Autor: Stefan Markus Kremeth

Dear Ladies and Gentlemen

People tend to consider actions of others to reflect correct behaviour. This psychological and social phenomenon happens all the time and is known under the name of “social proof”. Social proof is believed to be particularly prominent in uncertain social situations, which means situations during which people are unable to determine an appropriate mode of behaviour. It is furthermore driven by the assumption that the surrounding people enjoy more knowledge about a given current situation.
One explanation for social proof is that thousands of years ago, when people were still hunting in groups to feed their families, at a given moment a risk could emerge (i.e. some dangerous animal was trying to attack the hunters). During such events it seemed less risky to act like the other hunting-cohort members (i.e. running away) than trying to find out what the real issue was, risking, ending up as a snack for the dangerous animal. The effects of such social influence can also be referred to as „herd behaviour“.

Now, Ladies and Gentlemen, why would I be writing about this?

The reason is that in the investment industry herd behaviour may lead to decisions that are either correct or mistaken and I have the impression that today we are in a situation where herd behaviour can be detected in the residential real estate business.
During the last years of decreasing interest rates, real estate investments were among the only investments that would yield positive investment returns. Not only were they generating rental income but because the hunt for yield was pushing asset prices (thus also prices for residential real estate) up, the valuation of residential real estate portfolios went up as well. For pension fund managers and very wealthy individuals this was what I would call a double yummy. Now, unfortunately this very special situation seems to be over soon. Yields are going up, slowly for the time being but still the direction is not pointing south anymore. Eventually this will have a negative influence on the valuation of residential real estate investments and if, like in some areas of Switzerland, excess capacity is building up, valuation may even get a real hit.
Furthermore, as soon as the large cohorts of baby boomers will hit retirement age, at least some pension funds will be forced to liquidate residential real estate investments in order to generate cash but who will buy such investments at a time when demographic change will lead to dissaving of pension schemes?
There may come a situation where a lot of people seek exit through a small door. You know what I mean, right?
This is not imminent you may say, and I think you are right, but I think it is worthwhile keeping it in mind when considering entering this field.

And as always, Ladies and Gentlemen, if you want to share any of your thoughts with me, please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,

The World Economic Forum attracts political and economic leaders year after year. It is an interesting hub for official and unofficial talks between global political and economic leaders. Since many of the most influential politicians and influential economic players are present, analysts and researchers are trying to feel their pulse and trying to come up with estimates for 2018 and beyond. Looking at the media coverage and the official WEF website, I have tried to consolidate what I think could be a (not meant to be complete) 2018 economic consensus outlook pre-President Trump today’s speech.

The good news is that the global economy is solid, and the risk of a recession remains low, with global growth momentum still strengthening. Due to structural technological and globalization factors inflation is likely to remain under control. Crashing the global economy would require a large shock and while the list of such potential shocks is long, the probability of any of them doing serious damage is low.

However, growing debt burdens could become a risk for many economies and still and in contrast to the U.S. Central Bank, the ECB and BOE are unlikely to raise interest rates until 2019, the BOJ may wait even longer.

Europe’s expansion is expected to remain solid and thanks to the relatively subdued outlook for oil prices the upside for inflation seems limited, which ought to help real income growth. Labour markets should also continue to improve and the still relatively competitive euro as well as an underlying strong global growth should help exports. On the other hand, political uncertainty in the Eurozone and the UK could undermine growth.

The US economy is also likely to sustain above-trend growth. Economic growth is expected to increase to 2.6% up from 2.3% in 2017 and 1.5% in 2016. Financial conditions remain supportive and household balance sheets are improving, the US dollar is well off its peak and capacity utilization rates are high. Normally these are strong tailwinds for consumer spending, capital expenditures, and housing. The tax cuts and jobs act are expected to raise growth by another 0.3 % and push down unemployment, however eventually leading to higher interest rates and a higher USD.

While China’s economy is expected to slow down slightly due to its excess industrial capacity, debt overhang, and a housing oversupply, emerging markets should improve gradually. Unsurprisingly a large difference between individual countries within the Emerging Markets cohort needs to be expected.

All in all a positive consensus for once

And as always, Ladies and Gentlemen, if you want to share any of your thoughts with me, please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,

I have the impression the media and even many members of the financial industry are hoping for (equity) markets to crash. This may seem a little strange, but so many were wrong during the last 12 months, predicting bad- and worst-case scenarios and now they are hoping to finally be right with their poor predictions.

First, not all markets were going up and within the ones that went up there were large differences and sometimes with very high volatility. The best example for this is probably the rise of crypto currencies from something hardly known to something that made owners rich. As a more traditional investor, today I am looking at equities markets and within those, I like to look at the ones that offer statistical data for as many decades as possible.

Now, for this reason I am looking at the S&P 500, certainly one of the leading global indices. One can see that in 2017 this very index closed not once below the 200 day moving average line (an indicator to determine a stock’s or index’s closing average over a period of 200 consecutive days). This is rare and only happened 14 times in the past 90 years.

The interesting question is what happened in the year after such rare events. Well, in 54% of observations the market went up. The average performance in the following year was close to 2%. This of course does not mean much but maybe if narrow it down just a little more, because in 2017 we didn’t see any drawdown larger than 5% and this, Ladies and Gentlemen, only happened seven times in the past 90 years.

Again, it is interesting to look what happened in the 7 years thereafter. Two thirds of all observations showed a positive year following a year with intra year drawdowns of below 5%. The average performance in the seven years that followed years with maximum drawdowns of 5% stood at +8.5%. However, don’t get the champagne out just yet, because in those years volatility went up quite a bit and intra year drawdowns so far always came to stand at over 5%.

What does this small statistical exercise tell us? It tells us that purely statistically there is a 2/3 chance that 2018 may be positive for the S&P 500 and that the proposed increase in that index comes in at roughly 8.5% and that intra year volatility will be higher than 5%.
Interesting, no? Even more so because if this is what we are going to see in 2018, everyone will be happy. The doom sayers will thanks to high intra-year volatility be able to say, “we have always said the markets are to pricy and will have to go down” and the optimists will still see a positive over all year.

Fact is nobody knows where markets are heading therefore it is so important to invest after a plausible investment strategy and be willing and able to live with volatility.

And as always, Ladies and Gentlemen, if you want to share any of your thoughts with me, please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,

I wish you a very happy and prosperous new year! May most of your wishes come true!
Just before the year end 2017 we published the first edition of our quarterly crypto research report. I hope as many as possible of you have had a look at the links in my weekly mail, registered their names and read through the report.
I had received a lot of feedback, mostly positive, but some people, I would call them “concerned investors with a bias to tangible investments” wrote to me that they were wondering why Incrementum of all research and asset management houses would enter the crypto currency field.
Ladies and Gentlemen, I think this is a very valid question. Why would Incrementum AG, a company known for being conservative and geared towards tangible investments take up crypto currency research.
Of course, we understand that crypto currencies are as far away from tangible assets as they possibly can be. Most “Cryptos” are totally intangible (some offer knowledge or goods in exchange for tokens) and therefore and like in many other cases it comes down to a question of perception if something, in this case crypto currencies, has value to people, (i.e. consumers, speculators, investors) or not. If people believe others will see at least the same value in them as they do (whatever this value may be) it will work. The very day this perception changes the value will drop.
However, to me it is fascinating to see how the technology evolves and an industry builds up on it, having the potential to revolutionise business, capital markets, documenting, etc.
Looking at a slightly simplified example showing how crypto currencies can revolutionise for example capital markets the example of an entrepreneur who needs funding for a business idea is very interesting. “Our” entrepreneur can “tokenise” his idea (i.e. issue “tokens” of a virtual currency) and sell via internet his tokens to a global crowd of investors who believe in his idea. Such investors will in exchange for their “investment” participate in the success of that very idea. It is a bit like equity in a company without having to go through all the costly and time consuming legal and regulatory issues and with the potential of reaching a truly global investment crowd.
To sum it up and come back to the initial question why Incrementum would enter this field, it is because we believe the technology is interesting and we noticed an information vacuum which by entering the field we are trying to fill in an unbiased and neutral way.
And as always, if you want to share any of your thoughts with me, please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:
smk@incrementum.li
Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,