ZSpreading trust is part of the self-image of the investment strategists of large fund companies. Finally, paid products must be sold to investors, especially institutional clients. The difficult market environment becomes even clearer when a representative of this guild calls things by their proper name. This is the case of Bernhard Langer, who was a senior investment strategist at the American fund company Invesco for many years. “The magnitude of the correction in the financial markets was greater than expected,” he says in an interview with FAZ
The turnaround in interest rates and inflation is driven by factors that show no signs of easing, he adds. Supply chain problems depended on China’s measures to combat the crown pandemic. Energy and food prices would be affected by the war in Ukraine. According to Langer, at most one base effect of the price increase that has already occurred can occur in a year and push inflation down a bit.
“Things have already gone much worse than expected in the supply chains, as well as in the prices of energy and food. I don’t expect inflation to ease anytime soon, “is his sobering conclusion. In the US, according to his observation, there are also recession concerns. The expectation of an economic downturn is almost a consensus there. Analysts have begun to lower their earnings estimates. “This means on the stock market that valuations as measured by the price-to-earnings ratio are still too high.” Langer fears there is still a need for a correction here.
The ECB is in a dilemma
The big question in European financial markets is whether the European Central Bank (ECB) has delayed tightening monetary policy for too long. It does not want to raise interest rates until July, while central banks in the US and Britain have already acted much more aggressively. However, Langer does not believe that the price increase in Europe would have been significantly lower if the ECB had raised interest rates earlier. The Invesco strategist points out that the US Federal Reserve is also accused of reacting too late, even as it is raising interest rates very aggressively – as recently as 0.75 percentage points.
According to Langer, the ECB is in a dilemma due to the construction of the euro. It has to look at the yields of heavily indebted countries like Italy and, unlike the former Bundesbank, it cannot focus solely on monetary stability. DZ Bank analysts recently compared this monetary policy dilemma to squaring the circle. Given the weakness of the euro, especially against the dollar, Langer assumes that the euro area will now also import inflation. Because important imported goods such as oil are billed in dollars, so that the already high dollar price rises again due to the weak exchange rate of the euro.
“In my opinion, a lot has already been priced in the bond markets, so I no longer expect yields to increase significantly,” says Langer, referring to the sell-off in bond markets since the beginning of the year. Due to the high price losses, the highest in over 20 years, yields have increased significantly. As the year progresses, Langer does not rule out the possibility of the yield curve flattening or even reversing, which would be a clear sign of recession.
In an inverted yield curve, short-term rates, such as two-year yields, are higher than long-term, typically 10-year rates. Bond markets are thus pricing in weak economic growth, which the central bank tries to stimulate by lowering interest rates. This is reflected in the lower long-term interest rates.
“The cryptocurrency market is dead”
Langer also notes a change in attitude in his conversations with clients: “For them, the issue of risk is particularly important.” He views the cryptocurrency markets as a fear barometer. A lot of confidence was lost there, which is not only due to the drop in the price of Bitcoin, but also to the closure of the trading platforms. “The cryptocurrency market is dead,” Langer believes.
According to him, Invesco currently has a high liquidity ratio in its portfolios. This is also the case with other wealth managers because they want to play it safe given the uncertain outlook and therefore hold relatively large amounts of cash. Langer also points to the still high share of shares and then sends: “We hold hardly any bonds.” interesting for him. Real estate markets also remained in high demand, although it became increasingly difficult to find profitable properties.