Asset managers on inflation: "50 percent of Germans should be worried"

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New residential construction in Frankfurt: According to

, investors can protect their assets against inflation losses

by investing in residential real estate - under certain conditions

Photo: Sebastian Gollnow / dpa

Reinhard Panse

is a veteran of asset management in Germany.

For more than three decades he has been taking care of the investments of well-heeled customers.

Probably his most prominent career station: From 2011 to 2020 Panse was Chief Investment Officer (CIO) and Managing Director of HQ Trust GmbH, the multi-family office of the family of the former industrialist Harald Quandt.

According to his own statements, he was responsible for customer assets of a good ten billion euros there alone.

In 2020, Panse founded the Finvia asset management company in Frankfurt am Main together with partners.

As CIO, he is responsible for all investment decisions and capital market analyses.

Panse has arranged to meet with manager magazin via Microsoft Teams.

It deals with the prevailing questions in investing these days, with a special focus on the professional's wealthy clientele: How do wealthy investors deal with inflation?

Which investments are most likely to protect against currency depreciation?

And where is the protection possibly only supposedly given?

manager magazin: Mr. Panse, are your customers worried about the high inflation?

Reinhard Panse:

No, that is hardly an issue, because we have already prepared our customers for the fact that inflation rates will rise from summer 2020.

And that's exactly what happened.

The reasons are well known: demographics, deglobalization, increasing populism in politics, that is, politics that are no longer doing what is required for long-term economic growth anywhere in the world.

As a result, economic growth remains weak, which in turn creates problems when debt is very high.

In what way?

We have been showing our customers this connection for a long time: the decisive factor for interest rates is national debt, not the inflation rate.

If government debt is as high as it is now, central banks will no longer be able to fight inflation.

At least not to the extent that this would be necessary.

So the European Central Bank should take stronger action against inflation now?

Yes.

If you really want to fight inflation, interest rates must rise above inflation.

This is the only way to stimulate savings again.

History shows that clearly.

In the USA, interest rates were raised to 20 percent from the late 1970s, with an inflation rate of 10 percent.

That is completely unthinkable today.

The current inflation rates will fall again a bit.

But: In the USA, for example, a wage-price spiral is already threatening.

We see the highest level of vacancies to date.

Employees therefore have a strong position in salary negotiations.

You can also see that big brand manufacturers are already increasing their prices.

How is it in Germany?

In Germany we have the lowest unemployment rate in the entire euro zone.

The eurozone average is more than twice as high.

France, Italy and Spain are even higher.

These countries also have bigger debt problems than Germany, so they will want to prevent the ECB from adequately controlling inflation.

In addition, the central banks are now also looking at the financial markets, where excessive interest rate hikes can lead to turmoil.

Does this mean that inflation rates will remain high for the time being?

Yes, if only because the level of debt is much higher today than it was in the past.

So is there cause for concern among investors?

In principle, our clientele, i.e. comparatively wealthy investors, is well prepared for higher inflation rates, as they mainly own shares, company investments, real estate and gold, but few fixed-income investments.

However, 50 percent of Germans should be concerned.

Namely the 50 percent who have neither real estate nor a share portfolio.

They're going to get it.

Because their old-age provision, be it a Riester contract or life insurance, is largely backed by fixed-interest securities.

In these cases, the return is now 6 to 7 percent below the inflation rate.

It's really depressing that the state isn't doing anything there.

Our clientele, on the other hand, has a different problem.

Which?

The much-cited protection against inflation through real estate only applies to a limited extent, and that applies to many commercial properties.

Over-the-counter retail is threatened by online trade, and in the office sector the trend towards working from home is clouding the prospects.

Even an investment in the high-priced luxury living segment hardly offers any protection against inflation.

How should someone who is looking for a property that offers the desired protection against inflation proceed?

There are basically two areas that come into question.

One is new residential properties, but not in top locations, because prices have already risen too much.

Luxury real estate is no longer suitable as a capital investment, only for personal use.

Better are simple new apartments in cities that are not too bad.

What does "not too bad cities" mean?

It should be close to a big city, in the famous commuter belt.

Buying around Frankfurt is undoubtedly better than in Frankfurt itself. Locations outside of the city centers are also becoming more attractive due to the trend towards working from home.

Smaller cities that offer good infrastructure can also be 50 kilometers away from a metropolis to be considered for an investment.

Which is the second area?

If older apartment buildings from the 1950s or 1960s can be renovated professionally and inexpensively, then such an investment can also pay off.

It is crucial that the right craftsmen are available, otherwise it will be too expensive.

Not everyone can or wants to buy an entire apartment building right away.

We offer this model via funds.

So: buying somewhat shabby apartment buildings from the 1950s or 1960s, renovating them to save energy and then reselling them, often to the tenants themselves. However, we don't do that ourselves, we work together with professionals who have been running the business for many years.

What do you think of open-ended real estate funds that also invest in commercial real estate?

They don't matter to us.

The yields are also too low.

You explained which real estate investments offer the best protection against inflation from your point of view.

What about equities, company participations or inflation-linked bonds?

Do you see any good options for this purpose?

In fact, inflation-linked bonds make up the majority of our clients' bond portfolios.

But they are only a good investment if the inflation rate rises very sharply.

Then these papers bring good returns.

You don't need to look for other bonds, for example in the corporate sector.

If you can get anywhere near the rate of return that offsets the current rate of inflation, then you have very bad credit.

What about stocks?

Equities and company participations have even better protection against inflation in the long term than residential real estate.

The reason is that there is less political influence in this area.

Just think how tenants have been allowed to defer rent in lockdown.

Another keyword is the rent cap.

Such action against companies that offer jobs is rare.

In addition, you can diversify the capital much better with shares.

After all, companies also have advantages in times of inflation.

Especially if they are in debt.

That's right, if inflation is not fought with higher interest rates, your borrowed capital will remain low-interest.

On the other hand, a company's fixed costs are largely unaffected by inflation if it can raise prices at the same time.

Inflation then only has an impact on personnel costs, which usually increase.

But on the other hand, many companies are already using the instrument of digitization, which they can use to reduce their personnel costs.

Which industry do you think is particularly attractive in this regard?

There are two.

One is the healthcare sector and the other is the basic consumer goods sector.

Companies in these areas are hardly dependent on the economy.

The companies also often have high margins and great market power.

That's why last autumn, for example, the big brand manufacturers were the first to increase their prices.

They also tend to have strong balance sheets with plenty of equity.

These companies are less vulnerable to rising prices because they can pass them on to their customers.