Corona and the markets - key questions and answers for investors
The corona crisis has us under firm control. As many investors are showing signs of uncertainty we want to provide further guidance. This includes assessments of expected economic consequences as well as recommendations how to protect your capital and build up your wealth with equities, bonds etc. - even with a sustainable orientation.
Is the corona crisis so far unique - can it be compared with anything else?
Many people compare the crisis with the financial crisis of 2008/2009, but since it is due to exogenous influences, it cannot be equated with it. However, the financial crisis was a blueprint for how to respond to global crises. At the same time, we have no real experience with a virus-induced crisis per se. SARS 2002/2003 was only a comparatively small forerunner and was seen more as a local Asian problem. However, there is a historical pattern - and that is the year 1918: the "Spanish flu" had claimed over 50 million victims in two waves, overlaid by World War I. Nevertheless: At that time, of course, globalization was not yet a topic of discussion and the networking of the economy was not comparable to that of today. In this respect we can only draw few conclusions from that time for today's economic and stock market development. But we are trying to develop certain scenarios for our current situation. The demographic change with an ageing population in Western Europe seems to make crises triggered by global infections more likely. Consequently once the COVID-19 crisis will be over a decision will be made in particular on how to respond to such pandemics, i.e. whether the healthcare system needs to be changed and restructured - and how to deal with such large-scale crises in a more globally coordinated manner.
Let's look ahead: What consequences and phenomena remain?
There will be a partial de-globalization. The best example is the USA led by Donald Trump. As is already the case in agriculture, system-relevant parts of the wider economy, such as healthcare and medical technology, will increasingly produce within national borders. For example, antibiotics that were previously produced in China in order to achieve only a small cost advantage will again be manufactured at domestic sites. Values such as safety and sustainability are also gaining in importance.
How do you evaluate the weakest member of the euro zone, Italy?
It might be possible to bring the European bond market together in order to achieve convergence of interest rates. The strong countries must help the weak ones. This could be done, for example, by the European Central Bank (ECB) purchasing all bonds up to an interest rate of 0.3 percent for 10-year securities. The announcement alone would massively lower interest rates. Purchases by the ECB would not be necessary at all. Otherwise, one possible consequence would be that Italy would leave the euro. Europe must now move closer together if it wants to preserve the euro.
May investors get back into the equity markets now or should they wait and see?
If we leave the corona crisis aside for a moment and focus only on the economy we can see that we will have interest rates at zero for a very long time to come - and that the markets will be flooded with liquidity both now and in the future. Whether private or institutional investors: there will be no way of ignoring shares whether for private retirement provision or simply on a permanent basis within the framework of pension schemes. When it comes to stock selection the key factors are of course solidity, low debt, substance and a sustainable dividend orientation. Within the framework of the current catalogue of government measures it can also be observed whether inflationary tendencies are emerging in certain areas of the economy. Even if it is not conclusive at first glance: If we assume that the current crisis will also lead to de-globalization then the government liquidity injections may encounter a limited supply and lead to price increases. The historical pattern here would be the 1973 oil crisis.
Based on the question of whether now is the right time to get back in again the answer cannot be reduced to yes or no. Nobody has a patent solution to this, especially as the further development of the pandemic and its economic effects are open. Investors who do not need to access parts of their assets in the medium to long term can now cautiously participate in market potential via active multi-asset funds such as DJE - Zins & Dividende.
What are the current prospects for sustainable investments?
The current situation shows how networked and dependent we all are on each other. Thoughtfulness towards others ultimately helps each of us. After all, sustainable action and investment basically means nothing else than not living at the expense of the next generation or other people and is based on the principle of comprehensive consideration. Some companies are currently making exemplary efforts in this respect. For example, a major perfume manufacturer is switching to antiseptics - and an automotive supplier is setting up a production facility for respirators. In addition, there is an increasing global focus of the leading vaccine manufacturers on the corona vaccine. These flexible adjustments are right and important. We evaluate these companies in particular better than before in terms of sustainability.
How do you see gold as an investment - is it more like a portfolio insurance?
In the long run with potential. In the short term, gold is under pressure as many market participants were invested in gold and still are. There was a lot of euphoria in the market. But demand from India and China is weak. Large financial investors are over-invested in gold. In the long term, the vast amount of money that central banks are injecting into the market will have an inflationary effect - then gold could recover strongly again. At present gold is only suitable as a deposit hedge to a limited extent. This could also be observed in 2008. At that time many investors had to sell. However, we recommend gold in the longer term as protection against inflation.
What applies to bonds?
Investment in German government bonds should be restrictevly as they could fall more sharply in price if interest rates were to be adjusted in Europe. Then Italian and Spanish bonds would be interesting.
And what about stocks?
Stocks are now the first choice, in contrast to bonds. Many stocks are cheap. But you have to be very careful and very selective. Healthcare stocks and good consumer stocks are attractive. Pharmaceutical stocks were already under pressure before the crisis, for example in the US, where politicians wanted to cut pharmaceutical prices. Utilities are also part of the portfolio and these stocks also had comparatively small price declines so far.
Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care, the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent.