German investors, including retail, have been cognisant of long-termism and shown little sign of panic in their investment behaviour, finds Fiona Rintoul.
In common with its European neighbours, Germany has suffered many coronavirus cases. At the beginning of June, Worldometer put the total number of cases at 183,515, making it the ninth-most-affected country in the world. When it comes to deaths per million of population, however, Germany’s figures are much lower than those of its neighbours.
Germany ranked 24th in the world on June 1, while Belgium was second, with Spain, the UK, Italy and France ranking fourth to eighth. Perhaps Germany’s success in limiting fatalities from Covid-19 helps to explain the sang-froid with which German investors have faced the global pandemic.
“Investor confidence is unbroken despite the corona crisis,” says Hans Joachim Reinke, CEO of Union Investment, Germany’s third-largest asset manager. “Nothing has changed in the trends that determine savings and investment behaviour.”
The German government’s ‘Kurzarbeit’ (reduced working hours) programme, which helps corporates and employees and affects 10 million German workers, has also been a stabilising factor. It became clear that the government and central banks were prepared to do whatever it took to calm the crisis, notes Harald Rieger, head of coverage for Germany and Austria at DWS, which meant that investors – particularly on the retail side – reacted, but not as much as they had in former crises.
“I would say that the business overall was very stable, given what we’ve seen in markets and given how affected our clients have been, which we’re positively surprised about,” he says.
Behaviour varied across client groups. For corporates, it depended to a large extent on industry, with pharmaceutical companies, for example, far less affected than car manufacturers. Asset allocators typically reacted to the crisis more than other groups, says Rieger, with some forced to reduce equity positions due to risk management strategies.
“We’ve already seen those investors coming back to some extent – though not to the full position that they had before the crisis. And in our passive business, we’ve seen huge swings out of equity and into fixed income or short-duration fixed income and cash strategies.”
Long-termism trumps panic selling
Statistics bear this out. Figures for the first quarter of 2020 from the BVI (the German fund association) do not suggest panic. Overall, the German fund industry saw net inflows of €24.1 billion, with Spezialfonds (institutional vehicles), attracting €32.7 billion of new assets. However, investors did make net withdrawals of €13.9 billion from German retail funds in the first quarter, and those withdrawals were concentrated in equity funds, with €5.7 billion flowing out of equity ETFs.
Figures for the second quarter may paint a clearer picture, as the pandemic was obviously at an early stage during the first quarter. What has transpired subsequently is strong demand for savings plans. By the end of April 2020, Union Investment had concluded 156,000 new savings plans and had net new business of €2.4 billion. The trend continued to rise in May, with net sales standing at about €3.5 billion year-to-date towards the end of the month.
“Naturally, massive slumps on the capital markets unsettle investors,” says Reinke. “But it is increasingly possible to convince retail customers that long-term orientation is key when investing in securities and real estate.”
Germany’s largest asset manager, DWS, also reports strong demand for savings plans with both active and passive strategies from retail clients. As many retail clients did not go into the crisis with high equity quotas, they did not necessarily need to de-risk, says Rieger.
“We’ve seen some equity positions being sold – but not especially out of that group of retail investors. Many are using savings plans to build up equity positions, and obviously if you are planning long-term investments, you might even see a bad situation as a buying opportunity.”
There is another reason for German retail investors to remain calmer than most in the crisis. Household savings in Germany are among the strongest of any developed nation, notes Adrian Ash, director of research at BullionVault, running at 11% of total disposable income against less than 8% for the US and zero for the UK, based on OECD figures.
This gives German retail investors a cushion – but does nothing to allay an enduring fear: inflation. Only careful investment selections, perhaps with some managed risk, can help with that. One result is that Germany is now the world’s fourth-largest private consumer of gold in all forms and the only country where demand is dominated by investment.
“German citizens seem to feel the risk of inflation more keenly, choosing to hold a greater portion of their savings in physical bullion,” says Ash. “Compared to residents of other nations, Germans also show greater commitment to their investment in gold, researching their options more thoroughly and then buying more frequently compared to BullionVault users elsewhere.”
And gold is just one of many real assets that German investors, both retail and institutional, are turning to in these challenging times.
“With interest rates being rock bottom due to European Central Bank (ECB) interventions and the crisis, the necessary returns will have to come from real assets – including equities and private equity,” says Unigestion’s head of institutional clients Emea, Reto Germann.
Robust real estate vehicles
Open-ended real estate funds have long been a feature of the German fund market, and while demand has fallen during the crisis, Rieger expects it to pick up again when calm returns. After the last crisis, the funds were redesigned, and investors must now give 12 months’ notice if they want to make withdrawals. “This has made the whole vehicle more robust and means that clients use it in the right manner,” says DWS’s Rieger.
For Germann at Unigestion, the present crisis has also highlighted the need for more geographic diversification – for example, in real estate. He believes that the Covid-19 crisis has highlighted concentration risks, as the lockdown of the economy uncovers risks not previously imagined.
“Investors have realised that geographic diversification has helped to smooth performance, given the dispersion in the markets and different timelines and reactions of different countries,” he says.
Retrenchment to the home market is in any case scarcely possible. Globalisation blurs borders, and there are few markets more exposed to the global economy than the German one, with its strong manufacturing base and high export levels.
“First thoughts may have been towards increasing the home bias, but looking at the dependency of the German industry on the global economy, this would increase the risk even more,” says Torsten Köpke, director of global assets at Redington. “There is much more discussion about ESG (environmental, social and governance) as this seems to be one of the key drivers for future economic development.”
Reinke agrees that the sustainability “megatrend” remains intact. Indeed, the crisis is likely to intensify demand for coherent and authentic ESG strategies, which allow investors to take out some tail risk and avoid certain companies and sectors. “It really helps,” says Rieger. “From our perspective, ESG will become much stronger from the crisis.”
Focus on liquidity
That will be one part of the future, as we hopefully move beyond the crisis. Asset managers in Germany also expect continued demand for savings plans and multi-asset strategies. There is also a twofold focus on liquidity. On the one hand, investors prize liquidity (and asset managers had a lesson in its importance during the 2008 crisis); on the other, there is an understanding that in a low-yield environment, you must sometimes give up liquidity to secure the returns you need.
DWS has benefited from corporates building up liquidity positions using its money market funds. At the same time, there is increased interest in alternative, less liquid investments, such as real estate, infrastructure and private equity.
On the institutional side, Redington’s Köpke says this is a time for investors to define their framework as clearly as possible in terms of required returns and acceptable risks and pain points. That means rethinking their investment strategy, including liquid and illiquid elements.
“This is not about statistical optimisation, but instead an economic exercise to find a suitable balance between expectations and possible tolerance towards negative surprises,” he says.
He encourages institutions to prepare by defining required actions for extreme events in advance and structuring responsibility between their organisation and external service providers. According to Köpke, this is also a great opportunity for investors to review their allocation and managers.
“The last months have been a great opportunity to understand incumbent managers better and compare them with others,” he says. “What worked as expected and who reacted as promised? Understand the drivers of your asset manager instead of watching their historic performance.”
The evidence shows that German investors have kept their heads during the pandemic. But strategic rethinking of the kind Köpke describes will make sense for many. In this context, good communication will be key – as it has been since the crisis started.
“Clients’ need for advice is particularly high in times like these,” says Reinke.
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