5 questions for Stefan Kreuzkamp, DWS

I bought my first Pfandbrief about 20 years ago, just after I started working for DWS. I was surrounded by excited fund managers running around looking hot and bothered. Some of them had just caught the rampant Internet euphoria bug, while others were licking their wounds from the Asian, Russian and LCTM crises. I’m not a fan of the hot and bothered look myself, so I decided to add a healthy dose of Pfandbriefe to my portfolio. That was a good move for both me and my clients.

This is a question people have been asking us for years. To find the answer, you just need to look at how this asset class has performed, with comparatively low levels of volatility, which is also important to our clients. Attractive segments within the fixed-income securities market emerge time and again; recent examples include emerging markets or corporates. And when it comes to hedging against extreme risks, German government bonds are still far from redundant, too. Nevertheless, we prefer collateralised securities where the returns are similar and market liquidity sufficient. That’s why the Pfandbrief is, and will remain, a key component of our investment strategy. This is an area where we plan to maintain an active role in our domestic market.

We are seeing a whole range of political risk hotspots, mainly in emerging markets. While their accumulation could prompt some investors to abandon this asset class for a while, we don’t expect the trend to spiral out of control, especially since many countries are in a healthier economic position today than they were some 20 years ago. But we don’t have to look that far to identify the bigger medium-term risks. Besides many other problems, populism threatens to undermine established economic policy conditions in the world’s major industrialised nations.

We are in a cycle characterised by longevity and fatigue, the latter of course only in relation to the growth momentum of the current upswing. While momentum is modest, growth is broad-based, which is why our outlook for the economy and markets remains positive. As a result, we are still focusing on equities and bonds with a risk premium, but are adopting a more selective approach –also in emerging markets, where the correction is opening up some worthwhile opportunities.

In addition to the political risks I mentioned earlier, we believe that the capital markets themselves hold certain potential for negative surprises. Ten years of loose monetary policy and a corresponding increase in debt, one-sided positioning by some institutional investors and low liquidity in a number of sub-markets could quickly turn a small setback into a genuine, self-reinforcing correction. This is particularly true now that central banks are less willing to provide timely support to the markets.

I’m afraid I can’t bring you any groundbreaking news on that subject, but I can at least reassure you: we do not believe there is any broad-based real estate bubble in Germany. But it is certainly true that prices in some metropolitan areas no longer leave room for the sort of yields you can get excited about. That said, the supply and demand situation and financing structures argue against a major slump in property prices. What is more, Germany’s cities are simply catching up with their European counterparts.