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In a very turbulent economic and financial climate, some traditional principles are being challenged. Depending on the definition of risk, Guy Wagner, Managing Director of BLI - Banque de Luxembourg Investments, even thinks that investing in the shares of certain high-quality companies can be a wise choice (13.5 minute podcast).
Mr. Wagner, we are ten months through this highly unusual year of 2020. How have the financial markets as a whole performed during the pandemic?
It has certainly been a turbulent year. The markets started the year bullishly, then with COVID-19 and lockdown, they plummeted from mid-February to the end of March. They have bounced back since then and have more or less regained what they lost.
Given the context of very low interest rates over a long period of time, a rebound is logical, but its scale and speed is nonetheless surprising. Although economists are predicting that it will take two or three years for the economy to get back to the same level as at the beginning of the year, the financial markets have achieved that already.
Does this mean that the financial markets are somehow asymptomatic?
It simply means that they have successfully managed to distinguish between sectors that have done relatively well out of the pandemic and those that are continuing to suffer. The crisis has clearly accelerated a number of trends that were already present before. Tech stocks, which were already doing well, are one of the big winners from the situation: the crisis has made them even stronger. In contrast, sectors like oil and tourism are struggling. These are sectors facing structural problems and the uncertainties hanging over them will persist.
In the latest issue of ‘Perspectives’, you highlight the outperformance of tech stocks, to the point of calling into question, at least temporarily, the fundamental principle of diversification in investment portfolios...
Although this trend was already evident before the crisis, it has been amplified. It’s notable that the technology sector accounts for nearly 30% of the US S&P 500 index. The GAFA companies only represent 1% of the number of stocks making up this index, but account for more than 20% of the total valuation. It is no longer really true to say an index is representative of the diversity of the markets. We are clearly in an environment where a number of investment principles are being called into question.
Does this mean that investors should also question their own approach?
Perhaps the very definition of risk has changed. For as long as risk was directly associated with volatility, equities were obviously a risky investment. But if risk is now defined as the risk of losing part of your capital, then equities are not necessarily any riskier than government bonds. Today’s investor who wants to match or even exceed the performance of the indices is forced to over-invest in tech stocks.
With the Covid crisis and the fallout from the US election, the uncertainties have never been greater. And everyone knows that investors hate uncertain environments. What’s the best approach?
It’s important not to be overly influenced by short-term elements of uncertainty. The best approach is to invest in companies that you understand, that you know how to value, and that have strong balance sheets. There will always be some uncertainties. Now more than ever, patience is a major asset for the investor.
It’s important not to be overly influenced by short-term elements of uncertainty. Guy Wagner, Managing Director of BLI - Banque de Luxembourg Investments
Are there any safe havens? Gold, for example, comes to mind...
Obviously gold continues to have a place in a diversified portfolio, especially since there are a number of factors in its favour, such as excessive monetary growth and negative interest rates. It also offers a good response if fiscal discipline is abandoned. This hasn’t happened yet, but might be the case soon.
So let me say it again: in the current context, even if the idea goes against the grain, shares of some high-quality companies can be used to play a safe-haven role if you base risk on the fear of losing some or all of your capital.