The Eurozone is still debt-ridden. Investors are cautious and put safety first. But, paradoxically, the wide-spread caution is good news for stocks.
There are few people to whom investors should always listen. Bill Gross, rightly called the “bond king” for his impressive long-term track record, is one of them. He recently generated a firestorm when he boldly declared that “the cult of equity is dead”.
A recovery without retail investors
Gross has a point. Private investors usually support rising markets as we saw during the upswing from the lows of 2003 to 2006 when Americans invested some $700 billion in stock funds. Inflows in the late 1990s were even more remarkable.
Currently, we have a recovery without retail investors – although the market’s gains have been similar. Even taking the popular exchange-traded funds into account, US households have bought only $180 billion in equity funds since spring 2009, that figure was zero in 2012! In this cycle, it has been bond funds taking the biggest share of the cake with a hefty $1,000 billion in net buying.
“As long as global central banks keep flooding the system with money, as long as miniscule interest rates make many government and even corporate bonds unattractive, higher-yielding equities remain one of the few asset classes to get some return.” Jens Spudy
Best bet – low risk and low gains
Back in risk-averse Germany, prudence as well as institutional portfolios dominate. A recent survey showed that 83% of professional investors put “safety” first – an all-time high. Obviously there are plenty of reasons to be worried.
The Eurozone crisis is far from being resolved. We are stuck in a debt-ridden low-growth environment. But, paradoxically, the wide-spread caution is good news for stocks. A cyclical upswing in markets does not end because of fear. As long as global central banks keep flooding the system with money, as long as miniscule interest rates make many government and even corporate bonds unattractive, higher-yielding equities remain one of the few asset classes to get some return.
It goes without saying that there is a flip side to all of this. Investors have to accept regular periods of temporary losses.
The key message
Gross, as usual much smarter than most of his critics, did not argue against rising stock prices. Nor is he sanguine on bonds, his home turf. He is well aware that with interest rates at a 100-year low and rising inflation on the horizon, the market offers very limited chances and substantial risks for bond investors.
His key message? Keep expectations low. The perma-bull’s assumption of an annual real return of 6.5% on stocks is overly optimistic. But it is possible to get such a return in nominal terms at least, i.e. including inflation. Bonds and cash for their part will definitely deliver far less.
Jens Spudy is Chairman of Spudy & Co. Family Office wealth management; Dr. Ralf Zimmermann is Chief Investment Officer at asset manager Döttinger/Straubinger, Spudy’s Investment Office.