It might seem to you that not much has happened in the past quarter about our portfolios. Actually, you should not overlook the fact that our portfolios have held up well over this period. Beneath the surface, there have been some developments that could have major consequences and we need to be prepared for them.
Apart from all the ongoing geopolitical tensions, which have certainly not diminished, the biggest concern is the impact that we can expect from the sharply rising interest rates. That is not new you will think, and you are not wrong. Interest rates have been rising for almost two years now. Once again, the ECB and the FED have both raised their interest rates. The FED, the US central bank, has raised its rates to 5.5%. The ECB has raised them to 4%. In the wake of this, bond market interest rates have also started rising again. You are aware of the two most important “risk-free interest rates”: the rates at which the US and the German governments finance themselves for periods of 10 years. This 10-year rate in the US is currently about 4.6% and in Germany it is now almost 3%. These are the highest interest rates of the past 20 years, the highest since the introduction of the euro.
Meanwhile, we find ourselves in the schizophrenic situation where our governments are engaged in “deficit spending” and are thus spending far more than they are taking in. They are doing this in the context of a very expensive climate transition, investments in defence and the rising costs associated with an ageing population. With the result that government debt continues to rise. Monetary policy and fiscal policy are working against each other. The expansive fiscal policy of “Big Brother” can only lead to more inflation and currency devaluation. At the same time, monetary policy with its interest rate hikes is aimed at combatting the very same inflation. What makes this painful situation even worse is that not only is fiscal policy not working in the same direction, but that central banks can only exert a limited influence on inflation. For example, they cannot directly influence commodity prices.
They cannot resolve the labour market shortages. And when money becomes more expensive, it has the effect of making some other things more expensive, such as rents.
What should you do with your assets in such a confusing world?
First of all, we must protect you against inflation. In this regard, our strategy remains unchanged: we stand by the combination of inflation-linked bonds and shares of companies with pricing power.
But it is clear that the effects of the interest-rate shock are still reverberating through the economy. Governments and companies are having to refinance themselves much more expensively. Extreme caution and selectivity are therefore warranted. It is in this context that the enormous importance that we attach to the solidity of the companies in which we invest for you must be understood. Most of our companies have little debt. Those which do have debt have financed themselves by issuing long-term bonds. They are protected against these higher interest rates for the coming years.
In short, our investment strategy today rests on two main pillars.
First of all, we seek protection against inflation.
Secondly, this must be accompanied today by a very high degree of selectivity. Every bond, every share is subjected to intense scrutiny before we invest your money in it. We are going through a challenging period. However, the first piece of good news is that, thanks to the significantly higher interest rates, bonds will once again offer good future returns for the first time in 20 years. The second piece of good news is that our companies are in good shape. There are always opportunities for these companies, even more so in difficult circumstances. As always, we are ready to respond actively to the chances and opportunities that will arise in the coming months and years. In this regard, we are guided by a coherent investment process. That familiar compass which we have been following for more than 30 years now.
