3 MAR, 2022
By Bert Flossbach
It is difficult to write about investing these days. Our thoughts are with the people in Kiev, Kharkiv, Melitopol – in Mykolaiv or Sumy. Even if the unbelievable pictures that reach us daily from Ukraine speak a different language: We very much hope that people will soon start talking to each other again instead of shooting at each other.
Nevertheless, it is our job to look after the assets of our clients and investors, even – or especially – in times like these. Because the uncertainty is great, understandably so. Many investors ask themselves whether, in view of the war in Europe and the possible consequences, it would not be better to throw all shares out of the portfolio, or at least to hedge them. Unfortunately, this is much easier said than done.
Hedging instruments are usually expensive and therefore reduce returns in the long run, on the one hand. On the other hand, it does not help the hedger to get the timing of hedging right. He must also be right when it comes to unwinding the hedges. Experience shows that part two of the plan is much more difficult – and often fails. Thus, in the end, costs are produced above all.
It is the same with the exit. Those who get out now, sell their shares for fear that the market could fall even further, hoping to get back in later at lower prices, can be just as wrong. And those who are out once, who may have suffered price losses, rarely find their way back. So I would be cautious there, too.
Especially since there is a far more concrete risk for investors besides the imponderables of war: inflation. I wrote about it here at the end of last year. It has come to stay. This assessment has not changed since then.
The risk of inflation is not diminishing as a result of the war; on the contrary, it is actually increasing. On the one hand, because Russia could fail as a major energy supplier and oil and gas prices will continue to rise, driving up the inflation rate. Secondly, because the European Central Bank’s attempt to normalise its interest rate policy is likely to have failed before it has even begun.
For war not only slows down global economic growth, it also causes (national) debt to keep rising – take the massive increase in armament spending in Germany as an example. The global debt can only be paid off in the long term if interest rates remain low. Neither the one, a noticeable cooling of the global economy, nor the other, an overburdening of debtors, is in the interest of the central banks. Their hands are tied – this is more true than ever.
Rising inflation with unchanged or, at best, slightly rising nominal interest rates, i.e. negative real interest rates overall, are causing the balances on savings accounts and overnight deposits to melt away. Year after year.
So far, there has never been anything like this in the history of the Federal Republic – negative real interest rates. Whenever inflation was high in the past, interest rates were higher. Today and in the future it will be different. Investors should prepare themselves for this.
Those who want to preserve their assets in the long term therefore need more real assets, not less. The war in Ukraine does not change this assessment either. Above all, he needs shares in good companies, as cynical as that may sound these days.
Not a good time to sell stocks
I do not want to rule out that the stock markets will fall back again in the coming weeks and months. That nervousness on the capital markets will remain high. Enduring price fluctuations – that is the price investors must be prepared to pay in a world of negative real returns in order to be able to achieve adequate returns in the long term. To preserve their assets over the long term.
In any case, now is not the right time to sell shares. It would be better to buy shares – when good companies are unfairly or unduly punished. That is difficult, I know; but there is no other way. The turbulence on the stock markets will pass, as it always does.
Let’s hope that the war will soon be over too.