Investing in Inflation: What Investors Should Do Now

Enlarge image

Stockbroker in Frankfurt:

Rising inflation rates can currently make investors nervous

Photo: Frank Rumpenhorst / dpa

The world on the stock exchange could hardly be better: even in the run-up to the latest quarterly reports, investors were driving share prices with high expectations.

Most of the companies then exceeded these expectations with their business figures and generated additional profits on the stock market.

The best example is the car manufacturer Daimler, which a few days ago promoted its share to a six-year high thanks to a profit increase.

On Wall Street, the tech giants Microsoft and the Google parent company Alphabet or the large US banks such as Goldman Sachs and JP Morgan should also be mentioned.

The result: The German leading index Dax, the European Eurostoxx50, the important US indices Dow Jones, S&P 500 and Nasdaq 100 - they are all trading at or near record levels.

So a perfect world for stock market traders, at least apparently.

If it weren't for a few developments in the global economy that are causing concern: global logistics has been stuck in a traffic jam for months that is likely to drag on for a long time.

Energy prices have shot up in the wake of the comeback of the economy from the corona hole.

And as a result, what economists have been warning about for years has occurred: inflation rates have risen.

This poses a threat to the stock market: rising inflation could induce central banks to permanently abandon their overly loose monetary policy.

However, it is precisely this that has provided the fuel for the sustained upswing on the stock markets in recent years.

However, not all investors seem to be aware of this danger by a long way.

"The stock market and its feverish participants are currently trapped in an almost perfect world of imaginations of only temporary disruptions in the long-term scenario of low inflation, low interest rates and constructive growth in the world," says

, Portfolio Manager at Euroswitch Asset Management.

"Structural risks from changing supply chains and rising inflation are consistently ignored, recently even described by the European Central Bank as scaremongering."

It is desirable that the problems pass again, says Böckelmann.

In any case, the uncertainty will persist in the coming months.

Inflation rates at historically high levels

The portfolio manager isn't the only one worried like this.

is Chief Investment Officer at the Austrian Raiffeisen KAG, she also follows the development of the inflation figures closely. "From (good) reflation to (temporary) inflation to (bad) stagflation", this is how one could - somewhat exaggerated - summarize the reporting over the course of the year on the subject of price increases after the economic slump caused by the corona, writes Szeiler in a current assessment. "Of course, the headlines regarding stagflation are far exaggerated at the moment, but it is still important to carefully monitor any increasing tendencies in this direction, also with regard to the room for maneuver of the central banks."

Markus Sievers

, managing partner of the investment fund provider Apano, is also looking at what is happening a little further away. For more than ten years there has not been a prolonged phase of falling prices on the stock markets, he notes. The corona crash in spring 2020 was also too short to sharpen many market participants' sense of risk. But with rising inflation rates and the beginning rethinking in central banks such as the Fed in the USA, the Bank of England and soon possibly also the ECB, the risk of setbacks is growing. "The markets are currently pricing in that all existing risks will turn out well," says Sievers. Thanks to the large amount of liquidity from central banks, this has been the case in the past few years. "But will it really go on like this now?"asks Sievers.

Enlarge image

Worries about a lack of risk

awareness

, head of the fund provider Apano

Photo: apano

In fact, some of the inflation rates have now reached historical levels.

In the euro zone, consumer prices rose by 4.1 percent in October compared to the same month last year, the highest value since mid-2008. In Germany, prices rose by as much as 4.5 percent, the last time they were in October 1993. In In the United States, the inflation rate rose to 5.4 percent in September, also the highest level in 13 years.

Core inflation, which is also being monitored by the Federal Reserve, is 3.6 percent in the United States and has therefore been at a level for months that has not been there for 30 years.

In light of this, central banks such as the Bank of England or the US Fed have already indicated or started a cautious change in their monetary policy. At its most recent meeting, the Fed decided to restrict current bond purchases - because this was followed by cautious statements by Fed Chairman

(68), the markets reacted in this case with price gains. The European Central Bank has so far officially stuck to its position that inflation is a temporary phenomenon and does not require any monetary policy reaction. However, it seems questionable whether the interest rate watchdog can maintain this line should it become clear in the near future that the rate of price increases will remain at a higher level for longer.

So what should investors do in this scenario?

Can you trust that the ECB, Fed and Co will manage the tightrope act of fighting inflation without setbacks on the financial markets?

Or should you possibly position your portfolio for bad times?

Investment experts at times relaxed ...

If you ask around among investment experts, you will see that the industry is by no means of one mind on this matter. "We are still assuming that the current development of inflation is due to corona-related catch-up effects," says

, director of the asset manager Maiestas in Cologne. A higher inflation rate than in previous years is to be expected in the future. But: "Given an estimated inflation rate of 3 percent, we do not expect the central banks to intervene."

The investment advisor points out, however, that in a zero interest rate environment and inflation of 3 percent, investors could lose purchasing power of their savings. "At best, gold represents an inflation compensation for us," says Ahrens. "There is therefore no alternative to investing in real assets such as real estate and stocks."

Even

, Managing Director of the Society of Asset Management in Dusseldorf, is there left.

"We definitely do not recommend switching to so-called safe forms of investment such as bonds, as we do not expect any significant rate hikes in the coming years," he says.

"Companies with pricing power in particular will have the best chances of increasing their profits in an environment of higher inflation and thus laying the foundation for rising prices."

Basically, the focus will also be on stocks in the coming years, says Pilz, if only because it is difficult to achieve positive real interest rates on bonds.

... and partly alarmed

On the other hand, there are also more critical voices.

for example, asset manager at KSW Vermögensverwaltung in Nuremberg, holds one

slightly higher liquidity quota after the very successful and gratifying year on the stock market so far for "not a bad idea".

"In my opinion, certain things have not yet been priced in on the stock market and could lead to significant price losses in certain asset classes," warns

. In addition to the inflation issue, the managing director of PMP Vermögensmanagement from Düsseldorf points out the debt policy in Europe as a risk factor. "It is very doubtful whether Germany can maintain its restrictive debt policy," says Wieser. "At the moment the markets still believe in the steadfastness of the FDP. Whether that will be the case in the long term is at least doubtful."

The investment professional believes that the pressure from the southern European countries and France is great and a Europe-wide "new fiscal policy" could come about.

"In such a case, a bond crash cannot be ruled out," he fears.

Also

from Cologne asset manager B & K Assets looks with concern the current situation in the markets.

He advises investors to take action now and "critically review" their portfolio structure.

"A more restrictive monetary policy combined with rising capital market interest rates will in the short term lead to increasing volatility in almost all asset classes," says Göritz. "Bond investors have to be prepared for falling prices and should therefore avoid long durations." Since the real interest rate on safe investments will remain negative, there is no way around stocks as a medium and long-term protection against inflation, whereby one should pay attention to companies with high profitability, which have a strong competitive situation and first-class products. "These companies have the appropriate pricing power and can pass on rising procurement costs to their customers," says Göritz. The expert also points out that banks, for example, can benefit from rising interest rates.

The problem with market timing

There is one aspect that comes up again and again to many experts: there may be risks on the stock markets.

In view of the low interest rates and high inflation rates, however, there are no investment alternatives that are really safe and at the same time appear attractive.

Because with banks and savings banks, savers in this environment, in case of doubt, achieve a real loss of wealth.

Investment legend: Warren Buffett

doesn't believe in market timing

Photo: Arne Dedert / dpa

"In this scenario there are no safe investments," says

from Cologne-based asset manager Portfolio Concept. "It is an illusion that the money is securely invested in the overnight or fixed-term deposit account." The only thing that is "certain" at the moment is that savers will be able to afford less with the money they have invested in the future. "The only protection is provided by liquid assets such as robust quality stocks," he says. "Accordingly, long-term investors should increase their equity quota."

Richert also draws attention to a fundamental problem.

"Getting out of the market before the big crash and then getting back in at exactly the lowest price sounds tempting," he says.

"Unfortunately, the reality is very different."

According to Richert, trying to get the timing right when investing money is doomed to failure from the start.

With the view, the asset manager is in prominent company.

"The stupidest reason to buy a stock is because it rises, and the stupidest reason to sell a stock is because it falls," said investment grandmaster

.

And economist and Nobel Prize winner

is quoted as saying that market timing is a "foolish undertaking".