Monat: März 2023

Good Morning Ladies and Gentlemen

«The culpability of corporate directors in often putting their interests ahead of shareholders and customers seems a reoccurring, unaddressed course of business. When times are good, they deserve high compensation and stock options; when their decisions cause loss and hardships, it is time for risk to be shared.»

By Tom, one of my readers

Thank you!

Ladies and Gentlemen, This week, I initially wanted to write about an analogy with Aristotele’s unmoved mover. However, I felt like coming back on my last weekly. Thank you for the many emails I received to my last week’s Stefan’s weekly. I became slightly emotional when I wrote it; thanks for your understanding.

Accountability

I wanted to ensure that the message, not only obviously incapable management and shareholders but also clients who enabled the frivolous behaviour of Credit Suisse’s management ever since the Great Financial Crisis, maybe even before, should be held accountable. I know this is wishful thinking, and I know that most customers are simple, kind people who do not ask questions. Not many think about the fact that the big bonuses, the limousines with drivers, the buildings at the most expensive addresses, and the silver teaspoons to go with the expensive china have to be paid for, and thus no one questions where the money comes from and whether, in addition to too high fees, too high risks are also taken. However, I genuinely believe that mature bank customers should consider such matters, and if they do not, they should, as a consequence, bear part of the risk. As Tom put it, it cannot be that we «privatise profit and socialise risk.», i.e. that the broader population pays for it.

Cryptos

Let us move to another topic. Many cryptocurrencies, above all, Bitcoin, were initially launched as a decentralised, fast and cheap global means of payment. This was the idea behind the protocol. It was not primarily designed to be a store of value or a product of speculation. Nevertheless, this is precisely what it has become. As a result, most transactions in cryptocurrencies are speculative.

Advantages of FIAT currencies over cryptos

I am also a moderate critic of the FIAT system. It indeed has its weaknesses. However, where is the advantage of a system, like in cryptocurrencies, without a hint of a chance of recovering lost or stolen money? Ladies and Gentlemen, the ultimate lender who steps in if the worst happens does not exist in the crypto environment. The last lender, like in the case of Credit Suisse, remains central to any crisis case.
Moreover, who else should represent it but a state institution, which certainly does not enjoy organising bailouts? It is probably no fun for them, but it is their job, and they are doing it, and I am pleased they are. While I believe that large parts of a population can not assess the consequences of what would happen if state institutions did not interfere in a crisis, most of the population is probably, even if unknowingly, happy they do so. While I can not think much of privatising profits and socialising risks, I am still happy to know there are institutions stepping in when the worse comes to worst.
Now, Ladies and Gentlemen, this „guarantee“ of the ultimate lender does not exist in the world of cryptocurrencies. Funny enough, the notion of many crypto „investors“ is the opposite, i.e. they think that cryptos are more secure. They obviously are not, or not yet. Think about it.

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to:
smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day, a wonderful weekend, and above all, joy!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

«The difficulty lies not in the new ideas but in escaping from the old ones.»

By John Maynard Keynes

Credit Suisse

What happened to Credit Suisse, you may ask? I have been pointing out for years that Credit Suisse, on the one hand, was selling its real estate, writing losses, and, on the other hand, paying out billions in bonuses. This outrageous greed of obviously highly incompetent managers starkly contrasted with the bank’s performance. As a Swiss citizen and former banker, I am amazed and saddened by the fall of this traditional bank.

Taking responsibility

The indignation is suddenly very great, and guilty parties are being sought everywhere. Of course, the top management of the past 20 years bears a great responsibility and, if you like, guilt. However, the fact is that every client is responsible and should, by default, question how excessive spending on salaries, bonuses, offices, and client events can be financed. I think clients have a responsibility to question the behaviour of their bankers. Therefore, this story also depresses me because seemingly naïve customers feel flattered when bank employees greet them in meeting rooms with thicker carpets than the customers‘ wallets. It feels like in sixth-grade history class when we learned how the Spanish explorers sailed to Latin America and sold the natives glass beads for their gold reserves.

The media

Interestingly, in November 2022, the former Chairman of Credit Suisse’s Board of Directors was granted a multi-page interview in a Swiss weekend magazine. This magazine is clearly positioned left of the centre; nevertheless, no critical question was asked to the ex-Chairman of a large Swiss bank, under whom the stock lost 90% of its value. So I am asking myself what is the value of such an interview?

Enough

Excuse me, Ladies and Gentlemen; I had to get rid of these thoughts. Thanks for your understanding.

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day, a wonderful weekend, and above all, joy!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

For this article, we were asked to elaborate on our view on the impact of rising interest rates on real estate investments. After a general introduction to current topics, we will outline what we consider critical factors of this popular asset class in the now-changed interest rate environment.

One year ago, when the Russian war of aggression on Ukraine broke loose, energy prices soared, and financial markets crumbled. Interest rates went up and are still increasing. Stagflation was one of the keywords used excessively by the media and even by economists. Stagflation is a business cycle characterised by slow growth, high unemployment, and inflation. For economic policymakers, this combination is challenging to manage, as any attempt to correct one of the factors may aggravate another. However, one year later, stagflation is still nowhere to be seen, and as often, things develop differently than predicted by the masses; the term „stagflation“ was sent back to sleep, at least for the time being and seems to have disappeared from the media altogether. Instead, today’s buzzword is „soft landing“.

We will see in what direction economies went in twelve or twenty-four months. However, we can learn from the old „Austrians“ that societies and economies with constantly unbalanced budgets and accompanying market interventions inevitably lead to a consistent misallocation of resources. Over time, the loss of purchasing power due to a lack of budgetary discipline is significant, and during the last twelve months, global economies suffered heavily from this effect. At times inflationary pressure can be pushed back on the timeline, but eventually, an outbreak is unavoidable. Therefore an investment strategy tailored to one’s needs and which helps to diversify inflation makes enormous sense.

Balanced and cash-flow-producing strategies have proven resistant and shown impressive inflation diversification potential. Furthermore, those who can afford to invest in real estate and physical precious metals and want to add them to their portfolio can expect an additional diversification effect, maybe leading to lower volatility but not necessarily any better long-term performance.

Volatility always seems to be an issue, and as inconvenient as it may seem for investors, volatility nevertheless represents an intrinsic part of investing, and any investor should know that. We usually tell our private clients that volatility is a price to pay for any consistent long-term performance. Now, many people would like to see a fully insured society, with its economy in total equilibrium, which on top of everything, is tailored to the individual needs, fears, etc., of each individual. But, unfortunately, this is not realistic. Just as we cannot always expect perfect solutions from science, we cannot expect our society, the state, monetary policy, individual politicians, fellow human beings, doctors, teachers, gurus, family members, friends, and acquaintances to always have the adequate and tailor-made solution ready for an individual problem of each individual. How should that be possible? Economic cycles come and go, economic crises come and go, political cycles come and go, and political crises come and go. This may seem unreasonable, out of date, exhausting and at times unfair, but it is nevertheless constantly the case that all sorts of crises affect our daily interactions. Societies and their financial markets are pretty complex systems, and complex systems are unfortunately not always fair or in balance.

Even the best political system, economic theory, and investment approach have their limits and cannot answer all the questions, identify all the unknowns (hence the name) and take into account the complexities and interdependencies of politics, the macroeconomic environment, central bank policies and scientific innovation, to name but a few. Against this backdrop, and for purely common sense reasons, it seems arbitrary to us to focus on one asset class or, even worse, one single asset.

Karl Popper pointed out more than 80 years ago that science can never produce absolute truths but rather approaches the truth in constant processes (also thanks to trials and errors), i.e. every theory is only considered good until it can be replaced by a new and better and tested one. Now, we all know that theories often leave out certain aspects; the developers of such theories deliberately limit themselves to core topics and usually do not claim to be all-encompassing. So when investing, we should keep that in mind and not expect the impossible from any investment or other theory.

After this introduction, let us focus on the main topic of this article, real estate and the impact of higher interest rates, opportunities and threats on this asset class.

Over the last decades, real estate investments have enjoyed immense popularity against low or negative interest rates and steady economic growth. Prices knew only one direction – up. However, the changed interest rate landscape also leaves its mark on the real estate market. The days of continuously rising valuations are over, at least for now. Moderation is the order of the day.

Our thoughts relate to the market for investment properties. For owner-occupied residential real estate, some arguments are less relevant because not only economic factors play a role in the respective purchase decisions.
Rising interest rates influence the performance of investment properties in three ways. First, rising financing costs and the declining relative attractiveness due to higher yields on alternative investments (bonds) harm the price level.

In addition, the discount rate is the most critical factor influencing the valuation of an existing real estate portfolio. Real estate companies and pension funds use the discount rate to determine the present value of their portfolios. This rate is usually derived using models and is conceptually based on a risk-free interest rate (yield on long-term government bonds). In addition, the general real estate risk and property-specific surcharges are considered when determining the discount rate. Steadily falling discount rates have been the main driver of rising valuations in recent years. Accordingly, real estate portfolios have appreciated significantly. For example, the largest Swiss real estate company, „SPS“, has recognised more than CHF 1 billion as income from revaluations since 2017. Therefore, the need for adjustment due to the changed interest rate landscape will likely not be insignificant. However, due to the inertia and long-term nature of the real estate market, the impact of these adjustments will probably only become apparent over the coming years. From an investor’s perspective, therefore, there is no reason to rush into investing in existing real estate portfolios.

For real estate to become more attractive again from an investor’s perspective, property yields must rise (significantly). This means that property prices must fall and/or rents must rise. Rents for space in commercial properties are determined by supply and demand. Here, both the economic environment and structural factors impact pricing. Because of current trends in the labour market (home office) and retail trade (online shopping vs stationary retail), high-quality offers in central locations will likely remain in demand. On the other hand, properties in geographically peripheral regions and properties of inferior quality will become significantly less attractive. As a result, the market will become increasingly differentiated again in the future.

Regarding investment strategy, the time for „buy and hold“ is also over in the real estate market. An active strategy that focuses on quality and valuations seems more promising. It is essential to monitor current trends on the demand side. Structural changes are occurring due to demographics (immigration and urbanisation), the labour market (home office) and shopping habits (online vs stationary retail). This structural change is likely to accelerate further.

Nevertheless, selected real estate investments are to remain interesting. This is because they may offer a diversification contribution and deliver significant cash flows based on a reasonable valuation. This opens up exciting investment opportunities in the medium and long term for disciplined investors with experience who can handle investments in non-liquid asset classes.

Your Copy
If you feel like reading through the online version of the current Global Executive issue, please feel free to click on the following link.

Executive Global Magazine – Staying Ahead in a Fast-Paced Environment – Incrementum

Enjoy the read, Ladies and Gentlemen!      

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day, a wonderful weekend, and above all, joy!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Good Morning Ladies and Gentlemen

Many thanks for all your messages and participating in the Incrementum year-end competition. We all know it is seemingly impossible to forecast the future and that we are doing this for fun.

S&P

So far, the highest bet on the S&P stands at 4’634 and the lowest at 3200.

Gold

So far, the highest bet on gold stands at 2’600 and the lowest at 1’910.

Silver

So far, the highest bet on silver stands at 38 and the lowest at 21.13.

My bets

As every year, I like to be transparent. So my bets are as follows: gold 2’090, silver 21.425 and the S&P 4’116. I keep my fingers crossed for all of you and look forward to sending this one-ounce silver coin to the winner at the end of the year.

Interesting aspect

Some weeks ago, I read a piece of research. The producers were speculating about a technology shift corresponding to a workforce demography shift favoured by retiring baby boomers worldwide. The idea of the article was that while baby boomers from the combustion sector retire, younger workers increasingly develop into the renewable energy sector; this aspect, according to the writers of the research, is receiving too little positive attention. Interesting, no?

Next week

Next week I will share an article on the impact of rising interest rates on the real estate sector my partner Dr Christian Schärer and I produced with you.

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day, a wonderful weekend, and above all, joy!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li