Investment Strategies

Profits, Where Art Thou?

Draghi-BorisRoessler-DPA
Looking for the alternatives. Mario Draghi insists they're out there.
  • Why it matters

    Why it matters

    Europe’s central bank has set its base interest rate to zero, which is bad news for many individuals in Germany who rely largely on bank deposits as a way of saving for retirement.

  • Facts

    Facts

    • Alternatives for adventuresome investors include developing-country corporate bonds, precious metals and betting on an end to Wall Street’s bull market.
    • Investment returns of 5 to 6 percent beckon for mid-range U.S. dollar-denominated corporate bonds in India, for example.
    • Gold and silver offer safe harbors from shocks on the stock exchanges, and some investment securities can generate returns in any market scenario.
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    Audio

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Criticism of the extremely low interest rates of the European Central Bank continues unabated, especially in Germany. Georg Fahrenschon, president of the association of savings banks, has even accused the currency guardians of expropriating German savers. Another regional savings bank chairman said the ECB is no longer a neutral arbitor.

Mario Draghi, the ECB’s president, refuses to let these charges go unanswered. In an interview with the German daily Bild newspaper, he suggests savers put their money in more profitable investments:

“We are quite aware of savers’ predicament. Not only in Germany do savers have to live with low interest rates,” he said, arguing that alternatives to the savings book can bring “good returns.”

Nor is he backing down from his policies. In response to the question as to when interest rates will once again rise, the former investment banker from Goldman Sachs said: “Quite simply: When the economy is growing more strongly and inflation is once again closer to our goal.”

Anyone who doesn’t want to wait so long must indeed take action.

So where are these “good return” alternatives? Handelsblatt went on a search for the best options – both for Germany and for other struggling savers around the world.

Many fund managers are ranging ever further afield and focusing on developing countries. With a little luck, returns can be found there that are at least measurable.

To be sure, even with interest rates at rock bottom, most investment experts recommend putting the lion’s share of one’s savings in solid, widely-distributed investments. But a boost to returns can be achieved by bringing more risky additions into one’s portfolio.

Three such investment ideas are worthy of close scrutiny:

Bonds

Profits from bonds are still attainable – but investors have to “travel” a bit. That’s because in Germany, not only profits from government bonds have melted away. Ever since Mr. Draghi and his colleagues announced their intention to start buying corporate bonds in March, the returns on good-quality corporate bonds have dwindled to 1 percent or even less.

For that reason, many fund managers are ranging ever further afield and focusing on developing countries. With a little luck, returns can be found there that are at least measurable.

Eric Brard, head of bonds at the French investment manager Amundi, likes India, which he views as a vigorously developing country with committed companies and a fairly stable legal system.

Mr. Brard believes that bonds from Indian companies of mid-range quality can be attractive for investors who can deal with some risk in their portfolio. At the same time, the risks are scattered, because the market price of these bonds develops differently from that of bonds in the Western world. Returns of 5 to 6 percent beckon for bonds denominated in U.S. dollars.

Likewise attractive are developing countries whose bonds recently came under pressure because of crises – for example, Russia or Mexico. There, however, investors must content themselves with returns of 3.5 to 4 percent. Or they can gamble with bonds pegged to national currencies; ruble-denominated Russian bonds, for example, bring 9 percent.

To sum up: Anyone who looks around can still find interest-bearing bonds. But investors must live with the fact that they are lending their money to a developing country whose fortunes they can’t monitor as closely as they can in their home country.

“We see the price of gold at the beginning of a rise over several years.”

Michael Riesner, Analyst, UBS

Gold and silver

In today’s challenging low-interest rate world, it helps to travel back in time to the Turkey of 2,500 years ago, when King Croesus ruled. He understood something about money and ordered the first gold coins to be issued. Back then, he had no inkling that this metallic currency would still be valuable today.

Gold has one great advantage: Unlike some bonds that have turned negative, gold will never demand any penalty interest. And in the last four years, it has become cheaper and cheaper. Now the decline has come to a halt and the price has turned around. Since January 1, gold has become a fifth more expensive. Will the trend continue?

“We see the price of gold at the beginning of a rise over several years,” said UBS analyst Michael Riesner.

The impetus for the rise would be the further easing of monetary policy by Mr. Draghi and his colleagues. In the past, this has always been a reason for rising prices of the yellow precious metal. What is more, gold plays a role as insurance against accidents in the financial system and shocks on the stock exchanges.

Anyone more adventuresome can purchase silver. The price is higher than at any time in the last year. Silver is considered to be the little brother of gold, because the market is comparatively small. Silver is much less expensive in any case. An ounce of gold costs $1,250, whereas 31.1 grams of silver go for $17. But the price of the white metal is also far more volatile. Strong nerves are needed.

What exactly can one buy? On the shelves are mostly classic gold coins such as the South African Krugerrand. Bars are an alternative for those who want to hold the metal in physical form for a long time. Another possibility are funds that hold the metal themselves. This is more suitable for investors who are profit-oriented and want to get in and out quickly.

In summary: Precious metals belong in any portfolio. It makes sense to have a share of up to one-fifth of one’s liquid monetary assets in the sector.

The most important U.S. stock indices are once again approaching their all-time highs from last year. Most experts believe they have exhausted their potential.

Betting against Wall Street

There is a fear that, after a rise of more than seven years, stock prices have soared too high – above all on Wall Street. But that’s no reason to stay away from the stock exchanges altogether. With the correct instruments, adventurous investors can bet on an end to the bull market – and what is more, feel as daring as a short seller who earns money when prices fall.

For example, with a so-called reverse-bonus certificate keyed to the S&P 500 (security identification number: VS8B1F). This special investment security will deliver until mid-December of this year nearly 13 percent interest if the U.S. stock index scarcely moves – or crashes. The catch: The S&P 500 cannot at any time rise by around a tenth and reach the threshold of 2,300 points – or significant losses will be triggered.

The chances that the bet is successful aren’t bad. In contrast to their European counterparts, the most important U.S. stock indices are once again approaching their all-time highs from last year. Most experts believe they have exhausted their potential, according to a survey by the Reuters financial information service. On average, the participating analysts forecast an end-of-the-year figure of around 2,100 for the S&P 500 – the current level.

“The potential of the U.S. stock market is limited, and there are risks of a downturn,” warned investment strategists at Axa Investment Managers.

One important factor weighing against a continuation of the bull market is the weak development of corporate revenues. This makes U.S. stocks seem expensive. Measured against earnings developments over 12 months, the current price-to-earnings ratio of almost 17 is higher than the average value of 14.7.

What’s more, many expect the U.S. central bank to start weighing on stocks again soon. “The Fed’s low-interest rhetoric will in all probability not be long-term, nor will they thrust aside the fundamental data,” Axa’s analysts said.

To sum up: With a suitable mix of investments, any market scenario can generate profits.

 

Georgios Kokologiannis is an editor with Handelsblatt’s finance desk in Frankfurt, Germany’s finance capital. Ingo Narat is an editor with Handelsblatt’s finance section. Anke Rezmer covers the investment fund industry for Handelsblatt out of Frankfurt. To contact the authors: Kokologiannis@handelsblatt.com, narat@handelsblatt.com and rezmer@handelsblatt.com

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