Newsletters
December 2022
DFO Reflections Q4- 2022
2022 was the worst year in financial markets since the 2008 glo- bal financial crisis and in many ways the worst year in the last 100 years. Globally, more than 30 trillion U.S. dollars of capital market value was wiped out.
This was largely because global bond markets saw their worst year ever, as evidenced by the broad-based global bond bench- mark index (Bloomberg Global Multiverse), which showed a loss of more than 15 %. Such an index loss is unprecedented! Long-dated government bonds were the worst hit, losing more than 30 %. Medium-dated bonds of about 7 years lost a good 15 % and short-dated bonds about 7 %. Equity investors also had a very bad year, even if it could still be described as a ‚normal bad‘ year with losses of about 15 % for global equities as measured by the MSCI AC World Index.
But the ever-popular technology stocks, as measured by the very well-known Nasdaq 100 Index, which includes stocks like Apple, Amazon, Microsoft, Alphabet, etc., were down more than 30 %.
Very aggressive equity strategies that bet on promising compa- nies that are currently not yet generating a profit lost more than 60 % of their value. Since private investors rarely follow a systematic index strategy and often dabble in stock and bond selection themselves, there are surveys showing that private investors suffered losses of 25 % or more on average in 2022, which in many cases represented inflation adjusted losses of more than 30 %.
October 2022
DFO Reflections Q3- 2022
After a strong global equity market rally in July, an equally strong correction followed in late August and throughout September, so that at the end of the third quarter we are basically back to where we saw ourselves at the end of the second quarter. This means historic losses for global government and corporate bonds, which haven’t occurred since the 1930s and 1970s, and large losses in global equities.
European government bonds in particular saw sharp price drawdowns in the quarter, because it has become clear that the ECB is also raising its reference rates sharply in order to counter stubborn inflation. This had not been communicated so clearly at the end of the second quarter, even though many signs pointed to it. In the meantime, the ECB has pushed its reference rates back above zero, consigning terms like „negative interest rates“ and „savings account deposit fees“ to the history books.
Asian issued, U.S. Dollar denominated investment grade- and high yield debt continued to under-perform in Q3. Investors can now expect additional yields between 2 to 5 % vis a vis U.S. issued Dol- lar debt, which makes it very attractive for the long term investor.
DFO Reflections Q2- 2022
July 2022
Due to the very poor development of the first quarter, I assumed that we should see a reprieve in the second quarter. Unfortunately, that did not happen. Instead, we had to experience another round of price drawdowns in all relevant asset classes.
Interestingly, losses in the global government bond markets were also more pronounced in the second quarter than in the broadly diversified global equity markets. This is a very rare occurrence, as government bonds are primarily a portfolio stabiliser. Government bonds only move very strongly when there are unexpected changes in price levels. This is currently the case and hasn’t been seen since the 1970s. Ongoing high inflation rates make it necessary to adjust bond prices, as bond investors want to be compensated for increased inflation risks and only want to buy bonds in the secondary market (previously issued bonds) at lower prices. (Rising prices lead to rising capital market interest rates. Rising interest rates lead to falling prices for bonds in the secondary market, as newly issued bonds carry higher interest rates. In the case of a 10-year government bond, 1 percentage point rise in interest rates leads to about 7 % price drawdown).
By now, all global central banks are busy fighting inflation and raising target rates. Even the ECB is firmly planning to raise its reference rate and bury the questionable project of negative interest rates.
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DFO Yearbook 2021
June 2022
I’m very happy to present the 2021 edition of our DFO Financial Yearbook, which is meant to provide a robust context for long term investing. Especially in my early years as an investor, I was wondering, which realistic long term returns I should strive to achieve in the public markets. In the 1990s such information was difficult to come by and even today, most clients of private and priority banks will not receive such information from their relationship managers. As I’ve now had my fair share of investment successes and mistakes, I’m well equipped to share this experience, so that new generations of investors as well as more experienced investors who are looking for context, can be helped.
The fourth edition of our DFO Financial Yearbook comes at an important time as many investors are experiencing significant portfolio drawdowns after having lived through a period in which high returns seemed easily attainable and especially new investors thought that money virtually multiplies overnight. Evidence based long-term equity returns of 7-9% p.a. seemed rather uninspiring for this generation of investors, as they saw a random selection of hyped-up securities rise by that much within a day or a week. Now they’re experiencing the opposite, many of the great ideas of 2020/2021 have lost more than 80% and may never recover. Long-term annual returns of 7 to 9% p.a. seem like a dream as even globally diversified equity indices have lost much of the gains of the last two years. Even bond markets, that are typically meant to stabilize equity portfolios are disappointing with material mark to market drawdowns.
Greetings from a Millennium Trader to the Millennial Traders!
May 2021
CEO Mario Becker shares the invaluable lessons he has learnt from his investment journey as a a professional investor through the millenium and advice he has for millenials looking to embark on their investment journey today."Dare to trust the market overall, as it will always reflect realized and projectable profits of successful companies, not hoped-for profitability of great sounding ideas!" - Mario Becker
DFO Reflections Q1- 2022
March 2022
We started 2022 with moderate expectations due to the generally good results in 2021. However, we would never have dreamed that by the end of the first quarter we would already feel as if a whole year was behind us:
Putin‘s invasion of Ukraine is currently overshadowing all other events and bringing unspeakable suffering to the peoples of Ukraine and Russia. But it also affects many people whose basic food and energy supplies have become considerably more expensive. For Germany and Europe, a new era has dawned that we, as witnesses of the fall of the Berlin Wall, would not have thought possible in this form. Putin is forcing us to take actions and investment decisions that are diametrically opposed to combating important problems such as global warming. Hopefully there is still a way back here!
DFO Reflections Q4 - 2021
December 2021
2021 was the year for which we expected victory over Covid, as it seemed that successful vaccination programs could defeat the pandemic. However, as the year progressed, it became clear that new virus variants and sluggish vaccination campaigns would prolong the crisis. This led to a 'stop and go' economy in most countries in the second half of the year, after the 'logjam' of 2020 and the most pressing supply issues seemed to have dissipated in Spring.
Soon, there was a realisation that rising prices would probably not be temporary, but could last for a couple of years. Rising prices usually require central banks to adjust monetary policy, typically reducing money supply and/or raising interest rates. Rising interest rates, in turn, are poison for financial markets. Despite those new developments, both the 4th quarter and the full year 2021 produced very good investment returns for our clients.
DFO Reflections Q3 - 2021
September 2021
The 3rd quarter largely followed the developments of Q1 and Q2. Depending on the vaccination progress of a given country we can see higher or lower levels of normalisation in the economic activity. But overall, it appears that the global economy is on a recovery path. Most recently we could witness a spike in energy prices as well as transportation costs, which in some cases went up ninefold versus 2020.
All the above triggered an adjustment in inflation expectations as well as overall interest rate levels. Especially medium to long term interest rates adjusted upwards from less than 1% at the beginning of the year to about 1.5%, at this moment (reference: 10 Year U.S. Treasuries). In March we even saw 1.75% for 10 Year U.S. Treasuries.
While falling interest rates means rising bond prices, rising inte- rest rates always means the opposite: falling bond prices! Currently there’s a big discussion whether recent inflation spikes are temporary and will revert to historic CPI averages of close to 2% p.a.; or whether we need to brace ourselves for a permanent rise in consumer prices. Unfortunately, we will have to wait for a few more quarters to draw the right conclusions.
DFO Reflections Q2 - 2021
June 2021
The second quarter of 2021 continued much of the same trends as the first quarter: Equities of small and mid-sized companies, as well as more cyclical industries and slow-growth segments (keyword “value”), outperformed. Shares of developing countries saw a strongly differentiated development: Shares of commodity exporters such as Saudi Arabia and Russia saw strong price gains, whereas Chinese shares could not reverse the negative trend since February and selectively even traded in the red. Even the celebrations for the 100th anniversary of the founding of the Chinese Communist Party could not ignite any price fireworks here.
The “stay-at-home stocks” and shares of high-quality and less cyclical companies, which were neglected in the first quarter, saw strong price increases in May and June such that we can no longer speak of “hibernation” here. It would have been a big mistake to say goodbye to these stocks for short-term considerations, as they would now have to be bought back more expensively.
DFO Reflections Q1 - 2021
March 2021
In many respects, the first quarter of 2021 followed the performance of the final quarter of 2020: shares of small and medium-sized companies as well as developing countries continued to outperform; shares of cyclical industries also rallied strongly, whereas so-called ‚stay-at-home stocks‘ or shares of companies with high-quality and less cyclical earnings underperformed. China and Hong Kong saw an exuberant bull market.
DFO Reflections Q4 - 2020
December 2020
The final quarter of 2020 followed the good performance of previous quarters. Particularly corporate bonds (which were badly hit in the spring and whose returns were far behind those of government bonds) saw a massive recovery. This recovery was so strong that our investment components, which mainly contain corporate bonds, ended the year with higher total returns than those consisting mainly of government bonds. While this is quite normal, the crash in the spring of 2020 once again showed that corporate bonds should not be seen as „crash insurance“ – a fact that should definitely be taken into account when constructing quality investment portfolios.