5/20/22 5:07 PM - Lesezeit

Investing Against The Wind

Robert Karas

Chief Investment Officer

The struggles with rising inflation

The last few months have been very challenging. Stocks and bonds alike are struggling with rising inflation and an unclear economic outlook - a difficult mix. How should investors invest their money now?

Asset allocation is driven by several variables. Most important is the strategic direction of the allocation. Above all, the following question must be answered: How much volatility can I withstand in my portfolio? Ok, so actually it is how much drawdown can I withstand? Because, the upward volatility - the gain – has not worried anyone yet. 

Take a breath and hold on

If the investor chooses a strategic stock allocation, we should talk about the years 2000/2001 and 2008/2009. Both times, the broad stock markets halved. That makes, for example, with strategic 60% stocks (and 40% bonds), a whopping minus of 30%. Important to know: Those who stayed with strong nerves made up for it all and are now happy about the gains they have made since that time.

Both phases differ from today, because the bond part had a positive effect at that time (balancing the negative share prices). If one was invested in quality, this part of the portfolio increased and the total loss - in this case 30% - was significantly reduced.

Loss on equities and bonds

This year's market movements are by no means comparable to these crisis phases, and yet they pose their own challenges. In the 60/40 portfolio described above, a 16% drop in prices since the beginning of the year is quite possible; minus 20% for equities, minus 10% for bonds. That is the big difference from back then: both asset classes lost this year. 

Bank Gutmann customers suffered a smaller setback than this 16%. Good quality and defensive orientation mitigated the losses, but could not completely buck the market environment. Those who held only cash instead of bonds at the end of the year were surprisingly at an advantage. Yet, would holding cash have been a good long-term strategy? No, because the quality of the investment decision cannot be assessed based on short-term market movements. 

Why should you have switched to the money market just at the turn of the year? Why not all the years before, when interest rates and bond yields were also extremely low? If you had bet on the money market too early, negative interest rates would have been the result. You would have been right to ask whether we at Gutmann could not think of anything better. 

Positive returns again in Europe

The rapid rise in bond yields over the past few months has been particularly painful. However, we do not believe that this will continue. This is because it was not only the yields of the safest issuers that rose - in Europe, this is primarily the German government. In addition, the spread of all other securities increased. For example, the spread of Austrian government bonds over their German counterpart rose from 0.2 percent to 0.5 percent. This so-called 30 basis point difference also had a negative impact on the price of Austrian paper. 

Our favorite holiday destination, Italy, was hit even harder. There, the spread widened from 100 to 200 basis points. Many different issuers were affected by this widening of the spread.

These developments in yields and spreads can also be interpreted as investors wanting additional compensation for risks. What risks? Currently, probably related to inflation and credit. For existing positions, this means lower prices, the higher the increase in yields and spreads. 

The important thing is to look ahead

We do not expect the rapid rise in yields seen in recent months to continue. Thus, bonds should again better fulfill their role as a stabilizing part of a mixed portfolio in the coming months. 

Especially in turbulent times, it is good to have a partner for financial issues. Your Gutmann relationship manager will be happy to advise you on all aspects of your current investment.

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

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