Deutsche Bank’s top brass piled into the Berlin auditorium primed to give investors their best advice on how to wade through the countless uncertainties facing markets these days. But before they could begin, there was one elephant that needed to be ushered out of the room.
“The situation in our bank is better than described by outsiders,” Asoka Wöhrmann, head of retail banking for Germany at Deutsche Bank, said in reaction to the latest run of bad headlines for Germany’s largest bank.
His comments came amid a heated debate – and massive market volatility – over the threat of a $14-billion (€12.6 billion) fine in the United States, which has raised doubts about the bank’s capital resources and even evoked the possibility of a government bailout.
The run of headlines have sent the bank’s share price to a record low, worrying the bank’s shareholders and its customers.
Mr. Wöhrmann did his best to calm some of the nerves. Deutsche Bank is making progress on its path to becoming a “better and simpler bank,” he said, adding: “You can rest assured that we are currently fulfilling our capital requirements.”
The wider global market situation is hardly looking much better these days. Investors are scrambling to secure their assets and find ways to earn a decent return in a world of record low interest rates, the prospect of a Donald Trump presidency and tough negotiations looming between Brussels and London over Britain’s departure from the European Union.
Of course, for those investors that enjoy a challenge, there’s rarely been a better time.
“Either investors accept the increased volatility and somewhat more risk, or they have to scale back their yield expectations.”
“We are in the midst of an exciting time, with zero interest rates, a plunging British pound and British stocks hitting record highs,” Mr. Wöhrmann said, opening the “Investment Live” event in the German capital, an initiative sponsored by Deutsche Bank and Handelsblatt. “These are fantastic subjects for this evening’s discussion.”
It starts with central banks. Monetary policy in the 19-nation euro zone remains extremely relaxed, the U.S. central bank has postponed further rate hikes for the time being, the stock markets have been relatively volatile for months, and yields on 10-year German government bonds are now in negative territory.
“Investors need to completely rethink financial investment,” said Markus Koch, a leading German market expert and commentator. Or, to put it another way, investors have to adjust their expectations for what constitutes a “good” return in today’s environment.
“In times of zero interest rates, a return of 2-3 percent isn’t bad, especially with extremely low inflation,” argued Ulrich Stephan, chief investment strategist for private and corporate customers at Deutsche Bank.
It also means that traditional savings are largely off the table as sources of income. Investors need to look elsewhere if they want to get at least some bang for their buck.
“Stocks, preferably equities, still produce yield, but so do corporate bonds,” said Oliver Plein, head of equities at Deutsche Asset Management, the fund management subsidiary of Deutsche Bank.
Here’s an example: Where a portfolio with a 15-to-85-percent ratio of stocks to bonds was enough to achieve a 4-percent return in 2004, more than a decade later the mix needs to be adjusted to 50:50, and with significantly greater volatility, Mr. Plein noted. While volatility was 2 percent in 2004, the 50:50 ratio of stocks to bonds now comes with 11-percent volatility.
That leaves one of two options: “Either investors accept the increased volatility and somewhat more risk, or they have to scale back their yield expectations,” Mr. Plein said. “Yields have declined sharply in the bond segment.”
But it isn’t only the central banks’ policies, providing savers with zero and even negative interest rates, which are shaping events in the capital markets these days. Geopolitical crises are increasingly contributing to high volatility in individual investment classes.
“Investors always need to keep the risks associated with their investments in mind,” Mr. Plein said.
A look at the past six months gives a pretty bleak picture. At the beginning of the year, markets declined sharply in response to doubts over Chinese economic growth and the consequences for the global economy. In the summer, it was Great Britain’s surprise “yes” vote on leaving the European Union that led stock and currency markets on a wide.
While the markets recovered from the initial Brexit shock, Handelsblatt’s editor in chief Sven Afhüppe noted it may have simply been “the calm before the storm.”
At the latest convention of Britain’s Conservative Party, new British Prime Minister Theresa May’s tough line in talks with Brussels made it clear that what markets have dubbed a “hard Brexit” is likely.
Ms. May’s hard line, coupled with recent tough comments from German Chancellor Angela Merkel, suggests compromises with Brussels seem unlikely. That has sent the British pound plunging to its deepest level since 1985.
“Markets are doing relatively well with this new normal.”
Mr. Afhüppe noted the importance of foreign policy for the global economic outlook has been borne out by International Monetary Fund’s latest forecasts. The IMF predicted the world economy is likely to lose some steam this year and grow by 3.1 percent, with growth increasing somewhat to 3.4 percent next year.
Over the next few years, growth is likely to remain disappointing among industrialized nations, while the economy is more likely to pick up in emerging and developing economies. The IMF was more skeptical about the United States than it was in its last series of forecasts in July. It lowered its growth projections for the world’s largest economy from 2.2 to 1.6 percent for 2016, and from 2.5 to 2.2 for 2017.
Not surprisingly, all eyes are on the United States, which holds its next presidential election on November 8. The election outcome could trigger some volatility in the markets.
“If Republican Donald Trump were to win, the markets would react in alarm, but they would probably recover relatively quickly,” Mr. Stephan said.
But beyond that initial ride, the experts warned that the election campaign could have an enormous impact on the world economy – regardless of who wins. While Mr. Trump advocates isolating the United States and keeping it out of the worldwide flow of trade, Democrat Hillary Clinton has expressed similar views in a bid to keep voters in her camp.
The fact that Federal Reserve Chair Janet Yellen doesn’t feel comfortable raising interest rates in this kind of environment highlights the fragility of financial markets.
“The next rate hike in the United States probably won’t happen until December,” Mr. Stephan said.
The euro zone isn’t about to turn off the monetary spigot either. Mr. Stephan said he expects the European Central Bank to extend its €1.5 trillion bond-buying program, which is set to expire in March. Another monetary policy easing would likely bolster the financial markets, even if many economists are increasingly worried that the central bank is distorting the market rather than helping investors.
And yet, central banks are at least slowly starting to change their tune.
“Central banks are slowly realizing that they cannot continue with this type of monetary policy,” Mr. Stephan said. “Structural reforms are necessary. Interest policy alone is not enough to stimulate the world economy.”
In other words, central banks have limited options left to jumpstart growth. And yet, no one on the podium said they expect interest rates to rise significantly in the foreseeable future. Surveys have shown that financial markets also expect key interest rates to remain below 1 percent until 2025.
“Still, markets are doing relatively well with this new normal,” said market strategist Mr. Stephan.
Although yields are now negative on many German government bonds, stretching from two-year debt all the way to 10-year debt, there are alternatives. U.S. corporate bonds with high credit ratings, for example, are yielding 3 percent, while bonds from up-and-coming emerging economies are yielding 5 percent, and even 6 percent in their local currencies.
“Stocks also still appear to be relatively fairly valued,” he said. “Annual returns of 5 percent on the stock market are possible,” Mr. Stephan said, though he warned that you need a stomach for political turbulence.
Stocks from companies that are offering reliable dividends is also an opportunity that hasn’t been fully exploited, Mr. Plein suggested. While stock prices won’t see the kinds of 10-percent gains of years past, dividends could help make up the difference.
“Dividends are a very stable income source and the most important provider of yield for the coming years,” he said. “We prefer dividend yields of 3 to 5 percent,” he added. “It has been shown that there are relatively good opportunities here, and that distributions remain stable.”
And yet even the stock-market expert Mr. Plein had to acknowledge there are risks. He also warned against going after double-digit dividend yields, which are generally no longer sustainable.
“Loss mitigation is an important issue,” he said. “We will see fluctuations again and again, which is precisely why the chosen strategy should be able to absorb losses.”
Not all ideas are worthwhile, either. Mr. Stephan said he doesn’t think much of the idea of 50-year bonds that were issued recently. Italy, for example, is offering an interest coupon of 2.8 percent, which is not particularly worthwhile given the long maturity, he said.
Jessica Schwarzer is Handelsblatt’s stock market expert and is based in Frankfurt. To contact the author: firstname.lastname@example.org