Autor: Stefan Markus Kremeth

Good Morning Ladies and Gentlemen

«The crash influencers who run their investment funds earn money themselves with expensive tips.»

NZZ am Sonntag; May 21, 2023

Perception

Financial markets are all about perception, at least short-term and bad news sells better than good news; I understand that. However, even with this in mind, and to be upfront, I think the news we hear, read and watch about the fundamental state of financial markets is overly pessimistic. In my last Stefan’s weekly, I elaborated on the latest data from Bank of America’s monthly survey. According to that data, investors seem already quite pessimistic. The cash levels are high, and investors‘ confidence is low. It almost seems most investors are only waiting for the next crash to happen, and usually, it does not work like this. Usually, the opposite happens to what the majority of investors hope for.

But where is the rally in bonds?

Yes, Ladies and Gentlemen, bonds‘ failure to rally (interest rates‘ failure to decline), despite declining inflation rates, a somewhat subdued economic environment, and a recession in Germany may suggest, indeed, that a supply/demand mismatch in the market may materialise even as the debt ceiling has forced the U.S. Treasury Department lately into some sort of austerity. If such a supply/demand mismatch turns out to be the case, it suggests that once the debt ceiling is lifted and the U.S. Treasury Department begins to refill its coffers, interest rates could be pressured higher, possibly significantly higher. Would that be positive for equities? Probably not, but it loses its terror once that effect becomes priced in. To think about questions like this is part of any portfolio manager’s daily routine.

Portfolio management

So, what does it take to become a solid portfolio manager in times like this? Well, I am still convinced that it takes a lot of work, patience and composure to succeed in the financial markets in the long term, and it certainly helps if you see opportunities as well as risks. Pessimism, fear and alarmism inhibit investment taking and can lead to significant opportunity costs. This Ladies and Gentlemen, is true for challenging and easy market environments.

Crash influencers

But now, allow me to return to the quote at the beginning of today’s „Stefan’s weekly“. I was quite astonished to notice in the last issue of the „NZZ am Sonntag“ that even journalists seem to have understood and were taking up the topic of the so-called «crash influencers». Those guys earn big heaps of money with expensive tips and by running investment funds banking on people’s fears. Unfortunately, even in today’s ever more regulated world, average investors are still shamelessly plucked like Christmas geese by some market participants. So my advice is not to let yourself be distracted by negative noise too much but to stick to your investment principles.

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to:
smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

«The1930s depression was wide, deep, and prolonged because there was no international lender of last resort.»
(The World in Depression, 1929-1939, Charles Kindelberger)

Valid thoughts on the concept of fiduciary duty

In his latest edition of the «Seasonal Reflections», my partner Hans elaborates on his trip to the U.S. and some of his experiences. Let me briefly quote him for what I consider sensible, simple and remarkable thoughts. I do not want this to be too political, yet politics play an essential role in financial markets and must be considered.

Quote

«Perhaps, it is just another sign of what is wrong with our system of governance. Democracy is about the fair and equitable representation of voters‘ interests. However, politics increasingly seem to have degenerated to the preferred career path for bureaucrats and opportunists, whose primary focus is on keeping the competition at bay to secure re-election rather than what is best for the long-term fate of the electorate. In business, particularly the financial sector, we apply the concept of fiduciary duty, but politicians still get away with baseless promises and empty claims of having the best interest of their electorate at heart. There is no need to prove this objectively and no real accountability. Furthermore, with no skin in the game, the taxpayer’s money is usually squandered on short-term measures designed to increase (re-)election chances, while all Western democracies are put ever deeper into debt. Where is the sustainability in that?»

Seasonal reflections

My partner Hans is a seasoned portfolio manager. He is calm and long-term oriented, and he manages the Incrementum flagship fund, the «Incrementum All Seasons Fund» (Incrementum All Seasons Fund – Incrementum). Regularly, he writes his «seasonal reflections» for our investors in the fund and other interested parties. So if after the above quote, you feel like reading just some more, I have included this link to the current edition of it. Please take a look: Seasonal Reflections (2023 / 02).

Bank of America May 2023 survey

The key message of the May 2023 Bank of America survey is that investors remain bearish. With cash levels at 5.6%, bond allocation at a 14-year high, and bull & bear indicator at 3.4 (bearish). For the last 15 months, the fund managers‘ cash balance has exceeded the 5 per cent mark. This is a historically long period, and only one period was more extended; the 32 months in the bear market from 2000 to 2002. The participating fund managers identify a credit crisis combined with a global recession as the most significant risk. In the second place, they mention the risk of central banks remaining restrictive due to a stubbornly high inflation rate.

Personal conclusion

The negative sentiment among professional and private investors, high bond allocations and high cash levels have already anticipated a market collapse, at least to some degree. Yet, so much bad news seems priced in, and markets are still not going down significantly. Interesting, no?

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to:
smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

«The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.»
John Maynard Keynes

One last hike?

It seems most of my readers think this was it, Ladies and Gentlemen, the last hike for this inflationary period. So much the sum of the comments to my lase «Stefan’s weekly».

U.S. labour market

The labour market in the USA, which has been running hot, is showing signs of cooling down. The number of initial claims for unemployment benefits was recently much higher than expected. A total of 264,000 citizens filed for government assistance last week, according to the Labour Department in Washington yesterday. Economists polled by Reuters had expected only 245,000, after 242,000 the previous week.

Tipping Point?

The initial jobless claims thus no longer remain far below the critical 270’000 mark, which is considered a tipping point that signals a deterioration in the labour market. Most recently, job creation in the job market had been robust: In April, 253’000 new non-farm jobs were added. However, job creation in March was not as strong as initially reported, as the number was revised downwards by the ministry to 165’000 from 236’000.

Alternative indicator

In addition to the number of initial jobless claims, the development of the U.S. labour market can also be measured by the development of the U.S. job advertising market index. The development of the U.S. job advertising market index, i.e. the market for job ads in the U.S., has been moving sideways since the beginning of the year. Therefore, any resumption of any downward trend in that index would signal an adverse change in the U.S. labour market.

Hence

Hence I am increasingly convinced that interest rates, at least in the U.S., are peaking. But, let me be frank, Ladies and Gentlemen, this does not mean any immediate interest rate decrease.
Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to:
smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

Today’s financial press, research, and analysts‘ comments were full of reasons why yesterday’s interest hike by the U.S. Federal Reserve was the last one for this interest rate cycle. Before sharing my view on this topic with you, let me quickly go back to last week’s Stefan’s weekly.

Your comments

Many thanks, Ladies and Gentlemen, for all your messages and comments to my last Stefan’s weekly. Most people who wrote to me seemed equally concerned about what is happening in good old Germany. None of the messages I received came up with any sort of idea about a quick solution but rather shared concerns on structural political issues.

One last hike?

But now, let us go back to today’s topic. The U.S. Federal Reserve on Wednesday – as widely expected – raised the key interest rate another time by 25 basis points. Jerome Powell emphasised the data dependency for upcoming interest rate decisions and that the outlook for the economy and inflation is, therefore, crucial. According to the Fed Funds futures market, yesterday’s 25 basis point Fed rate hike was the last hike of this cycle.

Possible interest rate path

Looking at the Fed Funds futures market, market participants already expect a first-rate cut for Q3 2023. This seems a little early to me and could only be justified in a clearly recessionary environment. However, as many analysts will point out, the recent fall in the oil price and the fall in iron ore and copper may indicate that economic worries are increasing and that a recession is ante portas, even though the latest U.S. data surprised positively.

What would that mean for financial markets?

If the U.S. government cannot find a reasonably quick solution to extend its debt limit, equity markets will likely decrease, and U.S. government bonds may act as a safe haven. Nevertheless, assuming this was the last rate hike in the U.S. and assuming the market is right and the interest rate path will start to go down still this year, and assuming financial markets are following the playbook of the past, we should see more stock market weakness in the upcoming days, but as early as next week or the week after, stocks would already start to rally; with some high beta stocks and real estate leading the way. Interesting, no?
Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to:
smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

«Gentlemen, no one can stop me from getting smarter every day.»
Konrad Adenauer

Konrad Adenauer

Conrad Hermann Joseph Adenauer, Konrad Adenauer, was the first Chancellor of the Federal Republic of Germany from 1949 to 1963 and the first Federal Minister of Foreign Affairs from 1951 to 1955. During a meeting in December 1949 with members of his party, the CDU (Christian Democratic Union), he was called to have radically changed his position on joint European forces. He responded to those charges: «Gentlemen, no one can stop me from getting smarter every day.»

Germany’s recent economic history

Many hard-working and well-educated workers, professional pride, excellent and modern infrastructure (which was built after WW2 and was state of the art for decades), a liberal economic policy and cheap energy, among many other factors, have ensured that Germany could rise from a war-ravaged country to the fourth largest global economy. (Ladies and Gentlemen, I am deliberately simplifying a complex issue here. This is due to „Stefan’s weekly“ format, which should remain concise).

Germany’s economic present

I am utterly puzzled, and again I am simplifying, but why would German politicians take three functioning nuclear power plants off the grid and, on the other hand, pour thousands of tons of concrete in beautiful landscapes to be able to erect wind turbines on them and at the same time run coal-fired power plants to partially compensate for the electricity no longer produced by the shutdown nuclear power plants? Furthermore, why would German politicians hurt their small and medium-sized businesses as well as their large industrial conglomerates with exploding energy prices and risk a shrinking economic environment, recession and declining prosperity for broad sections of the population? Is this a sign of ideological blindness or, at best political opportunism?

Why Would I come up with this?

I understand if you ask yourself why Kremeth comes up with such a highly political and emotional topic in his «Stefan’s weekly». The reason is that I receive many calls, emails and questions during discussions with clients regarding investments in German companies. The consensus often is that due to the political and macroeconomic environment, there is no money to be made. Is that true? What do you reckon?

My view

Many, if not most, listed companies in Germany have an international client base and own production facilities around the globe. While it must be painful for numerous of them to see and experience what is happening in their home country, their global presence in a lot of circumstances offers solid diversification. Therefore, and this is what I am usually saying to our private clients, I see opportunities to invest in German companies at reasonable multiples and attractive dividend yields, despite the incomprehensible political developments and the expected economic consequences.

Konrad Adenauer once more

Ladies and Gentlemen, we need politicians to become smarter again, and we need them to have the courage to question their own decisions and views and, if necessary, to change their actions. Of course, we all make mistakes, but we should try to learn from them and introduce corrective actions where ever appropriate.

Disclaimer

As always, these are, of course, my very personal views. Thanks for your understanding.

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

««I do not know what the future holds for us, but I am confident that things will pick up again after every crisis, and dividends will continue to flow.»

Quarterly Report

Every quarter I report to our private clients. Let me share a part of the report on Q1 2023. It may be attractive to one or the other because it provides insight into the differentiated and multi-layered perspective in Incrementum AG’s portfolio management and shows how multi-faceted the approach to solving the problem of maintaining purchasing power can be.

June 13 2023 – 10 years Incrementum AG

On June 13, 2023, Incrementum AG will celebrate its ten anniversary. For this, we invited our private clients to a round of golf for those who enjoy playing golf, and all of them (golfers and non-golfers) for drinks, a barbecue dinner and a fabulous and relaxing evening at a beautiful golf club. So if you want to be part of it, feel free to become a private client of Incrementum AG.

Sustainability 1

I explained Incrementum’s view on sustainability to our private clients in a previous quarterly report (beginning of April 2022). The following part comes directly from the current quarterly report. «However, it is now the case that a new regulation stipulates that you, as customers, should give some thought to your personal sustainability preference. We have therefore developed a form that every customer must fill out and sign. We are obliged to request this form from you in the coming months. The paper is not necessarily self-explanatory for all persons, for which I apologise. As it must comply with strict regulatory requirements, the scope for wording on our side was somewhat limited. I will happily explain and discuss the form with you in the coming weeks and months. So far, unfortunately, the document only exists in German, but it will be translated within the following weeks.»

Sustainability 2

You know, Ladies and Gentlemen, as Incrementum AG, we want to opt-out as long as possible, not because we do not care but because of the many different standards used in the industry and because we feel that solving the problem of maintaining purchasing power is currently not even part of the sustainability equation, which to us seems a colossal omission.

Questions about the market environment

Now, our private clients often ask me whether I am not worried about the world situation and whether I do not see any risks.

Answer

My answer to this question in the report was the following. «Of course, I see risks and worry from time to time. This has accompanied me for decades and is an inherent part of my profession. How often have I warned you about Credit Suisse, for example? On the other hand, I also see opportunities time and again. At the moment, I have the feeling that very many people see mainly risks and the bad and almost forget to look at opportunities. All our portfolios have developed positively without exception over the last few years and also in 2023, and all the companies within our „dividend share strategy“ have announced that they will pay dividends and, in some cases, even increase them; the energy crisis notwithstanding, the war in Ukraine notwithstanding, sanctions notwithstanding and banking crisis notwithstanding. At the risk of repeating myself over and over again, I am pleased to be able to tell you that during all the troubles of the past years, dividends have risen on average, even if some shares have shown significant volatility and, in some cases are still trading below their purchase price, they have nevertheless delivered the expected cash flows. We can reinvest these cash flows and expect even more of them in the years to come and can thus benefit from the effect of compounding.»

And again…

The quarterly report ended with: «I do not know what the future holds for us, but I am confident that things will pick up again after every crisis, and dividends will continue to flow.»

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend, and hope you will join us on June 13, 2023, as our new private client!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

«The culpability of corporate directors in often putting their interests ahead of shareholders and customers seems a reoccurring, unaddressed course of business. When times are good, they deserve high compensation and stock options; when their decisions cause loss and hardships, it is time for risk to be shared.»

By Tom, one of my readers

Thank you!

Ladies and Gentlemen, This week, I initially wanted to write about an analogy with Aristotele’s unmoved mover. However, I felt like coming back on my last weekly. Thank you for the many emails I received to my last week’s Stefan’s weekly. I became slightly emotional when I wrote it; thanks for your understanding.

Accountability

I wanted to ensure that the message, not only obviously incapable management and shareholders but also clients who enabled the frivolous behaviour of Credit Suisse’s management ever since the Great Financial Crisis, maybe even before, should be held accountable. I know this is wishful thinking, and I know that most customers are simple, kind people who do not ask questions. Not many think about the fact that the big bonuses, the limousines with drivers, the buildings at the most expensive addresses, and the silver teaspoons to go with the expensive china have to be paid for, and thus no one questions where the money comes from and whether, in addition to too high fees, too high risks are also taken. However, I genuinely believe that mature bank customers should consider such matters, and if they do not, they should, as a consequence, bear part of the risk. As Tom put it, it cannot be that we «privatise profit and socialise risk.», i.e. that the broader population pays for it.

Cryptos

Let us move to another topic. Many cryptocurrencies, above all, Bitcoin, were initially launched as a decentralised, fast and cheap global means of payment. This was the idea behind the protocol. It was not primarily designed to be a store of value or a product of speculation. Nevertheless, this is precisely what it has become. As a result, most transactions in cryptocurrencies are speculative.

Advantages of FIAT currencies over cryptos

I am also a moderate critic of the FIAT system. It indeed has its weaknesses. However, where is the advantage of a system, like in cryptocurrencies, without a hint of a chance of recovering lost or stolen money? Ladies and Gentlemen, the ultimate lender who steps in if the worst happens does not exist in the crypto environment. The last lender, like in the case of Credit Suisse, remains central to any crisis case.
Moreover, who else should represent it but a state institution, which certainly does not enjoy organising bailouts? It is probably no fun for them, but it is their job, and they are doing it, and I am pleased they are. While I believe that large parts of a population can not assess the consequences of what would happen if state institutions did not interfere in a crisis, most of the population is probably, even if unknowingly, happy they do so. While I can not think much of privatising profits and socialising risks, I am still happy to know there are institutions stepping in when the worse comes to worst.
Now, Ladies and Gentlemen, this „guarantee“ of the ultimate lender does not exist in the world of cryptocurrencies. Funny enough, the notion of many crypto „investors“ is the opposite, i.e. they think that cryptos are more secure. They obviously are not, or not yet. Think about it.

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to:
smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day, a wonderful weekend, and above all, joy!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

«The difficulty lies not in the new ideas but in escaping from the old ones.»

By John Maynard Keynes

Credit Suisse

What happened to Credit Suisse, you may ask? I have been pointing out for years that Credit Suisse, on the one hand, was selling its real estate, writing losses, and, on the other hand, paying out billions in bonuses. This outrageous greed of obviously highly incompetent managers starkly contrasted with the bank’s performance. As a Swiss citizen and former banker, I am amazed and saddened by the fall of this traditional bank.

Taking responsibility

The indignation is suddenly very great, and guilty parties are being sought everywhere. Of course, the top management of the past 20 years bears a great responsibility and, if you like, guilt. However, the fact is that every client is responsible and should, by default, question how excessive spending on salaries, bonuses, offices, and client events can be financed. I think clients have a responsibility to question the behaviour of their bankers. Therefore, this story also depresses me because seemingly naïve customers feel flattered when bank employees greet them in meeting rooms with thicker carpets than the customers‘ wallets. It feels like in sixth-grade history class when we learned how the Spanish explorers sailed to Latin America and sold the natives glass beads for their gold reserves.

The media

Interestingly, in November 2022, the former Chairman of Credit Suisse’s Board of Directors was granted a multi-page interview in a Swiss weekend magazine. This magazine is clearly positioned left of the centre; nevertheless, no critical question was asked to the ex-Chairman of a large Swiss bank, under whom the stock lost 90% of its value. So I am asking myself what is the value of such an interview?

Enough

Excuse me, Ladies and Gentlemen; I had to get rid of these thoughts. Thanks for your understanding.

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day, a wonderful weekend, and above all, joy!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

For this article, we were asked to elaborate on our view on the impact of rising interest rates on real estate investments. After a general introduction to current topics, we will outline what we consider critical factors of this popular asset class in the now-changed interest rate environment.

One year ago, when the Russian war of aggression on Ukraine broke loose, energy prices soared, and financial markets crumbled. Interest rates went up and are still increasing. Stagflation was one of the keywords used excessively by the media and even by economists. Stagflation is a business cycle characterised by slow growth, high unemployment, and inflation. For economic policymakers, this combination is challenging to manage, as any attempt to correct one of the factors may aggravate another. However, one year later, stagflation is still nowhere to be seen, and as often, things develop differently than predicted by the masses; the term „stagflation“ was sent back to sleep, at least for the time being and seems to have disappeared from the media altogether. Instead, today’s buzzword is „soft landing“.

We will see in what direction economies went in twelve or twenty-four months. However, we can learn from the old „Austrians“ that societies and economies with constantly unbalanced budgets and accompanying market interventions inevitably lead to a consistent misallocation of resources. Over time, the loss of purchasing power due to a lack of budgetary discipline is significant, and during the last twelve months, global economies suffered heavily from this effect. At times inflationary pressure can be pushed back on the timeline, but eventually, an outbreak is unavoidable. Therefore an investment strategy tailored to one’s needs and which helps to diversify inflation makes enormous sense.

Balanced and cash-flow-producing strategies have proven resistant and shown impressive inflation diversification potential. Furthermore, those who can afford to invest in real estate and physical precious metals and want to add them to their portfolio can expect an additional diversification effect, maybe leading to lower volatility but not necessarily any better long-term performance.

Volatility always seems to be an issue, and as inconvenient as it may seem for investors, volatility nevertheless represents an intrinsic part of investing, and any investor should know that. We usually tell our private clients that volatility is a price to pay for any consistent long-term performance. Now, many people would like to see a fully insured society, with its economy in total equilibrium, which on top of everything, is tailored to the individual needs, fears, etc., of each individual. But, unfortunately, this is not realistic. Just as we cannot always expect perfect solutions from science, we cannot expect our society, the state, monetary policy, individual politicians, fellow human beings, doctors, teachers, gurus, family members, friends, and acquaintances to always have the adequate and tailor-made solution ready for an individual problem of each individual. How should that be possible? Economic cycles come and go, economic crises come and go, political cycles come and go, and political crises come and go. This may seem unreasonable, out of date, exhausting and at times unfair, but it is nevertheless constantly the case that all sorts of crises affect our daily interactions. Societies and their financial markets are pretty complex systems, and complex systems are unfortunately not always fair or in balance.

Even the best political system, economic theory, and investment approach have their limits and cannot answer all the questions, identify all the unknowns (hence the name) and take into account the complexities and interdependencies of politics, the macroeconomic environment, central bank policies and scientific innovation, to name but a few. Against this backdrop, and for purely common sense reasons, it seems arbitrary to us to focus on one asset class or, even worse, one single asset.

Karl Popper pointed out more than 80 years ago that science can never produce absolute truths but rather approaches the truth in constant processes (also thanks to trials and errors), i.e. every theory is only considered good until it can be replaced by a new and better and tested one. Now, we all know that theories often leave out certain aspects; the developers of such theories deliberately limit themselves to core topics and usually do not claim to be all-encompassing. So when investing, we should keep that in mind and not expect the impossible from any investment or other theory.

After this introduction, let us focus on the main topic of this article, real estate and the impact of higher interest rates, opportunities and threats on this asset class.

Over the last decades, real estate investments have enjoyed immense popularity against low or negative interest rates and steady economic growth. Prices knew only one direction – up. However, the changed interest rate landscape also leaves its mark on the real estate market. The days of continuously rising valuations are over, at least for now. Moderation is the order of the day.

Our thoughts relate to the market for investment properties. For owner-occupied residential real estate, some arguments are less relevant because not only economic factors play a role in the respective purchase decisions.
Rising interest rates influence the performance of investment properties in three ways. First, rising financing costs and the declining relative attractiveness due to higher yields on alternative investments (bonds) harm the price level.

In addition, the discount rate is the most critical factor influencing the valuation of an existing real estate portfolio. Real estate companies and pension funds use the discount rate to determine the present value of their portfolios. This rate is usually derived using models and is conceptually based on a risk-free interest rate (yield on long-term government bonds). In addition, the general real estate risk and property-specific surcharges are considered when determining the discount rate. Steadily falling discount rates have been the main driver of rising valuations in recent years. Accordingly, real estate portfolios have appreciated significantly. For example, the largest Swiss real estate company, „SPS“, has recognised more than CHF 1 billion as income from revaluations since 2017. Therefore, the need for adjustment due to the changed interest rate landscape will likely not be insignificant. However, due to the inertia and long-term nature of the real estate market, the impact of these adjustments will probably only become apparent over the coming years. From an investor’s perspective, therefore, there is no reason to rush into investing in existing real estate portfolios.

For real estate to become more attractive again from an investor’s perspective, property yields must rise (significantly). This means that property prices must fall and/or rents must rise. Rents for space in commercial properties are determined by supply and demand. Here, both the economic environment and structural factors impact pricing. Because of current trends in the labour market (home office) and retail trade (online shopping vs stationary retail), high-quality offers in central locations will likely remain in demand. On the other hand, properties in geographically peripheral regions and properties of inferior quality will become significantly less attractive. As a result, the market will become increasingly differentiated again in the future.

Regarding investment strategy, the time for „buy and hold“ is also over in the real estate market. An active strategy that focuses on quality and valuations seems more promising. It is essential to monitor current trends on the demand side. Structural changes are occurring due to demographics (immigration and urbanisation), the labour market (home office) and shopping habits (online vs stationary retail). This structural change is likely to accelerate further.

Nevertheless, selected real estate investments are to remain interesting. This is because they may offer a diversification contribution and deliver significant cash flows based on a reasonable valuation. This opens up exciting investment opportunities in the medium and long term for disciplined investors with experience who can handle investments in non-liquid asset classes.

Your Copy
If you feel like reading through the online version of the current Global Executive issue, please feel free to click on the following link.

Executive Global Magazine – Staying Ahead in a Fast-Paced Environment – Incrementum

Enjoy the read, Ladies and Gentlemen!      

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day, a wonderful weekend, and above all, joy!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

Many thanks for all your messages and participating in the Incrementum year-end competition. We all know it is seemingly impossible to forecast the future and that we are doing this for fun.

S&P

So far, the highest bet on the S&P stands at 4’634 and the lowest at 3200.

Gold

So far, the highest bet on gold stands at 2’600 and the lowest at 1’910.

Silver

So far, the highest bet on silver stands at 38 and the lowest at 21.13.

My bets

As every year, I like to be transparent. So my bets are as follows: gold 2’090, silver 21.425 and the S&P 4’116. I keep my fingers crossed for all of you and look forward to sending this one-ounce silver coin to the winner at the end of the year.

Interesting aspect

Some weeks ago, I read a piece of research. The producers were speculating about a technology shift corresponding to a workforce demography shift favoured by retiring baby boomers worldwide. The idea of the article was that while baby boomers from the combustion sector retire, younger workers increasingly develop into the renewable energy sector; this aspect, according to the writers of the research, is receiving too little positive attention. Interesting, no?

Next week

Next week I will share an article on the impact of rising interest rates on the real estate sector my partner Dr Christian Schärer and I produced with you.

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day, a wonderful weekend, and above all, joy!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li