Money markets are currently providing German investors with security from volatile market conditions...
Money markets are currently providing German investors with security from volatile market conditions. However, this current trend is only expected to be short term as equity markets begin to recover from their falls.
Money markets have been a good vehicle for German investors to place their cash in, while they wait for economic conditions to pick up. From the beginning of the year to the end of September money markets have had the highest net inflow in Germany of e11,775.4m, while equities had a net inflow of e3,626.6m.
The BVI, the German fund industry trade body, states: 'Investors use money market funds to park their assets. When the markets develop an interesting trend, investors will then decide how to invest that money in other fund categories.'
Because of the security they offer, money markets are presently the preferred option for investors, says Karl-Hermann Hammel, head of international communications for the mutual funds arm of Dresdner. German investors have naturally been cautious and like to put their money in a safe place when the markets look volatile.
This is because many German investors suffered from the bursting of the technology bubble, explains Thomas Richter, analyst at DWS.
He says: 'Money markets have become popular because of a bad situation on the global stock market. Many German investors were hurt from the fallout in the stock market. In between 1998 and 1999 Germans were buying sector funds. However, in the second half of 2000, following the technology fallout, the market started to go bad then people switched.'
Although there has been a big increase in money market funds, investors still have shown some interest in equities.
At JP Morgan Fleming Asset Management, the biggest growth area has been in funds of funds, says Peter Fchwicht, head of asset management. He explains this has been because funds of funds are a diversified investment.
According to figures from the BVI for the first six months of the year 2001, the German investment industry was able to report positive results. Although most of the global stock exchanges were bearish, German investors continued to show an interest in equity funds, albeit at a more moderate level than during the record year 2000. At the end of June, 47% of assets under management were equity funds.
Heike Boyce-Schwensow, director of HBS International, says: 'At the moment, some money has flown out of some investment companies, but it has not been that catastrophic. From a German perspective the market has done remarkabley well this year. The German investors are quite sensible and do not panic sell, otherwise they would lose too much money.'
Bock says: 'In Germany investors understand that the stock exchange is not the only type of investment in the country. German investors look to see how the markets are going and according to their own risk profile then re-organise their portfolio. Even though they used money market funds as a park, it was perhaps to have a kind of 'pole position' for a new investment in equity funds or bond funds or something else.'
Richter expects an increase in equity products in the next six to nine months. Richter says since the attack on the World Trade Center, the indices in Germany have re-bounded about 40%. Since then some investors have become more positive on equities and are investing in global equity funds. This is because global funds are broadly diversified, which reduces risk.
Boyce-Schwensow explains advisers have also become more knowledgeable about the markets. When the equity markets were achieving a high return the German investors were buying those types of products. Since then, the markets have become more volatile and have been investing in global and international funds with a more moderate risk profile.
Equities are also expected to become popular because of pension reforms that will come into effect in January. The German population is becoming aware that the government pension plan will not be enough and people will have to invest themselves.
Roger Guy, senior investment manager of European equities at Gartmore, says birth rates are dwindling across Europe and a huge switch to private pensions is likely to take place over the next decade. He expects the equity and life insurance culture will increase and they will start to realise equities can be good long-term investments. For the long term, the increase in the flow of money to Europe should provide strong support for share prices.
Although pension reform is positive for the market, Fchwicht explains that presently, the reforms are highly complicated and very insurance-focused. Mutual funds can only be sold in a capital guarantee and paid out in an annuity. However, it is expected as the reform process progresses over time it will become more mutual fund-friendly.
Guy adds that the creation of the Eurozone has created a lot of opportunities for merger and acquisitions to take place in order to increase market share and compete more effectively in the global marketplace. This is likely to have further positive implications for share prices. It has also prompted the German government to improve investment and business conditions or risk losing out to other, more investor-friendly locations.
Germans are aware of the increased opportunities equities can bring. For example, when Deutsche Telekom floated in 1996, its huge advertising campaign made investors more aware. In addition, the Neuer Markt ' launched in 1997 ' has added to this increased awareness. It became Europe's answer to the Nasdaq. There has been an increase in high profile companies as well as start up companies floating on the exchange.
Advice to investors also is improving and they are starting to look to see what options there are.
Index funds have also become more popular because they are a less volatile investment and although investors are not likely to outperform, they are not likely to underperform.
Threadneedle's most popular product has been European and US equity funds. Richard Eats, communications director at Threadneedle, says these funds have been popular because they have been stable. These funds have not been as volatile as technology, for example.
In regard to pension reform it has been early days and Threadneedle is very interested in the developments and opportunities it could lead to in the market.
However, Hammel says he is unsure when the equity markets will pick up but he sees some light in January or February as an upward trend has already started.
Hammel explains German investors invest according to their own risk profile. Dresdner use advisers to help sell their products and the risk profile of a client must clearly be decided before any advice can be given ' it depends on the client ' each person's situation is different so their risk situation varies. For example, a father of three children with a mortgage might have a more conservative risk profile than a single young professional.
Boch expects trends in the next six months in the German mutual fund industry will depend on the development of international equity markets. The uncertainty in the global markets is matched by the uncertainty in Germany.
The German market is equally uncertain as the global markets are at present.
Since 11 September, the indices in Germany have rebounded about 40% and some investors have become more positive on equities.
Money markets have been a good vehicle for German investors to place their cash in while they wait for economic conditions to pick up.
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