Thomas Lehr (Flossbach von Storch) | The US-China trade conflict is keeping markets on tenterhooks. Should we therefore avoid equities? We encourage investors to be courageous. Quality prevails. An argument in favour of long term investment.
The US-China trade conflict is keeping markets on tenterhooks. A protectionist confrontation on this scale could destroy entire value chains. Even worse, a new escalation in the trade war would have a negative impact on economic growth in the US, China and the rest of the world.
From our point of view, however, it seems almost impossible to predict the final outcomes and the next episodes in this conflict. In the long term, it is not only a question of tariffs, but also the technological, political and economic hegemony of global powers. On one hand, the US President is acting in a completely unpredictable way (not just during the election campaign). On the other hand, Trump promised economic prosperity and employment during the presidential campaign. An economic recession and a stock market collapse would destroy the balance of his administration and could damage his re-election prospects.
Investing without a crystal ball
We are guided by facts. For market participants, the topic is not new. It has caused uncertainty for 18 months. Cyclical stock market indices like the DAX have suffered sharp falls in this period. To some extent, the market is already discounting uncertainty. In terms of returns and cost benefit relations, the shares of cyclical companies currently seem cheap.
The shares of defensive companies which generate stable earnings not only in periods of growth are less affected. An investor who had invested two years ago on the basis of a continuous escalation in tariffs would have made a profit
In short: who would have invested in the stock market, if he had known the dispute between China and the US would intensify? And with hindsight, who would have been angry for not having invested, despite the protectionist escalation? In the last two years the MSCI World stock market index has increased almost 20% (in euros, including dividends).
We do not speculate, but invest over the long term. The investment horizon is better at 5 years, preferably at 10. According to our strategy and our investment directives, we position our portfolios solidly to confront temporary fluctuations. The total returns function only in the long term.
The fundamental question
As an active manager, we do not invest in markets in general, but in specific companies through a bottom-up process. We focus on business models which believe will survive the most turbulent times. The management team must be capable finding responses to the challenges of the moment. Today it is a trade conflict, tomorrow Brexit and in the future perhaps unknown technologies will require a readjustment to the entire business model. There have been and will always be challenges. Therefore those who do not invest assume that risks are greater than opportunities in the long term. In fact, however, it was always the opposite. Not even Donald Trump can change this.
