Opinion investment strategies
The deceptive stability on the German stock market
As of: 12:29 p.m. | Reading time: 3 minutes
Thomas Mayer, founding director of the Flossbach von Storch Research Institute
Quelle: ;Marc Comes/dpa/picture alliance; picture alliance/Geisler-Fotopress/Uwe Geisler
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On the global stock and bond markets it seems as if normality is finally back. But inflation is lurking again in the euro zone. Economist Thomas Mayer explains how shareholders should react now.
Since the beginning of the year, a semblance of normality has returned to the financial markets. The MSCI World global stock index is up around seven percent (in euros) this year, while the Barclays Global Aggregate bond index is down more than one percent.
The combination of rising stock and falling bond prices points to a well-growing global economy, in which corporate profits are increasing and inflation that remains too high is dampening hopes of quick interest rate cuts.
The fact that Germany is currently the sick man in the group of seven most important industrialized countries (G7) is irrelevant. The German stock index Dax has also risen since the beginning of the year and the bond index Rex has fallen.
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Germany’s weakness is more than offset by the strength of the USA in particular. The sky appears cloudless for the stock markets: the volatility index for US stocks (VIX) has fallen back to a level that was usual in the better times before the pandemic.
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The US Federal Reserve has to be thanked for the calm seas. It has achieved what almost no one thought possible: reducing inflation without plunging the US economy into recession.
However, the price for this is likely to be that, after the initial successes, it will become more difficult to bring inflation down to the two percent target. Because the labor market remains firm – which was the Fed’s intention – wage growth remains significantly higher than before the pandemic at around 5 percent year-on-year.
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Fortunately, however, employee productivity is increasing, most recently at an annual rate of around three percent. Unit labor costs, which reflect the cost pressure on companies, are only increasing by a little more than two percent.
Nevertheless, in order to achieve the inflation target in the long term, the growth in unit labor costs would have to fall somewhat and profit margins would have to stabilize. Given robust economic growth and a solid labor market, this is anything but certain.
The Fed may have to keep its key interest rate higher for longer than markets currently expect. The stock market could probably cope with this as long as there is no threat of further interest rate increases. However, bond prices could fall even further.
ECB at a disadvantage
The European Central Bank is in a less favorable position. It raised interest rates later than the Fed and is now leaving them at lower levels. Although the euro zone economy is weaker, inflationary pressure is still significantly greater.
Since productivity in the euro zone is falling, but employees are forcing similar or larger wage increases to compensate for inflation than their colleagues in the USA, unit labor costs are rising much more rapidly, most recently in Germany by more than seven percent compared to the previous year. The high wage cost pressure could lead to a renewed rise in inflation in the euro zone.
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Against this background, it is advisable for investors to invest their freely available savings primarily in stocks, ideally in a global portfolio with a high US share.
Because central banks are concerned about financial stability, they offer equity investors partial insurance against market downturns. Savings parked for later expenses are best kept in interest investments with short terms. Interest rate risks can be minimized with staggered terms, a so-called “bond ladder”.
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