When The World Ends
What happens if inflation remains high for years? Will our economic area suffer so much damage that the substance of the stock market would be destroyed? Will my investment strategy still fit then? That was the tenor of a client question on the current situation.
I am grateful for this question. Because it pushes fears that many of us feel to the forefront. It illuminates the tail of the negative extreme variants in the probability distribution.
The future is uncertain
As asset managers, one of our tasks is to take a close look at scenarios that seem impossible. Not because we believe they will happen, but because they open our minds to the unexpected. Get out of tunnel thinking and perceive the world with all its surprises - positive and negative.
Who would have expected that there would be war just a few hundred kilometers from Vienna? Who would have thought that in August 2022 producer prices in Germany would rise by 45.8% year-on-year? Even if we like to suppress it: We do not know what the future holds.
Equities as protection
Back to inflation. Is it here to stay? Is it possible to experience double-digit inflation for years? Yes of course, just think of Turkey. Here, double-digit inflation has now become the norm, and in recent months, people wish it would go down to 10% - in fact, in August prices were 80.2% higher than a year earlier.
In the euro zone, such a scenario is hard to imagine, as our institutions are much more firmly behind a stable monetary value - even if it does not always seem that way. Even the skeptics have to admit that the central bank is now resolutely raising interest rates and contra inflation - after all.
However, even in countries like Turkey, stocks offer protection against inflation. The Turkish stock market has almost tripled in the last 2 years - in Turkish lira only, of course. If one converts it into euro, it is still up by about 30%. The cash stuffed into the pillow two years ago will soon serve only as wallpaper.
Equities as an anchor
The loss of confidence in the currency leads to rampant inflation. In this extreme scenario, stocks and other real, productive assets become a haven of relative stability.
In the case of bonds, however, the situation is more challenging, as no issuer can or wants to pay a coupon - i.e. annual interest burden - of 80%. Real loss of value is therefore inevitable.
Incidentally, over the last 10 years, the Turkish stock market has almost quadrupled in value in local currency terms, but it has halved in euro terms. Over long periods, other factors also play a role: political risk is reflected in valuations, and the economic environment in Turkey has an impact on companies' profits.
Quality is the solution
Attractive returns are the result of successful entrepreneurship and the environment that makes it possible. That is why we carefully select each individual stock for you, our clients, and closely monitor the company’s entrepreneurial success. Our universe covers all Western countries where our ownership rights are well secured.
No matter how rosy or black you want to paint the future, equities in quality companies should be an important part of your financial assets. Who better to advise you on this than the bank you trust?
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