Union Investment Interview Inflation and Other Dangers for 2016

Handelsblatt put to one of Germany’s top fund managers 10 controversial predictions for the year 2016. Jens Wilhelm, CIO of Union Investment, didn’t shirk the challenge.
Jens Wilhelm is the Chairman of the Supervisory Board of Union Investment Real Estate and member of the Management Board of Union Asset Management Holding.


For the start of 2016, we chose a more unusual interview format. The idea was to confront the chief investment officer of Union Investment, Germany’s third-largest fund manager, with 10 provocative assumptions.

Jens Wilhelm, clearly enjoying the unorthodox conversation, didn’t agree with many of our – admittedly somewhat outlandish – challenges. But he used the opportunity to outline his own predictions for the path of financial markets in 2016.

Mr. Wilhelm, 49, is responsible for securities and real-estate funds at Union Investment, putting him in charge of some €235 billion in clients’ assets. It marks the lion’s share of the €260 billion that Union Investment, a cooperative fund manager, holds for private and institutional clients.

Among the risks that Mr. Wilhelm sees in 2016: An overreaction to rising inflation. Rising oil prices, he warns, could push up consumer prices in the United States. That could spook investors. In Europe, one of the key dangers: A British exit from the European Union.


Handelsblatt: Mr. Wilhelm, our first assertion: The DAX will break the 15,000-point barrier this year.

Mr. Wilhelm: The DAX will undoubtedly reach 15,000, but not in 2016. We'll need a little more time. The DAX is likely to reach 11,500 to 12,000 points this year. It depends on the economy, which is currently running on autopilot worldwide. The global economy is growing robustly at 3 percent, the U.S. economy at 2.5 percent and the European economy at 1.5 percent. This allows companies to grow their profits, and stocks are subject to the Tina principle.

What is the Tina principle?

"There is no alternative." In other words, there is no alternative to stocks.

But the interest-rate divide between the United States and Europe is growing. Is there a risk of a crash?

2016 will certainly be marked, once again, by considerable volatility in the markets. We are living at a time when investors should keep their nerve. Constantly reacting to fluctuations is pointless. Anyone who takes that advice will earn good returns with stocks.

Really? No crash?

That’s right. Investors are not euphoric. They are behaving cautiously and are looking into the new year with mixed feelings, which is always good. We also believe a recession is highly unlikely. This is a mix with which the investor can begin the year on a positive note.

Aren’t you underestimating the diverging interest rate policies in the United States and Europe?

We live in a complex world. That's the big challenge. In the United States, the prime rate was raised for the first time in almost 10 years, thereby putting monetary policy on the exit ramp. Investors are thinking about how to respond to this, while the markets are reacting with substantial price fluctuations. We will see the same picture in 2016. Changes like this always move the markets considerably. But despite the rate hike, the Fed remains on an expansive course.

Our second assumption: The U.S. federal funds rate will increase to 2 percent in 2016.

Hardly likely. The latest rate hike was already a forceps delivery. In the end, however, the baby came out the right size and weight. We should be at 1.25 to 1.50 percent by the end of the year.

Don't you fear there will be a distraction?

We will have to deal with a statistical anomaly on the inflation side in the United States in 2016, which can easily terrify investors. The reason is that the falling oil price kept inflation rates down for a long time. That base effect is now expiring. As a result, inflation may start up in the United States in the first half of the year. As a rule, though, nothing has changed in an environment of very moderate inflation.

Assumption three: The oil price will more than double, to about $80 a barrel, after record budget deficits in places like Saudi Arabia cause turmoil.

I think that's out of the question in the coming year. I also wouldn't underestimate Saudi Arabia's will to continue the policy of cheap oil until the shale oil industry in the United States fails. This won't happen from one day to the next, but there are already signs that the Americans are running into trouble with financing. Besides, we have a very warm winter this year, which also curbs demand.

What does that mean for the price of oil?

It will remain at the current level or perhaps will even drop to about $30. We only expect a significant increase near the end of the year. Then the price should head toward $50 to $60 a barrel.

Assumption four: China will surprise everyone and grow at 8 percent.

China is in a longer-term process of transformation from an export-oriented economy to one oriented more heavily toward the domestic market. This change, of course, will not be completed in 2016, which is why I cannot imagine China as a driver of growth. To be that, the Chinese would have to massively step on the gas when it comes to monetary policy, as they did in the financial crisis. But there are still problems reeling in the excesses of the time, which is why a repetition is unthinkable. In 2016, China is more likely to grow at 5.5 to 6 percent. Nevertheless, for investors China remains the most interesting market among the emerging economies.

Assumption five: The European Central Bank will maintain its relaxed monetary policy stance until 2020, and will even end up spending €100 billion a month on bonds (up from €60 billion currently).

It is clear that the relaxation of monetary policy – that is, quantitative easing programs – always lasts longer and becomes bigger than originally intended. However, an expansion is not up for debate at the moment, nor do we need it. Anyone who knows [ECB President] Mario Draghi knows that further easing is not out of the question for him. But I can only warn against that. If the bond-buying program had been expanded by €15 billion in the last meeting, as was discussed, the ECB would own more than 25 percent of Europe's government bonds by 2017. That would not be desirable for investors.

Assumption six: Great Britain will leave the European Union.

There is a risk of that. The issue is open and depends on the economic situation, the question of refugee distribution in Europe and concessions to Great Britain in the E.U. debate.

Shouldn't Europe finally let Great Britain go?

Germany, in particular, needs Great Britain in the E.U. as a country with a traditional market economy. A Brexit would be a great loss for the E.U., and especially for Germany. A compromise needs to be found, or else we in Europe will also face great challenges.

And if there is a Brexit?

The economic environment will change, which will be bad for us and Great Britain. The British are so tightly interwoven with Europe that none of these countries can afford to live alone, especially not in this geopolitically difficult situation.

Assumption seven: U.S. nationalist Donald Trump will succeed President Barack Obama in late 2016.

First of all, I don't believe it will get to that. Trump does speak to the fears of many white, male voters. But Democrat and political realist Hillary Clinton will win, and the markets will remain calm. But you address an important phenomenon. The radicalization of political dialogue, which we are seeing everywhere, is a dangerous trend. This also applies in Poland after the latest election. It is one of the central challenges of the coming years. It must be possible to hold liberal and market-based values up high in the world.

Or else we will see a return to regionalism?

Yes. It's a real danger and needs to be monitored closely.

Assumption eight: In light of the threat from terrorist organization Islamic State and his role in Syria – and despite Ukraine – Russian President Vladimir Putin will become socially acceptable once again.

Clearly Putin will be socially acceptable again in 2016, because without him there can be no peaceful coexistence in Europe, nor can the conflict in Syria be brought to an end. That's why the doors are open for him in Europe, even with German Chancellor Angela Merkel. The only requirement is that he walks through those doors himself, but that doesn't seem likely to happen at this point.

Despite the Russians' ability to endure suffering, doesn't Mr. Putin have to walk through that door in 2016, if he hopes to end the economic sanctions?

It’s a dilemma for Putin. Former German foreign minister Joschka Fischer once put it this way: Putin has climbed onto the nationalist tiger and now he needs to ride it. Getting off isn't an option, or he'll be eaten. The image describes Putin's situation very well, even though it is devoid of all reason. He has to continue serving the nationalist clientele or he will become vulnerable. In this sense, the economy, banks and the stock market are of secondary importance, especially as the Russians are surprisingly capable of enduring suffering, at least from our perspective.

Assumption nine: Bitcoin, the artificial currency, will grow into an alternative to the dollar and the euro.

With our customers, we constantly observe that money issues are issues of trust. That's why it will be very difficult for Bitcoin to earn the trust of investors and become widely accepted.

Don’t you believe that central banks will eventually have to recognize Bitcoins?

This could certainly change if there were a guarantor that warrants the artificial currency, like a central bank. As long as this is not the case, I doubt that will be the case.

Have you owned Bitcoins?

No. And I won’t buy any in the future.

Assumption 10: Gold will go into free fall, and the price will eventually be cut in half.

It's clear that interest-rate hikes are never good for gold. The same applies to a strong dollar and weak inflation. But I can't imagine that gold will immediately plummet into a bottomless pit. There is still a strong physical demand for gold from emerging economies like India and China.

Will we see a price of $800 for an ounce of gold?

More than that, I believe. In my view, $900 to $1,000 is likely.


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