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Annual Outlook 2022 – We look positively ahead

Review

After the Corona swings in 2020, many investors longed for a somewhat calmer and more relaxed year. That hope, however, faded as early as January with a U.S. president who refused to acknowledge his election defeat and even triggered a storm at the Capitol.

Despite generally friendly markets, wildly fluctuating oil and gold prices throughout the year were not for the faint of heart. Inflation, for a long time not an issue at all, made itself heard again, with levels last seen in the 1990s.

The Corona virus, which had almost been forgotten in the summer, returned with a vengeance toward the end of the year and led to renewed discussions across Europe about lockdowns and mandatory vaccinations.

The Bundestag elections in Germany ended Angela Merkel’s 16-year term in office with a historic defeat for the CDU/CSU. It now remains to be seen how the new German traffic light coalition will position and present itself on important issues.

Performance

Our equity fund ended the year +11.04% in euros and +6.48% in Swiss francs. This compares to the major indices: the DAX +16.94%, the STOXX600 (Europe) +21.84%, the S&P500 (USA) +36.24% and the MSCI World (worldwide) +31.23% (all values in euros). Starting with the summer months, we have adopted a somewhat more defensive stance and have been able to achieve a decent gain despite the hedges that have been extended even further.

Our bond fund, which won the German Bond Award in spring 2021, underlined this distinction once again with a strong performance, achieving +4.62% in Swiss francs and +9.10% in EUR, respectively, compared with the Bloomberg Barclays Global High Yield Total Return Index Value Hedged EUR, which ended the year at +1.54%. Due to high demand, the fund has also been available in a EUR-hedged tranche since mid-2021. We will of course be happy to provide you with more detailed information on request.

Thanks to the excellent result, our investors can once again look forward to a solid distribution, which we plan to make in March 2022. As of today, we expect the amount to be in line with previous years.

Current positioning

Starting in early summer, the markets entered a volatile sideways movement. After the interim shock over the new Corona variant Omicron had been digested, further gains were made towards the end of the year. We underestimated the price-driving liquidity -- caused by central bank policies -- and the resulting bull market in growth stocks.

As we see inflation as a key theme for 2022, we are betting on market-leading companies in the manufacturing sector at the beginning of this year, especially in the mid- and small-cap segment. These should be able to implement price increases through strong market positioning and thus at least keep their profit margins stable, ideally even increase them.

In the large cap sector, we see software providers, banks and insurance companies as beneficiaries of the current situation and have built up weight here.

Even though we were too cautious last year, especially in the second half, and our hedging strategy cost us performance, we remain true to our approach. We feel comfortable with the current hedges, have taken them into the new quarter/year and will proactively make adjustments as needed.

Outlook

If you are a regular reader of our publications, you may remember our forecast at the beginning of last year. We were convinced that the markets would quickly adjust to the new post-Corona environment and therefore continue to rise. We had also already addressed inflation and likewise the negative real interest rate. The latter has proved to be a major drag on all traditional savers, especially with inflation virtually exploding in the second half of the year.

What topics will keep us busy in the new year?

First:  Corona.

The virus is mutating faster than any of us would like. Alpha, Delta, Omicron, B.1.640.2 -- what’s next? It’s been over two years since the first outbreak, but we still find ourselves in lockdowns, 2G, 3G, 2G plus, boosting and practicing social distancing. No sooner have we become accustomed to the expression of one variant than the next mutation bends around the corner. Winning the race seems rather unrealistic as of today.

Consequence: We will (have to) get used to living with the virus.

The pharmaceutical industry is in the midst of developing vaccines that ideally combine flu and corona protection. So there will continue to be money to be made in this sector. With Corona, millions of workers worldwide were “transferred” to the home office. Nolens volens, the population working from home began to make friends with the new circumstances and make a virtue out of necessity. However, this also requires reasonably equipped workplaces at home. Some of the necessary equipment and upgrading activities have already taken place, but those who want to work more, perhaps even permanently, from home in comfort and efficiency will not be able to avoid one or the other technical equipment. Even though electronics and technology stocks have outperformed (and thus become susceptible to corrections), we still see potential here as well.

Second: Interest rates.

Are interest rates rising, and if so, by how much? Is it even possible to make money with bonds and to what extent could a rise in interest rates be a party killer for the equity markets?

For some time now, ten-year German government bonds have been yielding negative returns. This is an absolute nightmare for traditional interest rate savers, as their capital is subject to an annual loss in value. We expect to see an end to negative interest rates in the foreseeable future, but this does not mean that interest rates will go through the roof. ECB President Lagarde all but ruled out a rate hike for 2022 at the meeting at the end of last year; it seems that only in extreme cases was an interest rate step taken. The U.S. Federal Reserve (FED) and, somewhat surprisingly, the U.K. central bank (BoE) announced their first rate hikes in December, and they won’t be the last. Nevertheless, the landscape will not change overnight.

Sharp interest rate hikes would be tantamount to significantly more expensive refinancing for the states, which are dependent on extremely low interest rates right now as they put together one aid package after another. It would also be tantamount to a worsening profit situation for quite a few companies that regularly recapitalize themselves with money on the capital markets. A move would not be without consequences for real estate buyers and owners either; houses would become harder to finance, at the same time worth less, and in the case of fixed-rate expirations of loans, debtors would be threatened with an increase in their monthly installment. And indeed, large interest rate steps could also choke off the stock markets if a “risk-free” yield of 3% or more were to present itself.

In this respect, we see only a moderate rise in interest rates over the next 12-24 months. In order to manage interest rate risks in our bond fund, we rely on a deliberately low modified duration; a slight rise in interest rates would be an almost perfect scenario for us, as we can roll up the portfolio step by step to a higher yield level.

Third: Inflation.

Is it here to stay? Or is it disappearing as fast as it came? The reading of the central banks seems relatively clear; the chiefs of the ECB and FED see only a temporary boost, the causes of which were mainly caused by problems in the areas of production and logistics.

This sounds simple, but it may not be. Because two trends could very quickly disprove this interpretation. In various industries, de-globalization, i.e. a return and rebuilding of production capacities from Asia to Europe, is being discussed post Corona. For the “luxury” of regional production, be it high-tech micro-chips or pharmaceuticals, higher prices will be the death we die for it due to higher production costs. And the development towards “cleaner”, or at least more environmentally friendly, companies will also, everyone should be aware, lead to price increases in the medium term, because the companies will pass on the costs of the necessary conversion steps to the consumers.

What is clear is that the inflation rate is a driver behind the price increases of stocks and real estate. Tangible assets instead of monetary assets, that has been the motto for some time now, and there is much to suggest that this will not change any time soon. One reason is the lack of alternatives. Savings deposits only guarantee the continuation of a negative real interest rate, i.e. your money becomes worth less every month. Highly speculative casino investments like cryptocurrencies? Let’s face it, very few investors can withstand the fluctuations of this particular type of investment, not financially and certainly not psychologically.

As you can see, equities will remain an issue for the future. At the risk of repeating ourselves: If you can’t handle price fluctuations, you won’t make any money in the years to come.

We live in an environment that is subject to a change in values and is driven by short-lived trends. What was right yesterday can be wrong tomorrow. For this reason, foresight in combination with fast and consistent action will continue to be necessary in order to remain successful. Irrespective of this, we also consider a certain level of hedging to be essential for the current year in order to protect your assets against any upheavals on the markets.

Whatever 2022 will bring, with us you have a partner at your side who has the necessary peace of mind and experience to continue to navigate your capital well protected through the shoals of the financial seas.

In this spirit,

sincerely
your
Thomas Fischer
CEO Wydler Asset Management (Deutschland) GmbH

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