More than a dozen all-time highs in the DAX, the first record levels in the Nikkei 225 in 34 years, and in the US, too, prices climbed to new peaks in February and March. If you are wondering where things go from here: for Philipp Dobbert, Head of Asset Management at Quirin Privatbank and at quirion, it is not just the current situation that makes the case for a forecast-free investment strategy and a globally diversified world portfolio.
Mr Dobbert, many equity markets have already set record after record this year. Did that surprise you?
It actually surprised me a great deal. Prices had already risen sharply at the end of last year. At that point, the expectation had taken hold that key interest rates in the US and the eurozone would fall this year. At its core, not much has changed in the underlying conditions since then. And yet the markets have gained substantially once again. Many equity-market forecasts from December are already obsolete. Once again, you can see that forecasts are of no use when it comes to investment strategy.
In Germany, the economic situation has, if anything, deteriorated. Even so, prices here have risen significantly. Isn’t that a contradiction?
There are two misunderstandings hidden in that question. First, the equity market does not reflect the current economic situation. Prices are shaped by expectations about the future – and those expectations can look far into the future. Second, for the internationally positioned companies in the DAX, it is the global economic outlook that is decisive. And that outlook is far better than the one in Germany. In the large export market of China, for example, a somewhat stronger recovery is emerging. And the US economy remains very robust.
In the US, however, data released in March also showed that core inflation is holding at a higher level than had been expected. That works against the hoped-for interest-rate cuts. And yet, following the release, the S&P 500 climbed to a new all-time high…
The key interest rate isn’t everything. Single-cause explanations for trends on the equity markets very often lead nowhere. At any given time, you can find plenty of reasons for how prices develop. The range is extraordinarily broad – from company-specific news to macroeconomic data.
Of course the level of key interest rates is an important underlying condition. In the eurozone, we expect two rate cuts of 0.25 percentage points each in the second half of the year. In the US there is a bit more room to manoeuvre. Whether and when rate cuts actually happen depends above all on inflation and the economy. Speculating about that gets you nowhere when it comes to an investment strategy for long-term wealth building – just as little as fixating on the current price level.
But how far can share prices rise?
Share prices have no ceiling. That idea rests on a false picture – namely, that prices are constantly swinging back and forth between a peak and a trough. That picture is closely tied to the wish to get in at the bottom and get out at the top. But it is misleading and leads to investment mistakes. Over the long term, the trend points upwards. That is because shares give you a stake in companies, and the economy is geared towards growth. And this isn’t necessarily about growth in volume, but about growth in value. When people pay more for better quality, the economy grows as well. For the equity markets, of course, this doesn’t mean everything always runs like clockwork. When expectations are disappointed, corrections follow.
If you already know that, shouldn’t you now wait for cheaper prices?
Let me turn the question around: when exactly are prices cheap enough? No one can say with certainty how long and how far prices will rise. Anyone who stays on the sidelines out of fear of setbacks is, in any case, left out of the return opportunities. And if corrections do come: at what price level do you get in, or get back in? Hitting the low point would be pure luck. Setbacks are perfectly normal on the equity market. But over the long term, and on average, the direction is upwards.
The example of Japan shows that it can take a very long time for new record levels to be reached…
That’s true. And it is one of the many reasons that make the case for a world portfolio like our global ETF portfolio. You don’t know in advance which companies or which regions will be among the winners in a given period. But you do know that the equity markets and global economic growth belong together. Diversification reduces the risks you take on when you concentrate on individual markets.
There were records not only on the equity markets, but also in gold and bitcoin. Can I achieve long-term success with those, too?
There is a fundamental difference between shares and gold or cryptocurrencies. Unlike shares, gold and cryptocurrencies create no value. They are not productive capital. It is purely about the “price fantasy” in trading investment objects. Betting on that remains pure speculation and is therefore far riskier than relying on systematic wealth building with shares.
