A map of the region around Lake Starnberg hangs in Bernhard Langer’s Frankfurt office. That may be a reminiscence of his Bavarian homeland. But it can also be understood symbolically: someone wants to keep track of things in a complicated world and find the right way.
This is exactly what Langer has been doing professionally for almost 30 years at the independent investment company Invesco, which is based in Atlanta, USA. Langer co-determines the investment strategy and heads the quantitative strategies area, which is primarily based on data and works with probabilities and algorithms.
Therefore, the current hype about artificial intelligence is of course of particular interest to him. But he also deals with the current factors influencing the financial markets and issues a few warnings in this regard.
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Chance of a quick return
WELT: Mr. Langer, in the spring there was brief panic on the financial markets when first the Silicon Valley bank ran into problems, and then Credit Suisse. The situation has since calmed down and the stock markets are on record course. Is everything back to normal?
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Bernhard Langer: This sentiment is essentially based on the belief that the trend towards higher interest rates has come to an end and that the US Federal Reserve will soon even turn around and lower interest rates again. This is a big mistake. The central banks waited a very long time and watched the increase in inflation rates before they turned things around, the European Central Bank being the last.
But now they are all the more willing to curb inflation. This goal is more important to them than the question of whether it will trigger a recession. Both the Fed and the ECB will therefore raise interest rates again next week, and that’s not the end of it.
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WELT: How far will central banks go?
Langer: In Europe, the key interest rate is likely to rise to four to 4.5 percent, in the USA to over five percent. But the decisive factor is that the era of zero interest rates is finally over, interest rates will remain high because inflation will also remain high. There are now second-round effects.
In addition, the demographic development is leading to a labor shortage, which will continue to drive up wages in the long term. Converting the economy to climate neutrality also costs money, as does relocating production from China to other countries. We will therefore see inflation rates of three to four percent for many years, and interest rates will tend to be higher.
WELT: The economy seems to have gotten used to it and investors are mostly optimistic at the moment.
Langer: That’s the picture on the surface, but it’s simmering in the background. The increased interest rates are a problem for anyone who has financed something with a high proportion of credit, whether they are private individuals or professionals such as private equity funds or real estate investors. They used to pay 0.6 percent interest, now it’s four percent. It will take a while for this to take hold, but this will still lead to distortions, and we are already seeing the first signs of this in the US commercial real estate market.
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WELT: The last US housing crisis in 2008 grew into a global financial crisis. Is something like this threatening again this time?
Langer: It won’t be that bad. The regulation of the banking system in recent years has changed a lot, the system is much more stable today, the banks are much healthier. It may well be that some small bank will die, but that will not lead to a conflagration.
Investment Strategist Bernhard Langer from Invesco
What: Martin Joppen
WELT: So are the high share prices justified after all? The Dax has just reached a new record, despite the recession.
Langer: First of all, the German stock market had a lot of catching up to do in the past few months. Last summer Germany looked like it was falling into a deep hole, gas prices were skyrocketing and there was a risk of a production standstill in the winter. That didn’t happen, and so there was a relief rally. In addition, the recession has not been deep so far, we are dancing around the zero line, and companies have been able to expand their margins in recent months. At first glance, this justifies the current prices. Still.
Hype about AI also on the stock exchange
WELT: From this I hear skepticism.
Langer: We already have one of the lowest growth rates in Europe, energy prices are above average, and we are highly dependent on China, especially in the automotive industry, which is one of the country’s key industries. If nothing fundamental changes, Germany threatens to fall behind in the coming years.
WELT: The USA, on the other hand, is pulling away economically, and the government is bringing important industries back into the country, primarily with the help of subsidies. And in the USA, too, the stock market is on record course.
Langer: There, however, only a few stocks benefit from it, the seven large technology groups. If you calculate them out, the courses hardly move. The broader market isn’t part of the upswing. And that bothers me.
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WELT: The subject of artificial intelligence is driving the courses of these few large corporations.
Langer: Exactly. This sometimes leads to amazing buds. The shares of chip manufacturer Nvidia, which supplies the building blocks for AI applications, are currently trading at 37 times sales – not profits! That’s crazy and reminds me of the bubble on the Neuer Markt at the end of the 1990s.
At that time it was also said that the old valuation standards no longer applied and that profits were uncool. Back then, many forgot that stock prices can fall, and that seems to be the case again today. Nvidia, for example, fell over 50 percent in 2022 before gaining 170 percent this year.
WELT: Nevertheless, such hypes often last longer than you think.
Langer: Yes, but in the end a small trigger is often enough to trigger disappointment in the market. Then it is initially said that investors simply take profits, then sell more, and in the end there is a drastic price slide. I wouldn’t be surprised if this hype ends like this.
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WELT: Artificial intelligence is likely to change our world significantly, including the financial world. Why will we still need investment strategists in the future, when AI can do that better?
Langer: AI can help wherever there is a stable environment. In a skin cancer screening, for example, it can help to decide whether a spot is malignant or benign, there are clear criteria for this. But the world of economics and finance is chaotic.
There is a lot of data here, but it is not possible to clearly define which data, for example, leads to rising prices and which to falling. The markets are driven to a large extent by emotions such as greed or fear, and this is where AI reaches its limits. But it will certainly become an aid.
WELT: Like for example?
Langer: We’ve already worked with linguists to develop a tool that allows us to analyze CEO responses at analyst conferences. For example, does he say “I” or “we” more often? The latter suggests he’s distancing himself from the company, especially when that changes from one conference to the next. However, a person still has to draw the conclusions from this.
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“Everything on shares” is the daily stock exchange shot from the WELT business editorial team. Every morning from 5 a.m. with the financial journalists from WELT. For stock market experts and beginners. Subscribe to the podcast at Spotify, Apple Podcast, Amazon Music and Deezer. Or directly by RSS-Feed.