Outlook for the stock market year 2023: how dangerous will inflation be?

Created: 12/10/2022 9:01 am

From: Dr.

Bert Flossbach

dr

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

© N. Bruckmann/M.

Litzka/Company

The central banks are fighting inflation by raising interest rates.

But if that doesn't work, people's trust in the value of money dwindles.

Investors therefore need two things above all: patience and a good deal of "tolerance to fluctuations," explains Dr.

Bert Flossbach in the guest article.

Cologne – The major central banks, above all the US Federal Reserve (Fed), have taken up the fight against inflation and recently raised their key interest rates – in some cases significantly.

Whether they will win the fight is by no means certain.

If people's long-term inflation expectations and thus wage settlements remain moderate, things don't look all that bad.

But what if inflation remains high, possibly very high, well into next year?

Because governments are passing ever more extensive aid packages to alleviate the consequences of inflation for the people, but in doing so are thwarting the central banks' fight against inflation.

The extra money donated by governments eventually drives up inflation.

Inflation: Blunt Swords

It would become critical above all if the higher interest rates caused ever greater damage because loans – compared to previous years – have become significantly more expensive and overburden the debtors;

Damage to the real estate markets and thus also to the bank balance sheets and possibly to the statics of the financial system.

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When people realize that, ultimately, the central banks may not be able to do what they would like, that their swords in the fight against inflation are rather blunt than sharp, then people's trust in the value of money will also suffer.

The weakness of the pound sterling, but also that of the yen and the euro, already reflects an incipient loss of credibility.

While the central bank in Great Britain is fighting against a debt-financed, very expansive fiscal policy and the Japanese against a debt that has gotten out of hand, the European Central Bank is sticking to its own promise to keep the euro together - "whatever it takes", whatever the cost.

US Federal Reserve pushes ahead

The US Federal Reserve, on the other hand, has more options to combat inflation.

It has already raised interest rates several times and significantly;

and the economy is still in good shape.

But: The stronger the US dollar in the long term, the more it will become a burden for the US economy and for the emerging countries, which have debts that are mainly denominated in dollars.

The Fed must therefore also be careful not to overdo it in the fight against inflation.

Because if she did, the job would have been done, as Fed Chair Jerome Powell announced, i.e. the operation would have been successful – but the patient would probably not survive.

In this respect, the US Federal Reserve's room for maneuver is also limited.

And for them, too, it is ultimately about their own credibility.

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High equity share

From an investor's point of view, in this environment, intelligent global diversification with a high proportion of tangible assets, above all stocks of good companies, is the best strategy for limiting risks and safeguarding opportunities.

In our largest asset management fund, for example, the proportion of equities is currently around 67 percent.

We recently increased the proportion of bonds from zero to more than four percent.

The cash reserve accounts for around twelve percent.

It gives us the flexibility to take advantage of investment opportunities.

However, no one can say whether the worst on the stock exchanges is over.

In this respect, investors need patience and a good portion of "tolerance to fluctuations" - unfortunately there is no other way.

If people's trust in paper currencies should be lost, then gold is in demand, as so often in history, the currency of last resort.

Gold acts like fire insurance against the risks of the financial and monetary system.

An insurance that you never actually want to claim, but are very happy to have taken out at some point.

We therefore believe that gold should be an integral part of an investment strategy.

His share in the fund is currently more than 15 percent.

For the case of falls.

About the author: Dr.

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