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LGT Investorama: Swimming with or against the current?

October 1, 2020

Whether we are talking the latest fashion, political currents, economic news flow or movements in capital, similarities exist between developments in the fashion world and trends in politics, the economy and the financial world. Certain conclusions can be drawn from these parallels and analogies. In all these areas, there are not just short-lived but also longer-lasting trends. And time and time again, we are faced with the question of whether and how long we should swim with the current or when we should start swimming against it.

Fashion is almost exclusively about subjective questions of taste regarding current ideals and role models – which is why decision-making is allowed to be spontaneous and “from the gut”. The goal of a fashion-conscious person is to spot new lifestyle trends before most people do and to dress or do their hair accordingly. Those who do not like swimming with this current prefer to stick to the classic look, one that is never really “out of fashion”. Only in exceptional cases can rational and objective evaluation criteria for one or the other attitude be identified.

In political matters, questions of style (up to and including targeted provocations) can also play a certain role, but here the decision-making process is more challenging and should be more analytical, more a “head matter”. If one wants to get to the heart of the current zeitgeist, look no further than the climate protection movement and rallies by critics of globalization which are now center stage (if one first takes out of the equation all of the political issues around the coronavirus). The two currents have much in common: on one side, there is a core of legitimate justification, on the other an affinity for planned intervention in the economy, right up to a radical rejection of the market economy system. These tendencies even reach as far as the central banks. But these currency guardians are solely responsible for price stability, which is difficult enough and definitely no dull affair. So they should not want to invest their billions created from “quantitative easing” in “green” assets, ergo the ECB does not have to mutate into an “ESG CB” under its new leadership. After all, a cyclical instrument such as monetary policy is demonstrably unsuitable for solving a structural phenomenon such as climate change. And history has plenty of examples showing that politicizing monetary authorities always ends badly, as it means central banks one day become responsible for almost everything, but no longer capable of achieving anything.

During the coronavirus crisis, public and private sector decision-makers have also been exposed to currents. China has led the way in imposing lockdowns, the disproportionate narcotization of all socioeconomic life, and most governments have floated along in the stream of this authoritarian great power. Few have dared to break free of the pull of the masses and swim against the current. One of them is Sweden, which has refrained from shutting down the economy and has striven for herd immunity without adopting herd mentality. Or the rebellious libertarian Tesla visionary Elon Musk, who, flouting the diktats of the health authorities, restarted his Californian production facilities early. Both swam against the current using their “common sense”, and averted greater damage, but took heavy flak from the majority of know-alls.

Just like at a fashion show, when trying on clothes in front of the mirror, or as in the context of political decision-making, investors are constantly asking themselves in relation to financial markets, which trends they should put their money on. When is it better to stick by the motto “the trend is your friend”, and when is it better to stand aside or even play the “contrarian”? Are we currently at a turning point, or is one just around the corner? Under no circumstances should investors base their decisions solely on their interpretation of the economic news flow, which is overlaid by a strong random component. Besides taking into account various opposing interrelationships with different inherent time horizons, a multitude of both structural factors and technical orientation variables must also be assessed – including the current market situation and market valuation. On this basis, the stock markets’ recent perfect “V-pattern” cannot be classified as irrational – not (yet) because a V-shaped recovery back to the former growth path after the sharpest and shortest recession of all times would be a foregone conclusion, but because of the continuing very low interest rates at which even very distant future earnings are discounted. Shrewd investors have also learned to closely monitor every move of their central bank and operate in its financial wake – as long as the central bank does not go off course, needless to say! After all, a healthy dose of “gut feeling” is also required on the stock markets.

I was once standing at the stern of a Mediterranean ferry looking into the swirling wake. A big piece of paper floated up. Suddenly it was snatched out of its previous course and abruptly dragged along by our wake in the opposite direction. On financial markets, unlike that piece of paper – which had no will of its own after all – one should deliberately avoid such hasty changes of direction based on outside influences.

As with a personalized style analysis to work out your optimal wardrobe or hairstyle, when you are determining your personal investment style you need to make a realistic and honest assessment of your own ambitions and risk appetite at the outset (both being often overestimated). After that, it is important to remain fundamentally true to a suitable style. Even when there are temporary setbacks (a kind of “negative feedback from the markets”), it is not suddenly the time to start doubting yourself and go against your own choices. If you follow this rule and have the patience to wait for well-deserved “stock market compliments”, you will improve your wealth and self-confidence at the same time. If in doubt, let yourself be inspired, ask your client advisor about our current “fall collection” or for a tailor-made investment proposal!

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