The Capital markets made a strong start to the new decade. A new US president spreads optimism and disposes of a relatively high potential to reshape internal and external politics. Numerous economic indicators such as industrial production, new orders and the number of foreign investments, signal a strong upswing for 2021, even if new virus mutations and delays in the vaccination supply somewhat cloud the picture in the short term. Global growth is currently estimated at 4% p.a., which is likely to turn out to be too low, considering the basis effect and the delayed effects of the impacts of the huge fiscal programs.
And despite some possible short-term profit taking in the next couple of weeks, many investors are optimistic as rarely before, and the inflows into the capital markets are enormous. The two largest American Asset Managers, BlackRock and Vanguard, recorded approx. USD 450 billion in net flows into their funds last year, monies which flow directly into the capital markets and largely into stocks, with many American Asset Managers being fully invested. The planned share buybacks by companies are estimated at about USD 900 billion and the number of companies that are planning an IPO is large. All of these are signs and factors that push the ratings upwards. In addition to numerous growth-sensitive industrial assets, investors are focusing on oil stocks and US banks. The black gold is favored, as strong demand for energy meets a short supply, caused by low or declining capital investments (Capex) by oil producers in recent years and a deliberate production cut by Saudi Arabia. American banks are also in scope, as they are not only able to resume their share buyback programs while stronger regulations are off the table but are also expected to see larger gains in their interest rate differential business (long-term vs. short-term interest rates).
This brings us to the core of the matter and the main risk assessment. Yields and interest rates on the bond markets are going up – due to economic reasons – which might mean strong headwinds for the stock markets. The 10-year US bond yield has already tested the 1.2%. To achieve a stable balance between equities and bonds, not only a moderate fluctuation in interest rates within a certain range expected by market participants but also successful countermeasures taken by the central banks and influencing the long end of the interest rate curve. Governments, in particular, are dependent on low rates for refinancing their vast fiscal programs. The necessary balance is rounded off by generally stable exchange-rate relations, as abrupt and unexpected fluctuations were mostly the direct triggers and cause of financial crises in the past.
What does this mean for investors? As mentioned earlier, the right strategic asset allocation accounts for almost 80% of the investment success for a prudent and long-term investor. However, a successful implementation within the individual investment strategy is only possible based on a clear personal plan, considering the investor’s personal life situation and risk attitude and determines which personal and financial goals should be achieved by when.