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Heiko Böhmer: Inflation consumes wealth – this asset class helps | news

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Two things pose major challenges for investors: On the one hand, there are negative real interest rates of less than -5%, which make it increasingly difficult to achieve a positive real return on investment. On the other hand, high inflation also ensures that investors’ assets are constantly consumed. Imagine: with the current inflation rate of 8%, around 20% of purchasing power is lost after 3 years.

How do we assess the further development of financial markets in this area of ​​tension? We’re keeping him updated with Madeleine Albright, the recently deceased former US secretary of state: “I’m a very worried optimist.” We too are optimistic with doubts.

We are bullish over the long term – stocks have proven to be the most successful asset class when it comes to really long time frames. Just one example: Between 1926 and 2021, the US S&P 500 index returned an average of 10.45% per year. Over the same period, US bonds returned around 5%.

Long-term investors can remain calm

Hence, for those who have the time and can withstand stock market fluctuations, stocks remain the most important asset class. If you haven’t invested in stocks yet (and this is still most Germans), it’s better to get in now than tomorrow.

With so much negative news, it’s not easy to stay optimistic. Businesses are already suffering from high inflation. In Germany, producer prices increased by around 33% in May compared to the previous year. For many businesses it will be crucial how massively high prices can be passed on to customers. The key word here is price power.

Indeed, macro factors are now playing a much more important role than in previous years. In the meantime, it seemed that central banks would decide the game. Many large companies, especially in the technology sector, have developed excellently in an investment-friendly environment. But now things are slowly getting exciting back to the markets.

The decline in liquidity puts pressure on the financial markets

Warren Buffett once coined the phrase, “Only when the tide goes out, do you see who swam naked.” This image fits perfectly with the current market situation. With the flood of stock exchanges – equivalent to high prices – almost all market participants were wiped out. But now the water has withdrawn. because the almost unlimited liquidity provided by central banks is slowly being withdrawn from the market. So now we can see which companies can also hold their own in an environment with less liquidity.

At the same time, many market participants have to adjust to a “new normal”. So far, many investors have not seen a significant increase in inflation. Only veterans of the financial markets actually know the last phase with such high inflation rates in the 1970s and early 1980s. But for someone like me who has only been active on the stock markets for 20 good years, these conditions are new. As a result, new challenges arise for many investors.

Have we already seen the peak of inflation?

The fact is: the future trend of the stock exchanges will depend on the development of inflation rates. If things continue to grow significantly here, the situation is likely to get even worse. There is a risk of a massive drop in profits and margins for companies and a further drop in prices. However, if inflation turns around soon, then there is indeed hope of seeing a positive turnaround on the stock market as well.

After the recent surge in inflation, the question now remains: will we soon reach levels of 10 percent and beyond, or have we already peaked? This question is so important that I will answer in detail here in the next week, because there are numerous arguments in favor of one side or the other. Furthermore, I look at the evolution of the market in the first half of 2022, which resulted in losses for almost all asset classes.

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