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by Tobias Aigner, Euro am Sonntag
C.orona? The topic is apparently ticked off on the stock exchange: the stock markets are celebrating record highs, the pandemic seems to have been overcome, at least from an economic point of view. But the next fear is already around: inflation. Can it endanger the stock rally? How far are inflation rates going up? And how can investors protect their portfolios against this? Germany’s top asset managers discussed this at the annual € uro investment summit on Sunday.
However, the Corona issue was not completely settled. One of the invited participants, Jens Ehrhardt, had to cancel at short notice after receiving a COVID vaccination the day before. We therefore spoke to the head of DJE Kapital a few days later and included his answers in the interview.
€ uro on Sunday: There is a new horror on the stock markets: inflation. In the USA, inflation is already a good four percent. According to the Bundesbank, this value will probably also be reached in Germany in 2021. Is inflation believed to be dead returning with force?
Hendrik Leber: Yes. After Corona, people finally want to spend money again. The discharge of the pent-up consumer demand drives prices up. In doing so, the central banks will not raise interest rates, otherwise they will immediately stifle the economy again. I expect very strong inflation over several years – with inflation rates of up to five percent.
Michael Reuss: I expect significantly less. There will only be a brief bubble of inflation. The prices are rising because of temporary traffic jams. At the moment there are simply too few containers, chips and so on to meet the sudden demand. But that is playing back. And then the big trends work against it again: the high level of debt, the aging of societies and the rapid pace of technological development. I don’t see more than two percent inflation in the long term.
Jens Ehrhardt: Correct. Most of the inflationary effects will quickly subside again, such as the enormous increase in used car prices in the USA. These represented about 40 percent of the US inflation surge in April. And with the really dangerous drivers of inflation, wages and borrowing, the situation remains relaxed. In the medium term, inflation will be lower than many expect.
Philipp Vorndran: In the medium term, however, demography has an inflationary, not deflationary effect. Because it ensures that workers are becoming scarcer in the developed economies. At the same time, more and more people around the world are competing for raw materials and food. That also drives up prices. In addition, globalization is tending to be scaled back. We expect inflation rates averaging 2.5 percent over the next ten years.
Sounds bearable. The ECB’s inflation target is two percent.
Frank Fischer: That is anything but bearable. The saver is expropriated coldly and pays the bill for the central bank to make the national debt manageable with low interest rates.
If you manage the maneuver. Do you see no danger that the central banks will lose control of inflation and the whole thing will get out of hand?
Liver: But. I always think of the sorcerer’s apprentice. “I can’t get rid of the ghosts I called.” The central banks no longer have any control. If inflation picks up, there is nothing they can do. If they close the money locks just a little, the economy immediately hurts enormously.
Then ten or 20 percent inflation is also conceivable.
Liver: Yes. Or 200 percent.
That would be almost hyperinflation. Is this realistic?
Reuss: This would have to lead to a deep crisis of confidence. I don’t see them at the moment.
Liver: It is already possible. In any case, no one can plausibly explain to me how we can get out of this over-indebtedness in an orderly manner.
Fisherman: But I. With 2.5 percent inflation – over many decades. With that we can inflate the debt away moderately. This is how we get it under control, through cold expropriation and without a crisis of confidence.
Front: Correct. Nothing is just inflated away. It’s not like after the Second World War, when the US reduced its national debt ratio from 120 percent to below 60 percent through inflation, growth and interest rate caps. The challenges for national budgets today are so huge that the debt ratios are not falling, but can be kept in check to some extent.
Ehrhardt: But you will get used to the huge mountains of national debt. You just push them in front of you and keep interest rates down. That works because the economy won’t soar. The big reset won’t come for the time being.
Reuss: And if it doesn’t work out, the national debt will simply be removed from the central bank’s balance sheet.
Fisherman: In the long term, a surge in growth can be expected again. With advances in medicine, life expectancy is likely to increase by 30 years in ten years. That also helps with debt reduction.
Liver: It’s too easy for me. A banknote is a promise of future purchasing power. Regardless of whether it’s inflation or the cancellation of national debt – both of these mean: You don’t get what is on the banknote. The many people who rely on this promise for their retirement provision, for example, will be the losers. And then are these people supposed to get 30 years older? But there is a huge bang in the system.
Front: For investors, however, this discussion is irrelevant. The important thing is that inflation is rising – whether to three or 200 percent is secondary.
Seriously? 200 percent inflation would be a catastrophe.
Front: Sure, but even three percent inflation is a disaster for savers. They are systematically destroying purchasing power with fixed-term deposits, savings accounts or ten-year federal bonds. Either way: Investors with a long-term time horizon would have to invest everything in meaningful tangible assets. So into your own home, and of the rest 90 percent in stocks and ten percent in gold.
Fisherman: Complete agreement. In phases of high inflation you have to withstand violent price fluctuations with stocks. But in the end, most companies survive; the fortune can be preserved.
Reuss: But you have to tell the whole story. In the hyperinflation of 1923, the stock exchanges were sometimes closed for months. And the courses crashed dramatically in between. Stocks are definitely the most attractive investment and the best protection against inflation today. But 100 percent? The normal investor cannot get through that nervously. He also needs bonds and gold in the portfolio. An equity quota of 60 to 70 percent is more advisable.
Which stocks best protect against inflation?
Fisherman: Stocks of companies that can raise prices if everything gets more expensive. Nestlé, Unilever and Coca-Cola have this pricing power. Amazon is even better equipped. The online retailer can increase its prices almost every millisecond. You have to put such titles in the depot and then do nothing. As Charlie Munger said: Money is made by sitting, not by trading!
Liver: That’s too conventional for me. There are massive technological upheavals. There is an unbelievable cut-throat competition going on. Classics like Coca-Cola will be the losers. They are then only the vicarious agents of the digital providers such as Facebook, Alphabet or Amazon, who draw the full attention of consumers. These companies generate the big revenue.
So still buying big tech?
Ehrhardt: Yes. In the medium term, the major US growth stocks will again perform best. They have such huge market power that nobody can ignore.
Liver: But predatory competition is also enormous among tech companies. Facebook attacks Alphabet while searching online. Conversely, Alphabet Facebook digs the water off the cookies. Amazon is new to the game and is gaining market share. Only one will prevail. I don’t know who today. The dynamic is enormous. Everything can turn completely around in five years.
Front: It is best to have all three stocks in the portfolio. The profit I make with the winner will be many times greater than the loss with the loser.
Fisherman: But neither Facebook nor Alphabet can keep up with the top quality from Amazon. Internet trade is exploding, the online advertising business is pouring billions into the coffers, and the lucrative cloud business on top of that: Amazon has so much power, that’s crazy. We anticipate an average price increase of 14 percent per year over five years. This results in a price target of more than $ 6,000 for 2026. Today the stock stands at around $ 3,200.
The regulatory authorities are now watching the tech giants with eagle eyes. What if there is a breakup?
Reuss: A split would probably even be positive for investors. The individual parts of such a tech giant together are likely to be worth more on the stock market than the conglomerate. In addition, individual parts could merge into new companies, a part from Amazon with one from Google, for example.
Most recently, an industry rotation was observed on the stock exchange: out of tech and into cyclicals and value. Is the trend still going on?
Ehrhardt: The value rally may only be a short-term thing. As soon as the economic surge subsides over all the stimulants, it will be over again.
Fisherman: But there are still great value titles. Novo Nordisk, for example. The pharmaceutical company is the market leader in diabetes drugs. And now he’s about to become a leader in obesity treatment. It will be a success with an announcement. Firstly, because it relieves the burden on the health systems. And secondly, because many self-payers will say to themselves: Great, with 20 kilos less on my ribs, I look great again, I’ll buy that.
Liver: My favorite pick is BioNTech. The calculation is very simple. The company will sell two to three billion vaccine doses in 2021. The partner Pfizer, who does half of the business, estimates sales at $ 26 billion. So let’s say conservatively: BioNTech makes 20 billion with it. The margin on this is around 80 percent. If I subtract the taxes and use it to calculate the P / E ratio, the result is a value of four. That really screams at you, doesn’t it?
Many investors do not invest in individual stocks, but rather broadly via ETFs on the stock exchanges. Can you still count on profits this year? Or is the rally already over after the sharp rise in the first quarter?
Reuss: At first it will be very bumpy on the stock markets. Fear of inflation weighs on the stock markets, as does the fear of tapering, that is, of the central banks turning off the money tap earlier. I don’t expect a bear market, but a rough couple of months. After that, probably sometime around the end of the year, it will become clear that inflation will not be so bad after all. And then the stock exchanges will have room for improvement again.
Front: We carried out an analysis for the US market with the question: How will the rest of the stock exchange year go if the stock markets have already achieved more than ten percent performance in the first 100 days? Result: Then in 75 percent of the cases the performance was also positive in the rest of the year. On average, the stores even achieved a plus of 20 percent for the year as a whole.
Liver: It could be similar this year. Corporate profits will still make enormous leaps. That alone drives prices up.
Ehrhardt: I think we’ve already seen the majority of this year’s stock market profits. Nevertheless, the stock market environment remains favorable. The economy is picking up a bit, but not overflowing. Inflation remains lower than expected. And stocks remain more attractive than bonds.
Then the post-corona bull market will continue for a few years?
Ehrhardt: Yes. We are actually in a bubble. But it only bursts when the central banks take out the liquidity. Only then does this bloated monetary structure collapse. That will take many years to come.
Fisherman: Exactly. Thanks to the central banks, the party continues. It only gets uncomfortable when the debate about tapering boils up. We’ll probably see that in 2022. Or if the Fed does turn the interest rate screw. But these are also entry opportunities because higher interest rates cannot be enforced in the long term.
Reuss: I agree. On average, the stock market generates around six percent profit per year in the long term. That is also possible in the next few years.
Front: To be honest, if you subtract one percent of costs, 1.5 percent of taxes and two percent of inflation, the real investor is only left with 1.5 percent.
Many investors in cryptocurrencies also have doubts about monetary stability. Bitcoin, for example, has already had a brilliant rally this year – and suffered a major setback. Are cryptocurrencies suitable as a store of value and for diversification in the depot?
Liver: In any case. I have a Bitcoin certificate in our Datini fund; it is weighted at around eight percent. Bitcoin is the grandmother of cryptocurrencies and a real money store. Other cryptos like Ethereum or Ripple, on the other hand, tend to simplify the transactions. These are different worlds. Bitcoin is a good alternative to gold because it is scarce and limited in quantity. I still see a lot of price potential there.
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Bitcoin is out of date, however. The prospecting eats up loads of electricity, and the maximum number of transactions per second is measly. Won’t new cryptos overtake it?
Liver: Not as a store of value. In addition, the others lack the hard upper limit for the amount. Tomorrow the maximum number of units in circulation can be doubled – and the currency is worth almost nothing.
Front: It’s like copper and gold. Copper is definitely the more useful raw material, but it is also easier to mine. Only gold is scarce enough to act as a store of value.
Fisherman: But the exciting thing about cryptocurrencies is the blockchain technology. It will turn entire industries upside down.
Reuss: The technology is really revolutionary, but I can’t invest in it. And otherwise cryptocurrencies are only objects of speculation for me. They are not a portfolio asset. They’re not even currencies. Because a currency is a legal tender. Nobody is obliged to accept bitcoins. And bitcoins are not a store of value either. You don’t even know who invented Bitcoin or who is the biggest Bitcoin owner. On top of that, the central banks will never allow a currency in the long term that they cannot control.
Ehrhardt: I don’t believe in cryptocurrencies either. They remind me more of a chain letter system. I prefer to bet on gold. The precious metal has upside potential again. Real interest rates have plummeted again with the surge in inflation, which gives the gold price a lot of tailwind. In addition, the demand for gold jewelry in China and India is picking up again significantly.
The stock rally continues
Hendrik Leber, Acatis boss and Germany’s best-known value investor, looks to the second half of the stock market with confidence. Thanks to the huge economic stimulus packages, corporate profits will rise sharply, he says, which will further boost the stock markets. He believes the MSCI World Index will grow by more than ten percent over the next twelve months.
Hendrik Leber himself manages the Datini mixed fund. And he enjoys great freedom: He can also bet on exotic securities and weight his favorites relatively high. For example, he currently has just under eight percent of the portfolio invested in a certificate on the Bitcoin rate. That means: investors have to be able to withstand strong fluctuations, the fund carries a good dose of risk – but also particularly high profit opportunities. In the past five years, the Datini has grown on average around 20 percent per year.
The largest position in the fund is currently BioNTech. The stock has been on everyone’s lips since the COVID-19 vaccine development. But their price potential is far from exhausted, said Leber. Also on his top list is SFC Energy – “a world star that nobody knows because he comes from Germany. And one of the few companies in the world that can profitably produce fuel cells.” After 20 years in advance, the company is now receiving large orders, reports Leber. He sees this as the prelude to even larger orders.
Keep an eye on inflation
Like Hendrik Leber, Frank Fischer is also an advocate of the value investment. The money professional is currently watching the rise in inflation with eagle eyes. Because if inflation remained high in the medium term, said Fischer, then the central banks might be forced to stem the flood of money – which could put a damper on the stock markets for a short time.
The Frankfurt equity fund for foundations has gained around 26 percent in the past twelve months. That can be seen. One reason for the lush growth in value is the high proportion of equities in the portfolio. It is at least 51 percent, but currently even more than 80 percent. It is therefore also clear: Anyone who relies on the fund should be willing to take risks and not get cold feet straight away in the event of price turbulence.
A strong performance driver in recent months was the top position in the fund: secunet. Your course has more than doubled in a year. The cybersecurity company specializes in data security in highly sensitive areas, such as healthcare or the cloud. Its customers include NATO, the EU, numerous federal authorities and more than 20 DAX companies. How does Fischer choose his favorites? For him, it’s not just about buying cheap, he says. He also invests in slightly higher valued quality stocks, which, however, offer double-digit returns on capital. In the Corona crisis, for example, he struck the online retailer Amazon.
Central banks in a bind
Philipp Vorndran believes that inflation will probably increase. Nevertheless, he does not expect the central banks to turn the interest rate screw in the long term. “The collateral damage is much more restrictive Monetary policy would be huge “, says the capital market strategist von Flossbach von Storch. That is why stocks remain the most attractive asset class for him.
The FvS Multiple Opportunities is something like the supertanker among the mixed funds in Germany. He has collected almost 24 billion euros from investors. Vorndran explains the investment approach as follows: “We try to find a good balance between stable stocks that can be used as a bond substitute and stocks with above-average growth prospects.” A look at the largest stocks in the portfolio reveals what that looks like in practice. Consumer stocks like Nestlé and Unilever are anchors of stability. The top position Alphabet, on the other hand, is one of the winners in digitization, which scores with growth. The fund management currently has 80 percent of the portfolio invested in stocks. In hot market phases, however, it can reduce the share to 25 percent. “If the stock market crashes, we want to do significantly better than the market,” explains Vorndran. “And if the market goes up, we want to profit from it, knowing full well that we will most likely not be able to beat it in rally phases.” Since mid-2011, the fund has achieved an average annual return of 8.8 percent.
The stock exchange climate is getting harsher
Michael Reuss thinks shares are attractive in the long term. But in the next twelve months, the stock market climate will be rougher, he says. The economic upturn after Corona is priced in. And rising inflation will fuel a new discussion about loose monetary policy. Over the next twelve months, he sees the MSCI World moving sideways with strong fluctuations.
Reuss sees signs of exhaustion on the world exchanges. In line with this, the equity stake in the Arbor fund has been reduced to 52 percent net over the past three weeks. The fund management has also recently taken some risk out of stock selection. Defensive stocks were increased, while the proportion of tech and growth stocks was reduced. Goldman Sachs is currently one of the top positions in the fund. The investment bank just presented the best quarterly results in its history. During the Corona crisis, the company gained market share and the mergers and acquisitions business is booming. Owens Corning, a US manufacturer of building materials, is also on the favorites list. As an insulation specialist, he benefits, according to Reuss, from the fact that CO2 emissions from buildings have to drop by at least 50 percent if the climate targets are to be achieved by 2050. The money professional is also optimistic about gold. “We have expanded our gold position,” he explains, “and will gradually increase it further, at the expense of the equity quota”.
It’s not that wild
Jens Ehrhardt has been analyzing stock market events for more than 50 years. He is currently cautiously optimistic about the stock markets. The price gains in the second half of the year will be less than in the first, he says. But the economy and inflation are not soaring upwards that the central banks have to counteract this with interest rate increases.
Ehrhardt’s positive stock market outlook is reflected in the portfolio of DJE Zins & Dividende. The fund is currently almost 50 percent invested in stocks. This means that the upper limit for the equity quota is almost completely exhausted. However, it is not managed by Jens Ehrhardt, but by his son Jan. He is currently focusing more on stocks from the chemical, construction and finance sectors. One of the top positions is BASF. Today the group is one of the top automotive suppliers in the world. He is benefiting in particular from the trend towards electromobility. Because, according to Ehrhardt, the proportion of BASF products in an electric car is twice as high as in a vehicle with a combustion engine. Deutsche Post is also one of the heavyweights in the fund. The company benefits from online trading, can increase its margin and offers a dividend yield of around three percent.
Investors are usually spared sleepless neighbors with the DJE Zins & Dividende. The rather defensive investment approach is easy on the nerves in turbulent stock market times.
Image sources: Simon Katzer for € uro am Sonntag, Natee K Jindakum / Shutterstock.com