The winners of the crisis and the risks for the free market economy
Following this most severe recession in post-war history, investors will rethink their strategies and private investors in particular will increasingly focus on wealth preservation and less volatile assets. The consequences of government intervention on the free market economy remain to be seen. But for a successful new start, we also need support for small and medium-sized enterprises.
It is time to rethink — The Corona crisis has already had and will significantly change our everyday lives and investment strategies in the long term. Gross domestic product (GDP) shrank by 2.2 percent in the first quarter of 2020 compared to the previous quarter. The slump at the beginning of the year was the sharpest quarter-on-quarter decline since the global financial and economic crisis of 2008/2009 and the second-strongest since German reunification. As a result, we were already in a “technical recession” at the end of Q1, as German economic output fell by 0.1 percent in the final quarter of 2019 compared to the previous quarter.
However, the worst is not over yet: “Economic output is likely to be significantly lower than the average of the already depressed first quarter of the year,” according to the Deutsche Bundesbank's latest monthly report. Various market forecasts assume that German GDP will fall by up to 14 percent. Although the government expects an upturn in the second half of the year, the Corona crisis will be the most severe recession in post-war history. Anyone who doesn't rethink their investment strategy now will experience a deep slump in the next six to 18 months.
Even before the crisis, most private investors focused on achieving significant excess returns. As a result of the crisis, many investors have finally understood the connection between return and risk again. In the future, it will be a increased demand for less volatile investmentsthat have a real value and/or have a negative correlation with the stock market. In particular, Core residential properties, precious metals as well infrastructure projects receive an influx of investor funds. Private investors will increasingly focus on maintaining their wealth. At the same time, the sustainability of a capital investment is becoming more important. Generation Greta's investment motivations were further spurred on by the Corona crisis.
Finally, technology-driven companies that offer real added value will be winners of the crisis. Other companies will suffer from severe growth difficulties. Germany will also establish a form of state capitalism. This will be heavily based on that of France and will even be influenced by China's success. Our chancellor will give civil servants in Berlin new powers to intervene in the economy: They will select winners and losers, sow new industries and set up national champions. Buying shares in companies will no longer be taboo. The focus on a balanced budget balance is being reduced in order to release the full force of the German balance sheet.
One exemplary incident is the nine billion euro bailout by Lufthansa AG, which has yet to be approved by shareholders. The impact of the state's activist strategy on the free market economy remains to be seen. In my opinion, Germany and the EU can only achieve a successful new start if both large and small and medium-sized companies receive equal support. A collapse of SMEs would have long-term negative effects on the growth of the German economy.
