INVESTMENT CONUNDRUMS IN THE SECOND HALF OF 2023Aug 21, 2023
Our market space is full of worrying signs:
- The Ukraine-Russian war is ongoing and there is no sign for an end in the near future, recent diplomatic activities smell like cold war reloaded
- Interest rates have risen, but remain on acceptable levels so far in most countries. However, the changes triggered are still important
- The interest rate curve of the US is inverted which signals a recession in the offing, besides the FED being more relaxed lately. But historically inflation tends to be sticky and stagflation could be a realistic outlook
- China is lagging in growth and shows deflationary signs with a real estate sector probably too big for the economy. Surprisingly, Japan seems to be relatively attractive as the less ugly kid on the block at the moment
- Germany is probably already in recession and the outlook of economic agencies and research institutions is rather gloomy
- Private money appears to be more reluctant to active investing than ever in recent years
- Quantitative indicators predict a seasonal rise of volatility in autumn. There are fears that real estate market have just started to get shaky with Evergrande filing chapter 11
But some other factors contradict this negative picture:
- Equity markets have been surprisingly resilient despite all this gloom
- Stocks are not cheap, but there is no general overpricing
- Growth stocks have still performed in 2023, showing investor confidence
- Institutional investors are actively investing fresh money, managing a good flow of funds and showing no signs of extreme hedging
- In the US we have positive real interest rates – unseen for a long time
- Private investors and family offices are still seeking to improve the overall return by investing in illiquid private equity and venture capital investments, even though with a more selective approach than before
How does all this match?
The still existing worries about the bond market may be one factor supporting equity investments, but this is not enough to explain general market resilience.
Many companies have made structural changes in the last 10 years that justify today’s valuations – just think of traditional industries going digital or technological innovation in many fields of research.
But on a general level it should also be taken into account, how much stock prices discount future earnings. With all the gigantic leapfrog progress expected from the beginning era of artificial intelligence, quantum computing, new robotics and bioscience, you could argue that all this is in part already discounted in market prices of today. We cannot be sure, which companies will benefit the most for example from distributed ledger, Chat GPT or other disruptive boosts. But we can assume that there will be great investment stories out there in all sectors of the economy and all stock market segments.
What is the practical lesson from these reflections?
- Stay invested despite all worries, but have a long-term view
- Look at your overall wealth holistically in order to spot specific areas of risk allocations (BeeWyzer recommends its ‘5-dimensions-of-risk model’).
- Take higher volatility into account – either by partial hedging or by buying vola. If you are not trained for this, look for a talented partner
- Spread investment risk wide – the future is always hard to predict, but with game-changing technologies maybe this is even harder
- If you invest in single stocks, do a thorough analysis of the CEO’s strategies with regard to technological change and the opportunities in there
- If you want to tap aspects of technological change directly, buy VC/PE funds run by experienced professionals, rather than via the stock market
- Keep cash for opportunities that may come up, but use it also as margin for hedging and monetizing volatility – allowing you to get a better return on it
- Stop listening to the ‘Dr. Dooms’ of this planet, get independent and balanced advisors and think things through yourself!
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