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Resilience as a success factor: ways to crisis-proof capital investment

Bad Homburg, 1/1/0001
  • Investors expect a better investment year in 2023
  •  Stagflation trend and global structural breaks as stress test
  • Expanding factor-based investment strategies for greater portfolio stability
  • 35th FERI Conference discusses approaches to resilience in capital investment

Bad Homburg, November 17, 2022 - Resilience is the buzzword of the hour. This also applies to professional investors, who are facing extremely adverse conditions on the markets with the clash of stagflation, an increasingly restrictive monetary policy and growing geopolitical risks. FERI's experts spoke to more than 100 institutional investors about how resilience in investment can be achieved with high-profile guests at the 35th FERI Conference. "A resilient investment strategy recognizes opportunities and limits risks inherent in crises and structural upheavals. This requires an active multi-asset approach that goes beyond conventional forms of diversification," said Carsten Hermann, Managing Director FERI Trust GmbH.

More constructive outlook for equities in a persistently stagflationary environment

Looking at the economy and the capital markets, Axel D. Angermann, Chief Economist of the FERI Group, made it clear that 2023 would remain challenging and complex for investors: "In Europe, we expect a recession for sure, in the US with significant probability. China's growth momentum will remain subdued for the time being. Inflation rates are falling, but the central banks' 2 percent target will not be reached for the time being. Overall, we continue to operate in a stagflationary environment."

Marcus Zasada, Head of Portfolio Management FERI Trust GmbH, nevertheless expressed confidence that the investment year 2023 could be better than the current year. "The markets are expecting an end to interest rate hikes by the U.S. Federal Reserve soon, which could give equities a boost. We also see valuation ratios improving significantly in Europe and elsewhere." In addition, bonds are likely to be in greater demand again due to almost consistently positive yields. Particularly in view of the expected continued high volatility on the markets, alternative investment opportunities remain in focus. Zasada cited relative value-based hedge fund strategies as an example of this.

New factors for stock selection

Thomas Gerner, Director Portfolio Management FERI Trust GmbH, explained that an expansion of factor-based investment strategies is necessary to better reflect the new reality in the financial markets. Factors that should receive more attention in the future, he said, include the impact of commodity markets and currency risks on companies, the capital structure of issuers to determine interest rate and inflation risks, and geographic exposure. In this way, he said
a deeper systematic dovetailing of macro and micro levels in stock selection can be achieved.

Making the state and society more crisis-proof

Prof. Friedrich Heinemann from the ZEW Leibniz Centre for European Economic Research used the example of the European Monetary Union to illustrate that adjustment mechanisms also need to be further developed at the supranational level in order to make the financial system as a whole more resilient: "The interest rate turnaround poses enormous risks, especially for the euro states, where high debt levels go hand in hand with a weak economy. If countries like Italy do not find the path to more growth, a new euro debt crisis looms."

What the resilience principle fundamentally entails beyond the economic sphere was explained by Markus Brunnermeier, professor of economics at Princeton University and book laureate on the topic of resilience, who was live from the U.S. at the FERI conference. "It is not simply a matter of avoiding or minimizing risks. Rather, what is needed is a social contract that ensures resilience, for example by the state educating citizens in times of crisis and communicating in such a way that potential dangers do not come up in the first place," Prof. Brunnermeier said. This includes following social norms and consciously using market mechanisms, he added. Open societies are also better able to develop resilience than authoritarian ones, as Brunnermeier explained with many examples.