Market commentary by Pateo Investments GmbH

The geopolitical situation continues to be complex and confusing, with the Ukraine war overshadowing each day’s events, including the capital markets.

Yet of course, this evokes a lot of questions and insecurities for investors, which is why we are trying to put together some hard facts regarding the market for you. Since the beginning of the year, as has been expected by almost all analysts, the development of inflation and interest rates has been the main focus.

How many interest rate increases can we expect for the US market? Will the ECB eventually have to join their lead? Has it been more interesting for investors to invest in bonds than in the stock market? This consideration, however, concerns USD bonds more so than Euro bonds. The current inflation rate of both Germany and the whole of Europe could be located at 7% in March 2022. This caused the ECB to acknowledge the possibility of an interest rate increase within the year. Over the course of the past weeks, the US FED has implemented a first interest rate increase; the base rate margin is now at 0,25-0,5 %. Within the next 12 to 18 months, 4-6 further interest rate increases are expected. Currently, 10-year federal government bonds have a rate of return of approx.. 0,62%, with the 10-year US bonds’ (in USD) rate at 0,25-0,5%. At the moment, in the US, there is an inverted yield curve, owing to the fact that 2-year US bonds currently possess a higher rate of return than their 10-year bonds. In the past, inverted yield curves have been leading indicators for a recession, although, at the same time, exogenous factors have to be taken into consideration. Due to these factors, it could be wise to only put investment decisions into action selectively and in a carefully-dosed manner. The fact that company reports published by listed companies for the year 2021 have all been according to or even surpassed expectations does hardly matter in current price developments.

The US Federal Reserve’s interest rate increases have caused a lot of insecurity within the market, which is why stock markets drifted considerably lower in January and February – until February 24th, 2022, the day of the Russian invasion. On this day, a different kind of time reckoning was introduced to the markets. Instead of a massive price slump, on this day, US stock indices rose, with European ones declining. Today, Dow Jones and S&P 500 are rated higher than on the historical date of February 24th, 2022. Over the course of the year, the Dax has plummeted by 14%; at the moment, it is approximately at pre-war level. The overall uncertainty which has been noticeable has caused investors to turn to USD or gold investments. Oil prices have soared to sky-high levels, even though there hasn’t been any shortage or increased demands: At the stock exchange, expectations and fears are being traded as well. At the moment, a lot of people are earning huge amounts of money in this industry. Speaking of earnings, the prices of various companies within the armaments sector have risen through the roof. War, sanctions, a new Iron Curtain: Which course will global economy take? How will China react, bearing in mind that it might actually profit from the massive Western sanctions? A lot of questions are currently arising to which there is no definite answer. Nevertheless, massive changes are to be expected within the global economy; nothing will be as it was before. Prior to that, the corona pandemic had caused us to adapt our behaviours; it has disrupted supply chains, caused states and chains to establish warehousing. The current situation will aggravate and intensify this issue. Particularly the question of energy supplies – are we striving to become independent from Russia, or go about this separation too quickly? – won’t be so easily solved. Economy is once again facing a great many challenges, yet we are certain that these will be solvable.

In terms of your personal investment strategy, it is now more important than ever to examine whether your asset allocation may be modified to the new situation. Too high liquidity is certainly not advisable, be it in the low-interest phase or in times of high inflation. Over the medium- and long-term, one should, in fact, rather invest in solid physical and productive capital (real estate, shares). Only by following this path, real yields are to be sustainably achieved. Furthermore, we are assuming that a large amount of the interest rate increases have already been factored in.