The question always arises as to whether investments are being made at all and how high the proportion of stocks and fixed-interest securities should ideally be in the asset allocation.
In recent years, with continuously falling interest rates and even the phase of negative interest rates, the decision was usually very easy. Fixed-interest securities from the “old” days were held until maturity. New investments generally made no sense. Many investors switched to special forms such as subordinated and convertible bonds and participation certificates. In order to achieve a positive return, they often took greater risks.
2022, the year of horror for both asset classes
Last year, central banks began to raise interest rates significantly and very quickly as part of the fight against inflation. This was not good for both the stock markets and the bond markets and both asset classes gave us double-digit negative results. Investors in supposedly safe fixed-interest securities were particularly hard hit, as the previously mentioned special forms, borrowers of poor quality and/or longer terms had a disproportionate loss.
Situation on the stock markets at the end of the third quarter
At first glance, the stock markets in the USA and Europe performed very well. Much better than the majority of market participants expected at the beginning of the year. However, the positive price development was only driven by the largest public companies and by the run into everything that somehow smells of artificial intelligence. Many mid and small caps in Europe and the USA have not followed this movement and are extremely cheaply valued.
However, we are in the middle of a recession in Europe and the USA is slowly but surely moving in that direction too. As long as the recession is not noticeable in the USA, we believe that the central bank will not lower interest rates and this circumstance has great potential for disappointment for these stock markets. Many investors are expecting interest rate cuts soon and thus a tailwind for the stock markets.
Here we advise that only half of the funds earmarked for stocks should currently be invested in a so-called “recession portfolio”. We keep the other half liquid with interest. How nice that there are interest rates again.
Battered fixed income securities
It is becoming clear that we have reached the peak of the interest rate hike cycle in both the USA and Europe. Maybe the interest rate will move up a little, but that should be it on the whole. As a result, we recommend taking a close look at this asset class and investing boldly and carefully.
Yields of over 4.5 percent can currently be achieved again with high-quality corporate bonds. Even if inflation does not reach the target of two percent within the next 24 months, a decent, real return can be achieved again in this asset class after many years of sadness. If interest rates fall faster than expected, there will be opportunities for price gains in addition to the currently purchased yield level.
Fixed-interest securities of inferior quality, which will fall in price if the debtor’s creditworthiness deteriorates due to the effects of the recession, should be avoided. Systems in special shapes are not yet necessary. Only when it becomes clear that the recession is coming to an end can the focus be expanded to include this asset class.
Team share or team pension?
The answer here can only be: in principle and in the long term always both teams, but in the current market phase it is clearly TEAM RENT!
So: butter the fish!
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By Heiko Löschen, asset manager at GSP asset management GmbH in Münster
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