munich Security Conference; source: MSC/Kuhlmann