Equities are becoming even more attractive than government bonds

There is often only a fine line between fear and hope. Historically, the price declines at the beginning of the Corona outbreak in Europe were not the strongest, but they were by far the fastest. Fell within eight trading days the Dax by almost 33 percent. After a short breather, the prices climbed by 23 percent in just five trading days. The US stock exchanges followed this pattern.

At this stage, as an investor, you could do more wrong than right with actionism. Measured against the MSCI World Index, shares have suffered a loss of around 20 percent since the beginning of the year. Significantly less than during the financial crisis between June 2007 and March 2009 and during the bursting of the technology bubble in the period from June 2001 to May 2003. Both events resulted in share price losses of around 50 percent, calculated in euros, taking the dividends into account.

In view of the fact that the economy has largely come to a standstill over a month or two, combined with considerable income losses due to short-time work and unemployment, the price losses that shareholders have had to pay as a tribute to the corona crisis appear rather small.

This stems from the fact that many countries with unprecedented budget deficits absorb the costs and loss of income. This can also be justified, since this time it is not a self-inflicted crisis in the economy or the capital markets, but rather force majeure. Consequently, the state steps in by communitating the damage in the form of debt in order to minimize the negative consequences for individuals and for companies.

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However, the rescue measures are not financed through the free capital market, but through the major central banks such as the Federal Reserve, the European Central Bank or the Bank of Japan. These buy up the debt – in the case of the United States, even unlimited – and use it to print money. This compensates for liquidity bottlenecks and enables an exploding national debt at falling interest rates. There is probably no alternative to this approach by the states. However, it should be clear that we will face considerable costs in the future.

Money and public debt are two sides of the same coin

The following scenario is conceivable: The level of public debt increases massively in relation to the gross domestic product. Without lasting support from the central banks, interest rates would rise to an extent that would jeopardize the debt sustainability of the states. To prevent this, the central banks keep interest rates close to zero by buying government bonds.

This would not be a problem if inflation remained at the currently low level. Should this accelerate, however, the central banks would have their hands tied. After all, an increase in interest rates would not only drive the economy into a severe recession, but would also call the states’ debt sustainability into question.

A haircut would pose a risk to monetary stability in this scenario, since money is largely covered by the government debt bought by the central banks. In this scenario, money and public debt are two sides of the same coin. For investors, this means that government bonds, especially those with longer maturities, are not a suitable means of investing assets.

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However, shorter-running government bonds from the USA or Germany, for example, are not meant to deny their quality as a liquidity reserve. In the future, investors should measure the stability of money as a reflection of public debt above all by its equivalent in gold, since gold is an object of value that is independent of debt and largely stable in terms of the amount available, which at least in the past was also important by central banks Part of the cash coverage was seen.

Alternative route from Japan and Switzerland

It is interesting in the current environment that some central banks – above all the Swiss National Bank and the Bank of Japan – are taking an alternative way of financing government debt, which at least reduces the risks to monetary stability: In addition to bonds, they mainly buy shares, i.e. shares to companies.

Companies are – even if their debt has increased more in recent years – productive assets. As a source of wealth for every state, they generate income and wealth. Even if they make losses in the current crisis, they are the substance for a future upswing. The relative strength of the Swiss franc and the yen seems to confirm the strategy of the two central banks.

Investors should use the share price declines in the corona crisis as an opportunity and do the same to the central banks in Japan and Switzerland. While companies create added value, government bonds are assets in which you are not only a creditor and a debtor at the same time, but are also not even rewarded with interest.

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More: These companies are the big winners and losers of the corona crisis.

Klaus Kaldemorgen, born in 1953, is one of the best-known stock exchange strategists in Germany. He has worked as a fund manager for DWS for over 35 years, where one of the investment funds even bears his name.


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