We want to preserve the accumulated assets we have created. In that respect, we are all conservative. However, when it comes to investing, the term is often misinterpreted. Is a conservative investor one who is predominantly invested in bonds and not in stocks? Are stocks speculative because their value fluctuates wildly at times and bonds being conservative, are generally less volatile in comparison to the stock market?
Yes, is the answer from the point of view of a company's capital structure. If the company runs into balance sheet problems, the equity is the first to go and the share price goes to zero. Whatever remains in the Chapter 11 goes to the bondholders.
No wonder Kostolany (†1999), stock market expert and author, said, if you want to sleep well, buy bonds. He also declared in the same quote, if you want to eat well, buy stocks. Kostolany lived in a time when zero and minus interest rates were hard to imagine. It is conceivable that we are at the beginning of an era when we will look back shaking our heads at how such an event was possible in recent years.
Rising yields, falling prices
In 2020, yields on ten-year government bonds fell to 0.5 percent in the USA and even below minus 0.8 percent in Germany. Today, the picture has changed. In the USA, the three-percent mark in yields is within reach, and in Germany, the one-percent mark has been breached. Everything is back in positive territory.
Unfortunately, this development left its mark on the most conservative investors. If yields rise, prices fall. The longer the maturity, the stronger the price sensitivity; such is the inevitable mathematical relationship. So far, this results in a difficult mix for 2022: stocks as well as bonds struggle with the classification of rising inflation.
Historical price movements
A look back at the past shows just how severe the losses currently are in the bond world. According to reports from the information service provider Bloomberg, the price declines for global bonds were the worst since the introduction of the Bloomberg Global-Aggregate Total Return Index in 1990; on top of that, April 2022 was the worst month. The U.S. financial magazine Barron's writes of the most negative quarter for corporate bonds since 1980 and Bloomberg reports the highest price decline in European corporate bonds in history.
We can see that these are not the usual market movements in the conservative part of the investment pie. Bond investors are shocked by double-digit percentage declines. Should measures have not been undertaken months ago to protect these asset positions? Unfortunately, it is not that simple; clarity only comes with hindsight. Would you have thought that interest rates would decline for years and not stop at the zero line in Europe? Going into cash for years and waiting for better times would have been a difficult path to take.
Today, it is also not a viable solution from Gutmann's point of view.
With courage and prudence into the future
Tactically, the bond markets are heavily oversold and the probability of a countermovement is increasing. There are at least positive yields today and the negative interest rate phase of long bonds over 2019 to 2021 is a thing of the past for the time being.
If you are invested in bonds with moderate maturities and good issuers, do not switch to non-interest bearing savings. We recommend you to review your overall investment. Alone, with someone you trust, or with the support of your client relationship manager.
This is because equities are underrepresented in most portfolios in this country. Perhaps your investment can tolerate a little more excellent companies, which can currently be bought at mostly lower prices than just a few months ago - knowing, of course, that daily fluctuations can be high and setbacks possible. Equally, the likelihood is that you will better preserve your purchasing power in the long run with it.
Disclaimer: This is a marketing communication. Investments in financial instruments are exposed to market risks. Past performance or forecasts are not reliable indicators of future results. Tax treatment depends on each client's personal circumstances and may change in the future. Bank Gutmann AG hereby explicitly points out that this document is intended solely for personal use and for information only. Publishing, copying or transfer shall not be permitted without the consent of Bank Gutmann AG. The contents of this document have not been designed to meet the specific requirements of individual investors (desired return, tax situation, risk tolerance, etc.) but are of a general nature and reflect the current knowledge of the persons responsible for compiling the materials at the copy deadline. This document does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell securities. The required data for disclosure in accordance with Section 25 Media Act is available on the following website: https://www.gutmann.at/en/imprint