GRIMALDI & PARTNERS: Equity investments are to be preferred despite the turnaround in interest rates

By Silvano Grimaldi , CEO Grimaldi & Partners 

Zurich – At the moment, investor sentiment is in the basement. Is that justified? What is the real economic situation like? How should investors position themselves for the coming months? Silvano Grimaldi, CEO of the independent asset management company Grimaldi & Partners AG, gives you the answers to these questions.

Current State of Stock and Bond
Markets Typically, a mix of stocks, bonds and markets allows an investor to seek to reduce the risk taken without compromising the expected return from a portfolio. For this to succeed, stocks and bonds must be negatively correlated in the respective markets. Both stock and bond prices have fallen in recent months. In contrast to previous stock market crises, neither government nor corporate bonds with a high credit rating can currently assume the function of a safe haven.

Despite the turnaround in interest rates that has already taken place or is imminent, due to the high debt ratio, only a slow further increase in bond yields can be expected. Due to the high inflation rates, the real interest rates on bonds will certainly remain negative for a long time. Equities of strong companies that are able to push through their margins despite high inflation rates will therefore also be among the winners in such an environment.

In a phase of low real interest rates, stocks and other tangible assets are rightly regarded as the only alternative. In the case of equities, temporary setbacks are always to be expected. Previous estimates of future corporate earnings could turn out to be overly optimistic. The ongoing supply chain problems, the speed and extent of monetary policy reactions to the high rates of inflation and the loss of consumer purchasing power resulting from the rise in inflation, as well as the war in Ukraine are likely to at least lead to economic downturns in Europe and the USA with some certainty negatively influence the development on the stock markets for a longer period of time.

Although the yields on bonds from individual European companies with good credit ratings certainly still offer certain diversification opportunities in individual cases, selectively selected stocks with regular dividend payments still allow for higher returns on capital – despite the larger fluctuations.

Equity investments despite the current mixed situation
The emerging developments in inflation rates and key interest rates should only cause concern for investors who are not invested in real assets such as stock investments. The less expansive monetary policy of the US central bank has already meant that corporate profits expected in the future have to be discounted with a higher factor. Understandably, the valuations of the so-called growth stocks (growth stocks) and above all the stocks traded on technology exchanges - eg Nasdaq - are suffering from this. However, some of these stocks have had a major impact on stock market developments in recent years and will continue to do so in the years to come. Largely forgoing technology stocks in favor of stocks from other economic sectors that are currently the focus of attention - eg energy, raw materials, armaments, etc. - is not recommended for long-term oriented investors. However, shares in companies that have not yet been operationally very successful and whose valuations are based solely on hoped-for future profits are particularly affected by a tightening of monetary policy and should therefore no longer be part of a portfolio.

The stock markets have already fallen by up to 20% from their peak this year. This reaction is due to the current mixed situation (high inflation, declining economic momentum, the Ukraine war and China's zero-Covid strategy). Positive profit expectations from many companies are still supporting the stock markets. In general, stocks from strong companies that can increase their prices and sales even in a phase of rising inflation rates should therefore be preferred. This includes the "big players" from the technology sector, but also companies from the energy and raw materials sector with high dividends - e.g. Rio Tinto - but also companies from the food, health and pharmaceutical sectors - e.g. Nestle, Roche, Merck & Co, etc - as well as from the insurance sector - e.g. Munich Re, Allianz, Swiss Life, Baloise, etc. However, with few exceptions - eg Linde, Daimler Truck, Mercedes Benz Group, etc. - caution is called for in industries that are particularly affected by difficulties in the supply of energy sources and supply chain problems - eg parts of the chemical and automotive industries. (GRIMALDI & PARTNERS/mc/ps)

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GRIMALDI & PARTNERS Independent Asset Management is a renowned independent Swiss asset manager domiciled in the city of Zurich. The management, Silvano Grimaldi, Master’s Degree in Economics and Reto A. Lyk, PhD. in Law, are distinguished former bankers with an excellent reputation and more than 25 years of professional experience in asset management industry. The top-class management team ensures that business is run perfectly for the benefit of our customers. Grimaldi & Partners stands for independent, neutral, transparent, cost-conscious, performance-oriented asset management with better asset protection.



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