Financial market forecasts, “speculative bubbles” and geopolitics – Markus Hill spoke for FONDSBOUTIQUEN.DE with Martin Friedrich, Lansdowne Partners Austria GmbH, about the current challenges as a fund of funds manager in the area of capital market analysis and the importance of currency developments and commodity prices in the assessment of asset classes.
Hill: The markets are currently interesting. Can one now speak of a speculative bubble?
Friedrich: The first thing I would like to say about this is that the word “bubble” is used far too lightly in public discourse. In fact, not every sector that has risen sharply is necessarily in a bubble. Otherwise, market participants who make their money from short-selling wouldn’t be struggling as well. Some studies show that even a rise of 100% within two years only leads to a correction of at least 40% in half of all cases. However, there are segments in the U.S. market in particular that cause me concern. Interestingly, it is often the accompanying signs of the price increase that make it easier to diagnose a bubble. Unfortunately, there are several warning signs here.
Hill: What do you mean specifically?
Friedrich: First, the fact that some sectors are in an accelerating uptrend. In the process, volatility is rising, which is unusual – normally, the tendency to fluctuate is higher in downward phases and calms down on the way up. Second, we often see retail investors pushing particularly hard into the stock market toward the end of a bull market. It is also particularly evident right now, as was dramatically evident in light of the Gamestop episode. Third, we have high activity in new issues. Here, speculation is facilitated and additionally fueled by the oversupply of liquidity. We see a certain parallel here with the turn of the year 1999 to 2000 – the central bank played a role then, too. However, the reason was not a pandemic, but the fear that many computer systems would grind to a halt in connection with the date change. As a result, an index of leading Internet companies doubled in the last three months before the millennium change, having already returned 130% in the first nine months of 1999. In Germany, too, the Neuer Markt Index rose by 56% in 1999 as a whole and then made a further gain of almost 90% between the beginning of 2000 and mid-March. By comparison, however, 2020 compares favorably: an equally weighted index of Facebook, Amazon, Apple, Netflix, and Google rose 59% after rising 43% the year before. In cases like Tesla, the numbers are even higher by quite a bit.
Hill: To what extent do you base your market assessments on financial forecasts from other institutions?
Friedrich: Within the framework of our investment policy, we distinguish between medium- and long-term models. Here, the medium-term projections are aimed at a time horizon of 6 -18 months, whereas in the case of the long-term, we are concerned with the outlook for the next seven years. The distinction is important: while we exclusively use our models for the assessment of short- to medium-term events, for our long-term projections we observe an always constant cross-section of well-known asset managers and research houses, which have in common that they publish just such forecasts. The median of this “expert panel” is one of several input variables for our asset allocation planning. Paradoxically, in financial markets, long-term developments are often more predictable than short-term ones – for the simple reason that short-term upheavals often fade away as quickly as they can occur – the year 2020 was a good example of this.
Hill: Especially after the current election results – how do you view the current role of the U.S.?
Friedrich: We expect – as probably most do – that the new administration will isolate itself less internationally and seek a stronger relationship with traditional partners again. The conflict with China will nevertheless remain but probably conducted by other means. Economically, we expect very strong growth, brought about by the combination of high fiscal stimulus and recovery from the end of the pandemic. Besides, the dollar is likely to be weak, boosted by parallel budget and current account deficits and by a central bank which, after ten years of too-low inflation, now finally wants to see higher figures and is therefore deliberately keeping the economy “running hot”. This is an explosive set of macroeconomic conditions that we are facing here. That’s why it’s not possible to be confident that the “air will soon come out of the bubble,” if you’ll allow me a colloquial image.
Hill: In your fund of funds, your capital market analysis forms the basis for specific investment decisions. Is there a particular asset class and particular asset managers that you are looking at more closely at the moment?
Friedrich: We always have to keep an eye on all asset classes and managers, that’s our daily bread. But of course, some areas could potentially be favored by the macroeconomic big weather. For example, let’s stay with the likely weaker dollar that I just talked about: a weaker dollar increases liquidity in less developed countries and at the same time favors rising commodity prices. We could thus see a renaissance in emerging market assets, as well as value-oriented investments – parts of the capital market that are still heavily underrepresented in most investors’ portfolios after a prolonged bear market.
Hill: Thank you very much for talking to us.
Martin Friedrich is portfolio manager of the Lansdowne Endowment Fund and Head of Research. He joined Lansdowne Partners Austria in January 2019 from HQ Trust, one of the largest independent multi-family offices in Germany. Mr. Friedrich had been employed there since 2009, most recently as Head of Capital Markets Research and Co-Chief Investment Officer. Additionally, he managed client portfolios and was responsible for the investment process of LIQID, a fintech company in Berlin.
Link to Lansdowne Partners Austria GmbH: https://www.lansdownepartners.com/austria
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