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German Equities – Consistent Rewards for Patient Investors

The sudden return of sharp bouts of equity market volatility at the beginning of February 2018 served once more as a reminder to investors that there is never room for complacency in capital markets. The strong returns made in January 2018 evaporated within a short period of time. Oliver Maslowski, fund manager at GAM, on the merits of longer investment horizons, based on the German stock market’s example.

Thursday, March 15, 2018

While the last four decades have proved something of a triumph for fixed-income investors, who have benefited from the longest secular bull market in a lifetime, equity investors have seen returns become progressively smaller, while the drawdowns seen in 2000-02 and 2008-09 completely overshadowed those of preceding decades (as illustrated below).

MSCI World: bigger risks, smaller returns
Germany - Chart 1

Source: GAM and Bloomberg. Past performance is not an indicator of future performance and current or future trends.

However, this does not necessarily mean the traditional concept of buy and hold is dead; equity-based investment has always benefited those with longer-term time horizons and this appears especially true of the German market, which has seen a particularly interesting and recurring pattern that is well worth highlighting. Investors have been able to at least double their invested capital every decade on a fairly constant basis by being invested in the DAX. The following charts show the DAX returns for different decades, with an increase of the investment multiple from 1 to 2 equating to a doubling of invested capital.

The fact that investors were able to double their invested capital every decade, starting 1975, when being invested in German equities, seems like a fixed reward for being patient and hanging tough for 10 years. The regularity is perplexing and by no means uniform, suggesting that shorter-term investors would need to demonstrate exceptional market-timing skills in order to generate a similar level of return.

For example, between 1976 and 1983 investors were not rewarded at all for taking market risk. However, the market then took off abruptly to achieve a doubling of capital within a total ten-year timeframe, as illustrated below.

DAX investment multiple: December 1974 to December 1984

Source: GAM and Bloomberg. Past performance is not an indicator of future performance and current or future trends.

The next decade was fairly constant upward moving, interrupted by one heavy crash in 1987 (Black Monday with Dow Jones losing 22.6% in one day and all major world markets declined dramatically) and the 1990s recession. For suffering two heavy setbacks within one decade investors were rewarded by more than doubling invested capital.

DAX investment multiple: December 1984 to December 1994

Source: GAM and Bloomberg. Past performance is not an indicator of future performance and current or future trends.

The following decade proved to be a roller-coaster, with the market more than trebling by 2000 (Dotcom bubble with excessive speculation in Internet-based companies), turning into the Dotcom collapse before positive momentum returned beginning 2003 facilitating a doubling of capital over the next two years.

DAX investment multiple: December 1994 to December 2004
germany-chart4

Source: GAM and Bloomberg. Past performance is not an indicator of future performance and current or future trends.

The last observation period was characterised by two distinctive phases. A positive start was abruptly interrupted by the big crash of 2008 (credit market collapse leading to bank failures). Concertation policies of central banks and governments subsequently triggered a v-shaped inflection resulting in more than a doubling of invested capital over the full ten-year period.

DAX investment multiple: December 2004 to December 2014
germany-chart5

Source: GAM and Bloomberg. Past performance is not an indicator of future performance and current or future trends

In conclusion, it seems that the concept of longer time horizons equating to a higher probability of harvesting material, equity-based profits (‘time in the market rather than timing the market’) is as true today as it has always been. The early stages of 2018 remind us that spiking prices can trigger corrections (and vice versa) and it is not always easy to keep your head when others are losing theirs. Nevertheless, long-term optimism in the ability of equity markets to deliver material upside has been justified historically. Indeed, in the case of German equities, investors have been able to at least double their capital every decade over four consecutive ten-year periods.


Important legal information The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.