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The economy is only just beginning, says Christoph Schenk from ZKB. That is why the economy can also cope with inflation.
2021 will go down in the annals as a good year for the stock market, that much is already certain. But investors are far more interested in what is ahead than in the past. Because inflation is currently rising sharply in many countries, investors are having a hard time assessing the situation. Is inflation – rising prices for goods and services – damaging or helping the stock exchanges?
Rising prices have hardly ever done any harm
Zürcher Kantonalbank examined for Radio SRF how stock exchanges fared in phases with high inflation. And she has found that rising prices have hardly ever harmed the stock markets.
Inflation comes because the economy is doing well. It is mostly at the top level, so there are bottlenecks and prices are rising. That’s good for stock markets.
ZKB’s investment manager, Christoph Schenk, explains why: “Inflation comes because the economy is doing well. It is mostly at the top level, so there are bottlenecks and prices are rising. That’s good for stock markets. ”
There was, however, one exception to the rule in history: “In the 1970s, when inflation was last very high, you saw that – as soon as inflation rates rose well above five percent sustainably – the Swiss market too suffered, but not as badly. ”
Also no slump when interest rates rise
But what happens if the central banks raise interest rates, as the US Federal Reserve has already announced, in order to fight inflation? Higher interest rates mean higher costs for companies – which has a negative impact on profits. Christoph Schenk is also relaxed about that. Even rising interest rates would not immediately lead to a collapse in the stock markets.
Because the rule of thumb that stock exchanges go down as soon as interest rates go up is not entirely correct, because: “If companies can maintain or even expand margins because they can pass through prices, they can keep their profits with inflation or even increase. In other words, interest rates will rise, but as soon as profits can overcompensate for that, share prices will rise too. “
We are at the beginning of the rate hike, the economy is still going. That is why the shares can overcompensate for the negative effect of the rise in interest rates in this phase – with the profits.
The stock market only comes under pressure when the economy slows down, companies can no longer enforce higher prices and interest rates continue to rise at the same time. Only then do companies earn less, which has a negative impact on share prices.
Legend:
Slower economic pace, lower prices at companies and rising interest rates: only then will the market be under pressure, says Schenk.
Keystone
But this is a long way from being in this phase, says the ZKB investment manager. Instead: “We are at the beginning of the rate hike, the economy is still going. That is why the shares can overcompensate for the negative effect of the rise in interest rates in this phase – with the profits. ”
Christoph Schenk therefore dares to make a forecast: 2022 will be a good year for stocks – despite rising interest rates.