“More than the past, I am interested in the future, for in it I intend to live” (Albert Einstein). Markus Hill* spoke for FUNDBOUTIQUES.COM with Martin Friedrich, Lansdowne Partners Austria GmbH, about inflation, fiscal policy, asset allocation, “SPACs & New Market” REITs, and infrastructure investments. The question “Are we heading for Zimbabwe?” from his latest research publication further deepens this view.
Hill: In your last capital markets commentary, you focused more on inflation. How do you assess the current danger in this field?
Friedrich: Inflation is not only crucial for consumers, but it is also a very significant influencing factor for all economies, and thus automatically becomes a driving force for capital markets. That’s why we follow price developments very closely. However, I can reassure your question about a “threat” at least in the short term. We see strong deflationary forces at work due to the recession, and it will take quite a while for these to lose effectiveness. In this context, the central bank’s often demonized quantitative measures should be seen primarily as a bulwark in the fight against a deflationary collapse. It is not to say, that the macroeconomic management mechanisms of 2020 – some of which are new – do not harbor medium-term risks. That’s what we’ve been writing about it.
Hill: Where do you see – in the near or distant future – drivers for rising inflation?
Friedrich: Before I answer that, let me define what inflation we are talking about it. I am referring to the consumer price index calculated by the official site – Eurostat or Bureau of Labor Statistics and more. Besides that, of course, there are many other methods to measure the rate of price increase, for example, asset inflation or the subjective perception of consumers, which is disproportionately influenced by everyday goods, in which frequent transactions are made. Forbes even calculates a “cost-of-living-extremely-well” luxury goods index. This basket-of-goods-of-the-high-net-worth has been particularly inflationary since 1982. This is all interesting, and sometimes good for a headline, but mostly of secondary economic relevance.
We expect traditional inflation indicators to pick up noticeably in the coming year, provided that our expectation of a progressive economic recovery materializes. This is only right and proper, as we are currently recording values below zero in the eurozone. From the 2nd quarter of 2021, it will then become apparent that many commodity prices are likely to be significantly higher than in the 2nd quarter of this year, and these base effects will lead to a temporary increase. This is just the flip side of 2020. If the development of 2016 to 2017 is repeated, we could be back in the ECB’s target corridor of “close to 2.0%” in just one year. However, this is not a threat in itself, although it will be interesting to see how the bond market behaves in this context.
It will be more interesting from 2022 to 2023 because several long-term developments suggest a resurgence of inflationary tendencies from the middle of the decade. These include the possibility of a supply-side shortage of critical raw materials after a decade of below-average investment in production capacities, the restriction of world trade as a result of protectionist trends, but also a relative decline in the cohort of the working population as a result of a completely foreseeable demographic trend.
Ultimately, one must also ask whether the relatively new steering element of fiscal policy is implemented in a sufficiently countercyclical manner in practice. Hence, it is still too early to pass judgment. On the one hand, it was right and important to decouple the economy as far as possible from the public health crisis. Without the “helicopter money,” this would have been difficult to achieve. On the other hand, these very fiscal stimuli would also have to be withdrawn in time. Whether that will be possible amid our heated political discourse remains to be seen.
Hill: Are the players behaving “optimally” in fiscal policy – where are the opportunities and risks for investors here?
Friedrich: As I said earlier, the bailouts have saved not all, but certainly many companies from what would otherwise have been certain bankruptcy. The downside is that many a “zombie” will survive in the process. Our economic system needs a healthy amount of creative destruction, and that is being prevented right now. On the other hand, government bridge support can preserve capacity in many critical sectors of the economy. It’s sort of like an injured athlete trying to keep muscle atrophy to a minimum in the course of an enforced break. In other words, the less structural damage to the economy, the more robust the recovery will be when we will have inoculated our population! And it is precisely this upswing that gives us optimism that there will be opportunities for the capital markets in 2021.
Of course, the risks are never far away in my line of work either. Here I would like to refer to the speculative exuberance in some capital market segments. The development of the Tesla share or the hysteria surrounding the IPOs of some SPACs reminds me strongly of the time around the turn of the millennium. Some people will still get their fingers burned there.
Hill: You work intensively in the field of capital market strategy. As a fund manager and fund selector, you have additional “glasses” on – what are your expectations going into 2021?
Friedrich: We expect that equities will again generate positive real returns. G7 government bonds side, on the other hand, we think that even a nominal zero would be a success. Indeed, our fund is accordingly. However, the most exciting development will probably be at the sector level. We would not be surprised to see several losers in 2020 become winners in 2021. For this reason, we have remained true to our value-oriented managers in the selection process – even though it has hurt at times – and have even increased our exposure to this sector. Similarly, we see interesting opportunities in emerging markets and REITs, and infrastructure assets.
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
*) Markus Hill is an independent asset management consultant in Frankfurt am Main. Contact: firstname.lastname@example.org; Website: www.markus-hill.de
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