Deutsche Bank Positive Gains from Negative Rates

With German government bond yields close to or below zero, investors can still make money if they take more risk and invest in stocks, Deutsche Bank’s chief investment strategist explains.
Keeping a cool head at a time of negative bond yields: Asoka Wöhrmann, chief investment strategist at Deutsche Bank subsdiary Deutsche Asset & Wealth Management.

Asoka Wöhrmann is not easily rattled. The chief strategist of Deutsche Bank’s asset management unit is responsible for managing €1 trillion or $1.1 trillion. During a convention on mutual funds, he took time to talk about investing in the era of negative interest rates.

Herr Wöhrmann, how bad are record-low interest rates really? We’ve heard warnings for years but bond investors are still make reasonable returns.

Historically low interest rates are not a good thing. A 10-year German government bond only has a yield of 0.33 percent. Looking at a core inflation rate of 0.8 percent, it is clear that bond investors are losing money. Putting money in a savings account isn’t a profitable alternative either. Many investors cannot deal with the European Central Bank’s new monetary policy; they can’t deal with this uncertain environment. They’d rather shy away from capital markets altogether and see their assets fall in value in the long run.

How is this affecting retirement plans?

Retirement plans are strongly affected. There are no longer any bonds that have good credit ratings and at the same time offer attractive returns. In a nutshell: It is the end of a secure return.

Are you worried about old-age poverty?

This risk does exist when measures are not taken on time.

Germans are mostly savers. If interest rates remain low for such a long time, private retirement plans will offer ever less financial support to fall back on, in addition to government retirement schemes. Japan has experienced this. That is why an alternative strategy is required, even when it entails risks.

But retirement regulations are so strict there is little wiggle room to invest besides bonds.

Correct. Institutional investors such as pension funds are often not allowed to put more money into stocks.

Toward the end of the year, market pressure on the ECB will strongly increase to once again come with a “bazooka” of money. Asoka Wöhrmann, Chief investment strategist, Deutsche Bank

What needs to change?

Until now, pension funds have massively invested in bonds. This was a good thing in the past, and that is how the regulations have been set up. But in the current circumstances, it can lead to the wrong kind of investments. German government bonds with a 10-year maturity are yielding returns close to zero, posing a threat of real losses on assets.

What does this mean for investors?

They have to take risks. The ECB’s state bond-buying program worth more than €1.1 trillion has led to record-low interest rates for years to come. After accounting for inflation, interest rates are negative and this must lead to a new investment culture. This applies to all investors.

Is it possible that the 10-year German government bond itself offers an absolute, negative return and destroys value?

It is possible. I can explain it as follows: German government bonds have three advantages. Firstly, they have the best credit rating possible, a triple A rating. Secondly, they have high liquidity, making it possible to sell them without difficulty. And finally, the bonds are backed by Germany’s strong economy. Investors are therefore seeking a safe haven in German bonds.

Where will it lead to?

It means the end of a secure return. Many professional investors will protect their assets at the return level of close to zero. Institutional investors, in particular, are subject to regulations and must act accordingly. On the other hand, they need to search for investment possibilities and return to the market again when returns increase.

Should we expect another ECB capital injection?

In the middle of this year, many market watchers will become anxious and wonder why the battle against deflation and the economic stimulus are not showing results despite the government bond-buying program. But it will take two to three years before the changes become visible. Consumer inflation will remain extremely moderate due to low oil prices. Therefore, toward the end of the year, market pressure on the ECB will strongly increase to once again come with a “bazooka” of money. The U.S. central bank has also done it three times, and has announced additional measures.

Is a weak euro part of it, as it happened in the United States with the dollar?

During the last two years, the dollar was quite weak. This has been good for the United States because the country used this time to restructure its industry. From my perspective, central bankers at the Federal Reserve are currently saying: ‘We allow Europeans to keep the currency parity at one to one between the euro and dollar or even below that, but use this time.’ So, the weakness of the currency is accepted as long as Europeans help themselves out of their debt crisis.

The weakened euro, lower energy prices and record-low interest rates will firstly put a halt to profit revisions by European companies and then bring about a new trend. Asoka Wöhrmann, Chief investment strategist, Deutsche Bank

Is a weak currency not the actual goal of the bond buying program?

The weakening of the currency buys time for politicians to push through structural reforms. But in Japan, for instance, this is not working well. It does not lead to market restructuring and liberalization, especially when it comes to mobility of employees between business fields. The country needs an immigration policy. But this will take time, because Japan’s society is rather traditional.

Don’t you think Europe is also a place to worry about? Just look at Greece.

Greece has made enormous progress, which has led to cuts in income and wealth for many citizens. The European Union, therefore, has to meet Greece halfway to help it economically. But reforms have to continue.

How long will the ECB keep interest at an artificially low level?

Probably another three years.

This is requiring a different approach from investors. To which degree can stock investing be an alternative?

The dividend yield is the interest coupon of the future. Even if share prices are not rising anymore this year, investors will receive a dividend yield of 2.7 percent. But I don’t think this will be the case. We are expecting stock prices to go up.

But higher prices only come with growing profit – this is not what it looks like in Europe right now.

The weakened euro, lower energy prices and record-low interest rates will first put a halt to profit revisions by European companies and then bring about a new trend.

When will that be?

I think it will start already during this quarter. And during the next three quarters, European shares will see a clear positive trend. Low oil prices, especially, will fuel company profits.

What does that mean for leading indices, such as the DAX?

The DAX can go up to 11,000 points.

Is there more to get in other European countries?

The EURO STOXX 50, which represents the euro zone’s most important shares, could gain more than 10 percent. At the same time, we are observing that foreign investors are coming back and buying shares.


Robert Landgraf is the deputy head of Handelsblatt's finance section and is based in Frankfurt, Germany's finance capital. Anke Rezmer covers the investment fund industry for Handelsblatt out of Franfurt. To contact the authors: [email protected] and [email protected]