“Extremely strong pressure on the ECB to act”

Dhe interest rate outlook European Central Bank (ECB) and the US Federal Reserve have scared investors and caused significant price losses on the stock markets. For Marco Herrmann, Managing Director of the Munich-based asset manager Fiduka, which was founded in 1971 by André Kostolany and Gottfried Heller, nothing was announced at the Fed and ECB press conferences other than that the monetary policy reins must be tightened further – and this despite the pleasing decline in inflation rates everything in the United States.

Herrmann believes that after two further interest rate hikes, key interest rates will reach a high of just over 5 percent and will probably be on par with inflation. “Such a relationship used to be the norm,” he adds in an interview with the FAZ. For him, however, the pressure to act in the euro zone remains “extremely great”. This applies in particular against the background of the increased inflation forecasts for 2023 of 6.3 percent on average for the year compared to 5.5 percent previously.

“Cosmetic in nature”

Although there will be inflation-reducing base effects in energy costs over the course of the year, the classic second-round effects can be expected in many other areas, particularly in the labor markets and services.

The managing director of Fiduka sees the ECB’s announcement that it will start reducing its bond holdings as of March as cosmetic in nature. The ECB intends to reduce its holdings by EUR 15 billion a month by the end of June and then decide how to proceed. According to Herrmann, the adjustments should not have a major impact on the financial markets. The Fed is setting a completely different pace here with around six times the volume.

Take advantage of price declines for cheap entry

Bond markets in Europe have responded to the decisions by selling, pushing up yields on both the short and long ends. “The expectations priced in another interest rate hike of a quarter of a percentage point, which we still think is a bit too optimistic,” says Herrmann. Even now, ten-year Bunds are yielding only 2.15 percent with inflation around 10 percent. In the United States, investors are more likely to assume a Fed-induced recession, which is why the yield curve will remain very inverted, i.e. long-term yields are significantly lower than short-term ones. For euro investors, Fiduka still recommends investing in bonds with a maximum term of four years.

“As expected, the stock markets will initially remain volatile, but in our view, stronger price setbacks remain worth buying.” This means that investors should use stronger price declines as a cheap entry point. “This crisis will also pass, and we will look forward to a better future again,” says Herrmann with conviction.