Charlie Cooksey talks to Christian Gattiker, Head of Research at Swiss Wealth Manager, Julius Baer on investing in the last quarter of 2021.
Are we facing inflation or deflation, and how does it affect investment decisions?
We are facing a bit of both. In the long-run, we’re certainly facing deflation, with falling prices in the past 30-40 years and all the more during the pandemic. What changed during this kind of normalisation is that we have had a spike in inflation and the question now is – is it transitory or will it remain this way?
Our take is that we’re in a rather intermediate increase of inflation, which is very much related to the fact that lots of things were shut down and now reopened, so there’s a scarcity of some things and that pushes up the prices. Then we see a normilasation. That means we’ll most probably end up where we were before the crisis. Meaning not deflation, but rather pricing should be in time.
Why do you believe the extent of the global economic recovery is being underestimated?
We suspect that the blueprint is a different one from what we usually have of the growth crisis. The growth path of the recession in the past 40 years was flatter than before the recession. It was always coming down, and a lot of that was due to the fact that there was some intrinsic problem in the economy that triggered crises such as the housing bubble, bubble in equities, and Asian crisis in the 1990s. However, those were market intrinsic forces which needed to be worked out. They were previously successes in the system. A crisis happened and after that you have to work out and rebalance the economy.
This time is completely different. It is comparable to what we had after the Spanish Flu. This is not about the workout, this is about going back to normal. People are eager to catch up –companies are investing like crazy, money is cheap, and we think that this will trigger a virtuous circle which will be beneficial to the economy.
What is your view of America’s massive fiscal stimulus package?
The initial one which they used to bridge the gap until we were back to normal was certainly helpful. The oversize was really helping the economy to keep going.
The one which is more long-term and very much infrastructure-related, we think absolutely makes sense. There has been a lack of infrastructure spending, so that will trigger some dividends and there will be future benefits for that. But the way they will finance it is much more neutral than the initial package.
Overall, it’s a bit of a left pocket to the right pocket situation, so we don’t expect that it will move the needle in terms of growth, but it is something which certainly makes sense for the long-run.
Which companies do you believe currently offer the best investment prospects?
In our view, winter this year is about business models that provide a steady flow of cash which don’t have too much of a risky aspect when it comes to forecasting these cashflows. We think this is the complete opposite of what we had in the first nine months of this year where it was mostly about risky companies – the ones that are heavily tied into the business cycle – highly cyclical companies, and rather weak balance sheets.
We think this has now shifted and the main reason for that in our view is that the best is over in terms of speed in which the economy recovers. It now will be tapering off and that’s usually when investors turn back to the neglected part of the stock market. This is usually the quality companies.
Any recommendations from your side?
I think we have plenty. If you look at the stable companies, we think a lot of them are in healthcare, which is going through the roof. We think this is a highly disruptive situation when new technologies and possibilities come into play, such as medical technology, life sciences, and so forth. We think this is very interesting.
The tide has been shifting in plenty of other places too and it’s changing the way businesses are run. Look at the circular economy, waste treatment – how do you deal with that? Look at the future of mobility – we had a complete shift to electric vehicles, and the like. There’s plenty of opportunities and that’s why it boils down to single stocks. I think it’s very important to be decisive in the next 6-12 months to tell the one from the other.
Sustainable investments are growing in traction. Do you see this as just a passing phase?
It’s a continuation of a long-term trend and as with so many things, the health crisis accelerated this trend. Therefore, yes, we do think this will continue. The boost is maybe unprecedented of what we had in terms of how people looked at this pace, but certainly it will continue.
It’s a long-term theme where we see more and more of our clients turning this into one of their major pillars of how they run their wealth.
We see everyone talk about the future of everything; megatrends, mobility, healthcare. How do you see this evolving both short and long-term?
We think the short-term is really about tactics and I’m fully with the people saying that sometimes these things get ahead of themselves. The stocks are just pricy, therefore, megatrend investing can be also a tactical investment for the short-term.
We think the underlying trends we see we are extremely stable in most of the areas you mentioned. This is something which cannot be reversed – technology is a major driver, cheap capital, the playing together of many technologies at the same time, AI – all these are going in a direction that is unstoppable and that makes it so attractive over the 5-10 year horizon.
But if you want to hang in for the long-term, you certainly have to be aware that there’s times of doom and gloom and times of euphoria. Therefore, we advise our clients either to be very tactical about it and conscious.
The prime example would be the clean energy after the Biden win. The stock industry tripled within six months after the election. We had to trim the exposure because there’s so much priced into these stocks and we’ve had this correction and then there’s also times when you can get it back in again.
What does the future hold for crypto assets and do you recommend them as a safe investment?
We can’t tell what the future holds. I think it’s a major Darwinian selection process of various technologies, ideas, and ways of cryptocurrencies being set up. The underlying technology blockchain certainly has potential to change the world or at least the way we run business on a global scale. I think we cannot imagine what it will do to the economy.
I like to compare it to the rollout of electric power 150 years ago – nobody had a clue what this was going to do to everyday life and were in no position to forecast that. So, against this backdrop, it’s of high uncertainty, it’s about getting new standards.
It reminds me a bit of the TMT euphoria 25 years ago where the market was spot on about the fact that something completely new is coming. The trouble at the time was that not all of the new business models were available. It might be the same with some of the crypto space that the next ‘gold’, US dollar, or reserve currency in crypto is not even available yet today.
So that can insist that we add some caution to the euphoria. We tell investors that it makes sense to have a certain part of the assets, but be aware of the risks and try to learn what it feels like to have it in your portfolio. I think by eating it, you realize what it does in terms of fluctuations and just keep an open mind to what’s going to happen. I think there will be new opportunities along the way.
How would you recommend someone to invest a million dollars if they were looking long term and low risk? What would be your advice to someone in that position?
A conservative investor to us is labeled a ‘fixed income investor’. At this stage, roughly, if you split your money in the different pocket, it means that you have more than half of your assets, about 65% in bonds; about 20-25% in equities; some in alternative investments; and the remaining 5% or less in cash. That’s usually how you run a portfolio.
That is also our benchmark. At this stage, we’re just a bit underweight so we’re not fully invested in the fixed income space. We have a slight overweight in equities, but we don’t think this is the time to be aggressively far away from where we’d like to be. Therefore, for conservative investors, it’s a plus-minus. I would advise a 60-20-15-5 split, bonds-equities-alternatives-cash.
For more information on Julius Baer, visit their website.