February 2021 | Germany is in the deepest recession since the financial crisis of 2009. The gross domestic product slumped by more than 5 percent in 2020. Worldwide, the index has fallen by 3.5 percent. However, if we watch the stock markets, it looks like there was a party going on. It seems as if a decoupling of financial markets and the real economy is taking place. Are we threatened by a situation like the bursting of the dotcom bubble in 2000? Why it is worthwhile not only to focus on shares in one’s investment strategy, but also to invest in classic tangible assets.
The recession is not new. German industry has been suffering for a good two years now. In addition to all the problems that already existed, Corona was added at the beginning of 2020. The share of industry in gross domestic product (GDP) fell from 23 per cent to around 20 % in the first half of 2020 (source: Information Service of the Institute of the German Economy).
On the other hand, the stock markets are booming, the indices are shooting up. The German blue chip stock market index DAX passed the magic mark of 14,000 points in February. Similar highs can also be seen on Wall Street. If we compare the changes in the German leading index and the gross domestic product, a skewed picture emerges. The following graphs show the difference in the development of the real economy to the stock market:
Development of German gross domestic product (GDP) in percent (2008-2020)
Development of German blue chip stock market index DAX (2010 – 2021)
Memories of the bursting of the dotcom bubble come up
History teaches us that this can be dangerous. Take, for example, the legendary New Economy that began in the mid-1990s. Millions of small investors worldwide discovered the stock market for themselves and invested in technology companies, among others. Probably very few people knew what the business model actually looked like. One IPO followed the next, and the shares sold like hot cakes. The stock market valuation had nothing whatsoever to do with the company’s profits. The end is history. When the dotcom bubble burst in March 2000, it wiped out a market capitalisation of 5 trillion dollars. Even worse, the interest rate policy that followed the bust ushered in the global economic crisis of 2008.
Today, speculation continues to play a major role in the stock markets:
- The most recent example is Gamestop, which caused a big stir in January 2021. Internet forums like Reddit called on numerous small investors to buy shares in the US retail chain for computer games and entertainment software. The goal, however, was not to make money on the stock. The aim was to punish hedge funds that had short-selling bets on the stock. With success – according to German newspaper Handelsblatt, the professionals incurred losses of 19.75 billion US dollars.
- Automotive companies such as Tesla or Nikola Motor Company are also betting on the imagination of investors. Tesla’s valuation is currently higher than that of VW, Daimler, BMW, Fiat Chrysler, Peugeot and Renault combined. Yet not even 400,000 deliveries took place in 2020. The situation is even more extreme at the Nikola Motor Company. Its valuation was at one point 24 billion US dollars. Sales record: zero. There are many orders, but not a single model has been sold yet. This is now taking its toll: the share price is hovering below the 20 US dollar mark, around 80 percent lower than in the summer of 2020.
- The bankruptcy of Wirecard last year caused a scandal. The company was rigorously manipulated, cheated and falsified. Turnovers were simply made up. To this day, there is no trace of the missing 1.9 billion euros, of which it is unclear whether they ever existed. In June 2020, Wirecard becomes the first group in the history of the DAX to file for insolvency. There were enough warnings here. Only they were not listened to much. As a result, not only the auditors but also Federal Financial Supervisory Authority BaFin came under criticism. However, this dispute will not help the investors, because their money is gone.
IPOs at record level in 2020 – is dotcom 2.0 now looming?
While the global economy was ailing, more companies went public than at any time in the last ten years. A full 1,322 IPOs took place in 2020, 15 percent more than in the previous year. The issue volume rose by 26 % to 263 billion US dollars and reached the highest value since 2010 (source: EY).
The front-runner in terms of issuance volume is China with Hong Kong (116 billion US dollars/up 51 %), followed by the USA (86 billion US dollars/up 69 %). Germany plays only a minor role with nine new listings and an issue volume of 1.1 billion euros.
Leading the pack is chip manufacturer Semiconductor Manufacturing International with an issue volume of 7.6 billion USD, followed by online retailer JD.com with 4.5 billion. The operators of the Beijing-Shanghai High Speed Railway raised USD 4.4 billion. In the US, tourism company Airbnb topped the list with USD 3.5 billion. The delivery service Doordash raised 3.4 billion, as did the software company Snowflake. Palantir Technologies (data mining) succeeded with 2.6 billion.
Biggest IPOs in 2020
Spacs spur IPOs
Since 2020, the importance of a new vehicle has been increasingly influencing IPOs: Spacs (Special Purpose Acquisition Companies) are companies that go public as an empty shell. They serve as a stock market shell that enables other companies to have a faster and easier Initial Public Offering (IPO). Around a quarter of the global volume of IPOs was attributable to these special purpose vehicles in 2020, according to the Financial Times. And the boom continues: already at the end of January 2021, more than 60 Spacs have gone public. Their volume, at $18.8 trillion, even exceeds that of traditional IPOs.
Investors are taking advantage of the hype of the high volumes and storming the stock market. This is also reminiscent of the New Economy. Even if the term FOMO (Fear Of Missing Out), the fear of missing out, did not exist back then.
In addition, investing in the stock market is even easier today: commission-free brokers like Robinhood or eToro are booming. With their colourful user interfaces, apps lend gambling a certain gamification. It is questionable whether investors are still following Warren Buffet’s lead:
“I only invest in companies whose businesses I understand.”
Have the financial markets really decoupled from the real economy?
No, says the FERI Group. According to the investment house, a stock market rally during a recession is not unusual. The stock markets are usually one to two years ahead of the real economic development. They are already assessing the opportunities that are emerging for the period after the Corona crisis. “An important role is played here by the unprecedented government bailout programmes, which should pave the way for an upswing in the second half of 2020 and which contribute to the optimism in the markets. Added to this is the extremely expansive central bank policy, which has created masses of new liquidity and thus inflated the monetary base,” says Dr. Eduard Baitinger, Head of Asset Allocation in the FERI Markets Update.
Dr Ulrich Stephan, Chief Investment Strategist Private and Corporate Clients at Deutsche Bank, expects a challenging year on the financial markets. While the real economy in particular was very complicated in 2020, the stock markets were relatively easy, he said. In 2021, on the other hand, he expects a significant recovery in the real economy, but probably somewhat complicated financial markets, Stephan told Handelsblatt.
Why it’s worth not just focusing on equities in the 2021 investment strategy
“What goes up must come down” – this old stock market adage could soon prove true again. Professional investors know the signs, but for private investors it can be surprising and painful – see New Economy and dotcom bubble. This makes it all the more important to include classic real asset investments in the investment strategy. Especially if they are based not only on fantasy, but on tangible figures and business models. This does not always seem to be the case with the flood of hyped shares.
Evergreens among tangible asset investments are real estate, gold and other precious metals or gemstones. With the exception of real estate, however, these do not generate any ongoing interest in direct investment. This is quite different with ships. The Green Ship Token of the Hamburg shipping company Vogemann, for example, also generates profits from the chartering of ships. A market that is currently growing strongly. And for those who don’t want to do without the online access they are used to from buying shares: the subscription process also takes place digitally for the Green Ship Token as a security token offering.
Would you like to know how you can add an investment in ships to your portfolio and make yourself less dependent on the stock markets? Get in touch with us.