Polis

• Similar to private consumer credit, open government debt has risen significantly faster than national income over the past 40 years. This does not include the hidden public debt, because it is not recognized in the balance sheet, which in Germany, for example, amounts to an additional EUR 1,500 billion for unfunded pension obligations.
• Due to a number of aggravating factors (demographic deformation, highly indebted private sector, incipient de-globalization, low productivity growth), it is hardly possible for countries to repay their debts through increased tax revenue - in comparison to the national debt after the Second World War.
• The most likely path is deleveraging through inflation, but this leads to speculative bubbles, which can already be observed (cryptocurrencies, share price performance of unprofitable companies, etc.).

Development

• Company profits will come under pressure in the future. Increased regulation, restrictions on entrepreneurial freedom for geopolitical reasons or higher wages due to a declining proportion of working people in the overall population will reduce the profitability of companies. Dependence on China as a growth driver is increasing.
• The current 6th wave of Kondratieff cycles, which includes artificial intelligence, green technologies and cloud services, is having a positive impact. However, compared to the current situation on the capital markets, this is not for the producers of the technologies but for the users of the technologies, who can thus escape the cost pressure - at least in part.
• The developers of the new technologies will find it increasingly difficult to maintain their rapid growth rates, as they have already achieved enormous market shares with a negligible tax burden. Regulation and normal tax rates as well as stricter monitoring and harsher penalties for data misuse will place a considerable burden on these companies in the future.

Investments

• Despite further price gains for long-dated bonds in 2020, the outlook for bond investments is not encouraging. Taking expected inflation into account, losses of a third are very realistic for German government bonds over the next decade.
• Gold generally increases in value when real interest rates are negative. Real interest rates, which are likely to become increasingly negative, favor gold investments. This will attract more and more investors to the precious metal.
• Due to the coronavirus crisis and the structural change in the real economy, many commercial properties tend to have equity characteristics. A careful analysis of the properties and the associated income is imminently important.
• Although the expected global equity return of 5% p.a. is below the historical values of recent years, it is still 3.5 percentage points p.a. and therefore significantly higher than the expected return on global government bonds. Increased switching from bonds to equities will give the latter a boost.
• The US equity market is at record levels with a price/cash flow ratio of 20, especially if US companies are not able to return their profits to pre-corona crisis levels, which we expect. But even then, they will probably not outperform the global equity market over the next 10 years.
• The price/cash flow ratio also shows a very high dependency on interest rates in the USA. If interest rates rise moderately, it will be dangerous, especially for growth stocks in the technology sector. Interest rates must therefore not rise in the USA.
• Tendencies similar to those seen during the dotcom bubble are becoming increasingly noticeable: 1) triple-digit percentage gains in shares of companies that do not generate profits and 2) herd behavior of inexperienced small investors in Gamestop shares
• In Europe, the low proportion of technology companies is currently advantageous in terms of valuation, so that a return of 8% p.a. can be expected over the next 10 years.
• In Germany, the outlook for the stock market is positive - if the theory that it is not developers but users who will benefit from new technologies in the future is correct. This is also reflected in the slight undervaluation in a historical comparison.
• A late consequence of the collapse of the Nikkei is the very frugal behavior of Japanese company managers, with the result that corporate balance sheets are currently the cleanest in the world. Above-average performance potential lies dormant here.
• Regional differences in the performance of the equity market do not necessarily have consequences for private equity funds. For example, investment funds active in Europe have been more successful in the last 10 years than those with an investment focus on the USA.

Plateau

• Bond investments should be avoided. With longer maturities, they have the same price risks as equities without comparable price potential. If interest rates rise by 3%, 30-year German government bonds will suffer price falls of 60%.
• Only the money market and assets such as shares, private equity, (residential) real estate and gold are sensible forms of investment.
• Regionally, shares from Europe, Japan and the developing countries offer more opportunities than those from the USA, which is also due to the very high weighting of the technology sector there. In addition, investors should free themselves from herd behavior and pay attention to economically sensible company valuations.
• Despite the expected low economic growth (see above), equity investments certainly offer performance potential. This is because economic growth and stock market performance are not correlated, as shown by Switzerland, for example, over the last 120 years (real economic growth of 1.3% p.a. and a 500-fold increase in the stock market)
• In 2021, it will be exciting to see whether 1) companies will return to their pre-corona crisis results, 2) politicians will learn from the populism of the past decade, 3) Mario Draghi will stabilize Italy and European politics as a whole and 4) retail investors will exhibit the typical herd behavior of the Gamestop share or the dotcom bubble