Along the lines of our concerns expressed in our latest two market comments from earlier this year, it looks like the dominos are starting to fall. Today, the first major German company had to file for bankruptcy due to high energy prices and overall rising prices in commodity goods:
We are afraid that this is just the first among many others to follow and believe that there is an at least 50% chance for the German economy to be headed for a depression, alongside other European markets. The situation as it presents itself is extremely fragile in our opinion and can easily spin out of control. High energy-, production-, and transportation costs are likely to remain at today's levels or increase further, which we believe will lead to more bankruptcies, fast growing unemployment numbers, and a substantial decline in purchasing power for the average European consumer. Even though we believe this first wave of disruptions to mainly hit the European economy, we cannot rule out that the United States is going to follow within the next 3 to 6 months. While Asia and Southeast Asia look a lot more resilient, the ripple effects will clearly be felt in some of those low-cost manufacturing hubs as well.
Due to all the aforementioned concerns, we recommend to further reduce equity exposure to the consumer goods sector in Europe, especially Germany, and avoid any investment in otherwise related cyclical stocks, primarily small- and mid-caps.
However, since we believe that large caps will get more and more affected by this escalating energy crisis as well, we recommend a certain hedge of existing investments by buying the following two short ETFs:
- ProShares UltraShort FTSE Europe (EPV): https://finance.yahoo.com/quote/EPV?p=EPV&.tsrc=fin-srch
- ProShares UltraShort Consumer Goods (SZK): https://finance.yahoo.com/quote/SZK?p=SZK&.tsrc=fin-srch
Please be aware that such short ETFs are only suitable as a short-term hedge and need to be monitored closely. Hence, only experienced investors with a medium- to high risk-profile should consider the two afore recommended short investments. Please contact us if you should have any questions or concerns for personal and suitable advice, that is in-line with your individual risk- and investment profile.
Oliver E. Hohermuth, Principal and Chief Investment Officer