4E CIO Letter – Challenges 2021
The year 2020 will probably remain in our memories forever. Before we talk about the economic developments, we would like to express our deepest condolences to our valued clients, friends, and readers who had to say goodbye to their loved ones this year. We sincerely hope that this challenging period will soon come to an end and that we will find our way back to normal life the quickest possible.
At the same time, we would like to express our gratitude for the great trust that has been placed in us during the still young history of 4E, and we are proud to say that despite the numerous external difficulties, we have been able to continue to grow. 4E is increasingly seen by the outside world as a center of excellence for different family office and wealth management areas. Whether it is asset management, art investments, estate planning, structures, reallocations, legal requests, and further family and business challenges, individual and tailor-made solutions are sought and found globally for any personal need.
We wish you a very healthy, happy and prosperous 2021.
Chief Investment Officer
New Starting Point after the COVID-19 Crisis
The crisis we have experienced and its ongoing recovery will probably be remembered as unique in the economic history in terms of both its severity and speed. One extreme followed the other. The recordbreaking US economic expansion ended abruptly after just over a decade. The deepest recession in roughly eight decades was the result. An even more massive crash was prevented only by an extraordinary policy response, as well as an unanticipated scale of monetary support. Consequently, numerous bankruptcies could not only be avoided but also brought some stock markets to new all-time highs. That the oil price was even negative (!) may only be mentioned briefly aside.
It also became apparent in 2020 that the Fed’s dynamics and the political regime are extremely important for financial markets. Investors can argue that they are even more relevant short-term than the development in the real economy. The crisis also seems to have set in motion a paradigm shift in which governments will exert more influence on markets with expansionary and non-conventional fiscal policy measures (away from austerity). Being able to interpret this correctly will be a key to continued investment success.
Challenges Facing the Future
The global debt burden will continue to soar. However, this should not necessarily be perceived as a worry since it can (still) be sustained due to low-interest rates and positive growth. Nevertheless, investors will have to face the following challenging issues (amongst others):
Influence of governments with their extended decision-making powers and its consequences to the economy - Particular attention should be paid to the increase in spending, the potential push for inflation, regulatory changes, and government investment programs.
The future role of national banks - A key focus should be placed on the extent to which central banks can maintain policy independence and accept increased inflation. Thoughts on possible exit strategies and likely reactions in the case of strongly fluctuating asset prices, which have an increasingly destabilizing effect on the system, should not be ignored either.
Consequences of the growing financial burden and possible ways out - Topics such as financial repression, increased austerity measures, higher taxes, debt haircuts, state bankruptcies, and social inequalities will become more significant.
Behavioral changes - There is likely to be more opposition to globalization and multilateralism, and there will be more reflection on the benefits of maintaining global supply chains. Moreover, the relations between China and the rest of the world will be tense.
It seems apparent that the risks to financial stability will continue to increase in the medium term and further attention needs to be given to a sharper rise in expected inflation.
There are currently strong reasons to believe that ultra-loose fiscal and monetary conditions are likely to be maintained, and real interest rates will remain in negative territory. Hence, this should keep bond yields contained, which, against the backdrop of economic recovery, should mean a generally positive environment for risky assets and penalize savers and pension holders. However, there are risks to our cautiously optimistic outlook of temporary setbacks, especially if expected inflation rises sharply, political support is withdrawn prematurely, and if the pandemic fails to get under control. Thus, now more than ever, it is crucial to build a portfolio as resilient and robust as possible and to strive for the right balance in terms of risks, return opportunities, and liquidity.
Our portfolios, which are broadly diversified and rely on sustainable investments, are given additional selective accents (satellites) in which long-term promising themes, regions, and alternative investments are taken into consideration. Examples include healthcare, China as a region, and systematic alternative strategies with low volatility. We continue to highly value liquid instruments, as these not only pay off from a risk management perspective but also allow opportunities to be exploited very quickly and effectively.
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