Fund manager Bert Flossbach: ECB could sacrifice the primacy of fighting inflation

• ECB will probably keep interest rates at a high level for a while
• Flossbach: ECB also has an eye on the solvency of highly indebted countries
• Bert Flossbach is adding bonds to his fund again

ECB President Christine Lagarde has signaled that the central bank will not begin cutting interest rates, at least “in the coming quarters.” She explained on November 10th at the Financial Times Global Boardroom conference that inflation in the Eurozone will return to the 2 percent target if interest rates are kept at their current levels “long enough.”

Bundesbank President Joachim Nagel warned of unsound state finances

Bundesbank President Joachim Nagel made similar comments. Accordingly, the ECB Council is firmly determined to establish price stability, i.e. to soon reduce the inflation rate back to 2 percent. For this to happen, the key interest rates would have to remain at a sufficiently high level for a sufficiently long time, said the ECB Council member in a speech in Baden-Baden.

On this occasion, Nagel also warned of the danger that unsound government finances pose to price stability. “If debt ratios are high, people could lose confidence that the burden can still be met without an inflation tax. Inflation expectations and therefore inflation itself could therefore rise,” argues the monetary authority.

Dr. Bert Flossbach focuses on public finances

Also Dr. Bert Flossbach, co-founder of the asset manager Flossbach von Storch, sees the monetary authorities facing enormous problems in view of highly indebted countries. The expert assumes that there is currently no peak in interest rates, but rather the beginning of a plateau, the length of which depends not only on the persistence of inflation, but also on the resilience of the financial system in the face of persistently high or further rising interest rates.

According to Flossbach, the ECB is faced with a conflict of interest between combating inflation and financial market stability. On the one hand, to combat inflation, the monetary authorities have to raise interest rates above the inflation rate in order to cool down the economy. But on the other hand, inflation is a blessing for state budgets because rising prices and higher wages increase tax revenue. This gives the gross domestic product an additional (nominal) boost, which reduces national debt in relation to economic output. To do this, interest rates must remain below the inflation rate (negative real interest rate) so that the additional interest burden does not eat up the inflation gains, explains Flossbach, according to “Institutional Money”.

In this context, the ECB faces an enormous challenge because there are large differences in national debt between the individual euro member countries. For example, in 2022, Italy’s public debt ratio was 144 percent, more than twice as high as Germany’s 66 percent.

In Flossbach’s opinion, the ECB will also keep a close eye on the yield level in Italy and the risk premium compared to federal bonds when combating inflation. If this yield difference were to increase significantly, it would signal a flight to the supposedly safe haven of federal bonds. In order to prevent another euro and banking crisis, the ECB would probably be forced to intervene and purchase Italian bonds. This would mean sacrificing the primacy of fighting inflation in favor of financial market stability.

How does Dr. Bert Flossbach in times of high interest rates?

At his Cologne fund boutique Flossbach von Storch, the expert has already reacted to the new world of interest rates. As fund manager of the “Multiple Opportunities” fund worth more than 36 billion euros, he is now back to investing in bonds, after having previously looked for them in vain in the portfolio of the flagship fund.

According to “Das Investment”, the fund already consists of 17 percent bonds, including US Treasuries, but also corporate bonds from Volkswagen and JPMorgan. When asked, the expert also explained that he was not averse to expanding the bond position even further if the yield environment continued to change. However, he focuses on quality. However, he does not invest in high-yield securities because he does not consider the risk/return ratio to be attractive.

When it comes to his stock investments, Flossbach also concentrates on quality stocks such as Apple, Microsoft, Alphabet and Amazon. Even if the valuations of some tech stocks have increased significantly in recent years, the quality of the companies has also increased, argues the fund manager.

Editorial team finanzen.net

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