TINA reloaded

The investment plight for the classic private investor with a mixed portfolio existed already before the corona pandemic and was usually aptly described with four letters: “TINA” (There Is No Alternative). In recent months, the challenge has now steadily become even more complex, especially on the fixed-income bond side. In Switzerland and the eurozone, we have been confronted with very low or even negative nominal interest rates for years. The solution has usually been to move into riskier segments within fixed income in order to service the bond quota. With the renewed money sponges of the three major central banks – Federal Reserve, ECB and Bank of Japan – investors are getting less and less for the risk taken in bonds. This impression is strongly confirmed by looking at the yield on US high-yield bonds, which are even showing a negative real return following the recent increase in inflationary pressure (graph 1).

Investors are thus no longer even compensated for inflation, not to mention the risk of the individual issuers. Of course, the picture no longer looks so dramatic if the rise in inflation turns out to be only temporary. Nevertheless, this development should be taken as a warning sign.?

Stocks - yes, but. . . .

The above-mentioned term “TINA” focuses primarily on equities, to which there seems to be no alternative. We assume that investors will hardly be able to avoid the topic of equities in the coming months. The focus should be on investments in themes and business models, and less on the intention to reflect the?overall market in the portfolio. With a valuation of over 20, the global stock market – MSCI World – is rather on the sporty side and in the top quartile in a historical comparison. How strongly the overall market has already run is impressively illustrated in graph 2.

Despite an impressive V- shaped economic recovery triggered by the coordinated global dual stimulus, the performance is impressive compared to the past. This is also the reason why we continue to have a preference for equities over bonds in our investment strategy, but in the case of equities our clear conviction is to invest very selectively in companies and themes that have a relative attractiveness on the one hand and propagate a sustainable business model on the other.?

Timber – valuable resource with inflation protection?

Diversification has been an important topic since the 1950s, when Harry Markowitz defined the modern portfolio theory. In today's world, dominated by central banks, this topic is even more relevant. In the LGT Private Banking Europe Midyear Outlook (dated June 23, 2021), we addressed ten exciting investment topics. At this point, I would like to briefly revisit our theme No. 5: “Wood – a valuable resource with inflation protection”. From our point of view, this investment opportunity is interesting not only for the next six months but also in the medium to long term due to the following three points:?

• Trend towards wood products makes wood a valuable resource for the future?
• Wood offers a partial inflation protection and a positive diversification effect?
• Substitution of fossil materials enables investors to contribute to environmental protection?

Investing in such concentrated themes, which clearly focus on selection, we recommend a collective investment vehicle.?