Be careful Why Germans stubbornly insist on making bad investment decisions

Handelsblatt’s chief economist spells out why many Germans are so risk-averse and why that’s making them poorer. They're potentially losing out on billions.
Haunting times.

The world became 7.7 percent richer last year, according to the latest Allianz Global Wealth Report. Around the world, households’ gross financial assets rose to €168.3 trillion in 2017. But that growth missed Germany: Most savers here saw their assets grow by only 4.7 percent. That, in turn, put Germany further back in the ranking of the richest countries, to 20th place, behind France, Ireland, Austria and Italy.

In Denmark, the Netherlands or Sweden, where per capita income is about the same level as Germany, people on average have twice the financial assets as Germans, with their €73,600. Germans are keen savers but they are relatively poor in terms of assets: Their total financial assets currently amount to almost €6 trillion.

Germans complain a lot about quantitative easing and Mario Draghi's low-interest policies. But that avoids the real problem, which is Germans' fear of losses.

Only one in 10 Germans owns shares or equity funds; most rely on bonds and savings accounts. Shares are equity instruments, and the long-term return on equity investments must be higher than on debt investments such as bonds or time deposits because of the higher risk involved. Even turbulence on the stock market doesn’t change this long-term yield advantage. Actually, it reminds us that higher volatility is the price for higher long-term returns. In the past, only people who sold all their securities in a rare crash year wound up with poor returns on equity savings plans. That’s in line with calculations by consumer advisory services.

Why the cold feet? Mention the names Ron Sommer and Manfred Krug, and shivers will go down the spines of many Germans. Mr. Sommer used to manage Deutsche Telekom, the national telecom provider which floated its shares 20 years ago. Mr. Krug is an actor who helped promote the Telekom IPO. Everything went swimmingly until the share price slumped; anyone who bought the shares at the highest price and sold them at the lowest price suffered a loss of more than 90 percent. (Never mind that anyone who bought shares at the start and still has them today has earned an annual return of almost 4 percent.)

Another reason Germans today are so risk-averse is because of the Lehman Brothers bankruptcy 10 years ago. Some banks had sold Lehman certificates to small investors as a safe investment, without mentioning the possibility of the issuer's bankruptcy, which at the time seemed theoretical. These certificates were like subordinated bonds, meaning if the issuer goes bankrupt, the paper is worthless, regardless of whether the name at the top is Lehman, Holzmann or Air Berlin.

People here also often overlook the fact that German investors can rely on the implicit guarantee of the most powerful of all central banks, the Fed, for US stock exchanges and thus the global financial markets. Alan Greenspan was president of the Fed from mid-1987 to early 2006. The legendary "Greenspan put" named after him, describing rapid interest rate cuts and a flooding of the markets with money to prevent a sustained crash of the stock markets, has now become a "Powell put." Nobody doubts that Jay Powell, the Fed chairman, would also react to a real stock market crash with massive monetary easing. People may criticize that, but the Fed reduces equity risk to prevent real longer-term economic damage.

What else do Germans worry about? Sure, a fall in prices is a problem for anyone who has to sell at rock-bottom prices. Large institutional investors never actually have to sell — their capital usually grows steadily and interim price falls usually even out quickly. Nevertheless, German insurers barely invest in equities. At the end of 2017, a modest 5 percent of primary insurers were invested in equities, while around 85 percent of their capital was invested in bonds. This shows that a zero interest rate policy is a far greater problem for German savers than a stock crash, which is possible at any time but nevertheless rare.

The thing is, it is now clear and undisputed that the statutory pension insurance scheme will face two difficult decades ahead: The number of pensioners will rise between 2025 and 2045, while employment will fall. Both are depressing the return of the system. Citizens have a good €6 trillion in financial assets. If its yield were to rise by only 1 percent, this would correspond to €60 billion in income growth per year. If it were possible to increase the yield by 2 points and thus close to the global average, the average saver would receive extra earnings of €120 per month — more money than any tax reform could offer. But Germans would first have to put their Deutsche Telekom nightmares to bed.

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