Interview with Prof. Sebastian Müller: “I’m sceptical that the recovery on the markets will come soon”

The coronavirus has brought stock markets around the world to their knees. Share prices have taken a nose dive, investors are unsettled and no improvement is yet in sight. Sebastian Müller, Professor for Finance at the TUM School of Management, has been researching anomalies on financial markets for years. During an interview, he talks about the current crisis and considers how stock owners may best respond to the situation.

The coronavirus has brought down share prices. Have financial markets already bottomed out?

I’d also like to know! Whether or not prices continue to fall, or if we’ve already reached a bottom, depends on many factors: When will a vaccine be available? Will effective medicines be found to tackle the infection? How long will the economic shutdown last? How will central banks act? These are all questions we don’t currently have answers to. Or not exactly, in any case.

How does the current situation differ from the 2008 financial crisis?

Both crises came very suddenly – which is a typical characteristic of crises. In 2008, it was the insolvency of Lehman Brothers over a weekend. And right now, we’re all seeing how quickly our lives have changed within 14 days. While the 2008 crisis started on the financial markets before reaching the real economy, this time exactly the reverse is true. We see supply and demand shocks in the real economy, which are naturally also affecting the financial markets.

Over the course of many years, people have often been advised to invest more in equities. Now lots of stock owners are stuck with substantial losses and are unsettled. What would you advise them in the current situation?

No-one can predict how the markets will develop in the short term. So panic-driven portfolio reallocations are probably doing more harm in the current situation than good. And for investors with a long-term horizon, the advice to invest at least a portion of one’s assets in equities is still right. After all, in the past equities have generated additional returns between 4 and 6 percent per year compared to money market accounts. However, this expected additional return comes at a price in the form of higher risk – as can be seen again today.

How can investors handle the risk of equities?

Firstly, investors should be aware that price collapses of 30%, 40% or 50% on the stock market are rare, but not extremely rare. In fact, in the last 20 years there have been three price collapses with this intensity. With this in mind, investors should always be aware of how much risk they can bear based on their own financial situation. What’s more, the old stock market proverb “Don’t put all your eggs in one basket” continues to hold true. For diversification reasons, it can be a good idea to add other asset classes like sovereign bonds or commodities like gold to a portfolio.

Do you believe there will be a swift recovery? What will it depend on?

In light of the critical developments and rapidly increasing numbers of infection cases, I’m unfortunately sceptical that the recovery in the economy and on the markets will come soon.

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