Ukraine War and the Price of Return

Created: 05/03/2022 08:56

dr

Bert Flossbach is one of the best-known wealth managers in Germany.

© N. Bruckmann/M.

Litzka/Company

Russian President Vladimir Putin is waging war in Ukraine.

The stock markets are under pressure.

Energy prices, on the other hand, seem to be rising inexorably.

What that means for investors is described by the head of the Cologne asset manager Flossbach von Storch, Dr.

Bert Flossbach.

Cologne - It's hard to write about investing these days.

Our thoughts are with the people in Kyiv, Kharkiv, Melitopol – in Mykolaiv or Sumy*.

Even if the incredible images that reach us every day from Ukraine speak a different language: We very much hope that we will soon be talking to each other again instead of shooting at each other.

Nevertheless, it is our job to look after the assets of our customers and investors, even – or especially – in times like these.

Because the uncertainty is great, understandably.

Many investors are wondering 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, that's a lot easier said than done.

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Climate change, supply bottlenecks, corona pandemic: Rarely before has interest in the economy been as great as it is now.

This applies to current news, but also to very fundamental questions: How do the billions in corona aid and the debt brake go together?

What can we do about the climate crisis without jeopardizing our competitiveness?

How do we secure our pension?

And how do we generate the prosperity of tomorrow?

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Ukraine war: hedging costs money

Hedging instruments are usually expensive and therefore reduce long-term returns, on the one hand.

On the other hand, it does not help the hedger to get the right time to hedge.

He also has to be right when it comes to resolving the fuses.

Experience teaches that part two of the project is much more difficult - and often fails.

In the end, it is mainly costs that are produced.

It's the same with exit.

Anyone who gets out now, selling their shares out of fear that the market will fall even further, and hoping to get back in later at lower prices, can be just as wrong.

And once you're out and possibly suffered price losses, you rarely find your way back.

In that respect I would be careful there too.

Especially since there is a much more concrete risk for investors in addition to the imponderables of the war: inflation.

I wrote about it here at the end of last year.

She came to stay.

Nothing has changed in this assessment since then.

Ukraine war: There is no turnaround in interest rates

The risk of inflation will not decrease as a result of the war, on the contrary, it will actually increase.

On the one hand, because Russia could fail as a major energy supplier and oil and gas prices continue to rise, driving up the inflation rate.

On the other hand, since the European Central Bank's attempt to normalize its interest rate policy is likely to have failed before it even started.

Because the war not only slows down global economic growth, it also causes (national) debt to continue to rise - let's take the massive increase in arms spending in Germany as an example.

Global debt can only be paid off in the long term if interest rates remain low.

Neither the one, a noticeable cooling of the world economy, nor the other, overburdening the debtors, is in the interest of the central banks.

Your hands are tied - more than ever.

Rising inflation with nominal interest rates remaining the same, or at best slightly increasing, i.e. negative real interest rates overall, mean that the balances in savings accounts and overnight money are melting away.

Year for year.

So far there has never been anything like this in the history of the Federal Republic - negative real interest rates.

Whenever inflation has been high in the past, interest rates have been higher.

It's different now and in the future.

Investors should be prepared for this.

If you want to preserve your assets in the long term, you need more material assets, not less.

The war in Ukraine has not changed this assessment either.

Above all, he needs shares in good companies, as cynical as that may sound these days.

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Ukraine war: 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 the nervousness on the capital markets remains high.

In a world of negative real returns, this is the price that investors must be willing to pay in order to achieve decent long-term returns.

To preserve their wealth over the long term.

In any case, now is not the right time to sell stocks.

It would be better to buy stocks – when good companies are being punished unfairly or excessively.

It's hard, I know;

but there is no other way.

The turbulence on the stock markets will pass, as always.

Let's hope that the war will also be over soon.

About the author: Dr.

Bert Flossbach is the founder and CEO of Flossbach von Storch AG in Cologne.