Investing despite inflation: A cocktail of risks
Created: 08/09/2022, 10:10 am
dr
Bert Flossbach is one of the best-known asset managers in Germany.
© N. Bruckmann/M.
Litzka/Company
War in Ukraine, inflation, fears of recession - many investors are unsettled by the capital market environment.
Is the worst on the stock exchanges yet to come?
dr
Bert Flossbach, head of the Cologne asset manager Flossbach von Storch, analyzes the situation in the guest article.
Cologne – Rarely have there been so many different trouble spots and thus imponderables at the same time.
The barbaric war in Ukraine and the suffering it entailed.
The ongoing corona pandemic, which China's government believes it can continue to fight by sealing off entire metropolitan regions - and thus breaking the already unstable supply chains.
Not to forget inflation, which, driven by war and the pandemic, is constantly climbing to new heights.
People around the world are being weighed down by higher prices for energy, food and other necessities of life;
the value of their savings is diminished.
The central banks are faced with a Herculean task: How can inflation be contained effectively – without stalling the economy?
And without overburdening the debtors, who have gorged themselves on cheap money over the past few years?
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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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Inflation in the euro area: ECB in a bind
The environment is particularly delicate for the European Central Bank (ECB).
Unlike the US Federal Reserve, for example, it has to make a monetary policy for many very different economies.
It must defend the value of money through massive interest rate hikes without triggering a debt crisis and endangering the continued existence of the euro.
This is like squaring the circle.
Even the moderate increase in interest rates and yields in the first half of the year led to sharp falls in bond prices.
But that would only be a foretaste of what would happen if the central banks decided to take much tougher measures in the face of persistently high inflation.
The damage to the economy and financial system would probably be enormous.
Many of the challenges of our time directly or indirectly affect or are influenced by inflation.
This interaction makes forecasts even more difficult than they already are.
But there are also developments that can help solve several problems at once.
The key lies in technological progress with many small and large innovations and digitization.
More productivity means less consumption of resources, dampens the upward pressure on prices and leads to sustained higher growth rates.
Innovative and successful companies from the IT, industrial and service sectors thus serve not only their shareholders but also the general public.
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The solution is: innovation, digitization and technological progress
Equities recorded significant price losses in the first half of the year, although the earnings prospects of high-growth and resilient companies remain good.
As a result, the risk/reward ratio has improved.
A possible economic slowdown would not change that.
Stocks in companies whose products and services are in demand and which have sufficient pricing power offer not only protection against inflation, but also real potential for appreciation over the long term.
However, investors need patience - and a healthy dose of tolerance for price fluctuations.
It is quite possible that prices will reset again in the coming weeks.
Gold, on the other hand, serves more to preserve wealth and offers additional insurance in the event that the central banks cannot get inflation under control.
Bonds offer insufficient protection against inflation as long as the yields are below the expected long-term inflation.
For the first time in a long time, however, corporate bonds with medium credit ratings are showing yields that could even be sufficient to beat inflation.
In this respect, we can be more confident than the current “crisis cocktail” would suggest.
About the author: Dr. Bert Flossbach is the founder and CEO of Flossbach von Storch AG in Cologne.