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Trade and geopolitical tensions, tighter monetary policy, inflation and fears about global growth: what impact will they have on your investments?

Watch the macroeconomic analysis video by Jean-François Gillardin, Head of Discretionary Management at Banque de Luxembourg (video in French).

 

 

 

Video recorded at Banque de Luxembourg, the parent company.

 

In the articles below, our fund managers and specialists from BLI - Banque de Luxembourg Investments provide insight into the Bank's investment strategy and the opportunities emerging in the current market environment1.

Europe
United States
Asia
Bonds

What are the advantages for companies in Europe?

How do European companies fit into a diversified portfolio? Unlike the US, the European market is fragmented into a number of smaller domestic markets. How are European companies positioning themselves in globalised markets? What are their competitive advantages and growth areas?

On first impression, European companies face two major disadvantages:

  • The limited size of their respective national markets
  • Competition from countries producing at lower cost.

And yet, innovation, the quest for excellence – thanks to high quality standards and leading or pioneering positions internationally – coupled with good corporate governance, have enabled a large number of European companies to overcome these two disadvantages and take on their Asian and US competitors.

So, despite highly fragmented national markets, the European companies held in our funds have managed to broaden their reach and generate around 60% of their revenues outside Europe.

In its discretionary management of European equities, the aim of our management company, BLI – Banque de Luxembourg Investments is to identify those companies capable of coming out on top and creating long-term value.

They all share aspects in common, i.e., they have one or more solid, long-term competitive advantages, a sound financial structure and attractive profitability.

BLI's approach to asset selection is based on long-term convictions, resulting in the construction of concentrated portfolios. The companies selected to meet these strict quality criteria are not easy to find in all business sectors.

At Banque de Luxembourg, we approach investment from the perspective of a long-term shareholder. We allocate assets with the aim of building a diversified portfolio that fits each client’s investment strategy. We invest in companies with clear business models and transparent balance sheets, that generate attractive long-term profitability and are reasonably priced. The companies selected have tangible competitive advantages that create long-term value.

This information does not constitute investment advice or a recommendation or solicitation to invest, and should not be interpreted as legal or tax advice. Investors are also reminded that the past performance of a financial instrument is in no way an indication of future results.

Are quality and profitability always part of the equation?

As the world's largest economy, the United States is a key component of an investment portfolio, its economy offering fertile ground for innovation and growth. Are the selection criteria fundamentally different for small caps and large caps? How can we identify companies capable of generating long-term added value and what types of stock should we include in our portfolios?

Undeniable advantages

The US equity market is highly attractive for investors.

First, the US economy is a major driver of global growth and is likely to remain so in the future. To benefit from this performance potential, it is vital to focus investments on quality companies which, thanks to their powerful competitive advantage, remain capable of growth in the most challenging economic contexts.

Second, Wall Street makes up more than half of the world's market capitalisation and is seen as the benchmark that sets the trend for the rest of the globe. Furthermore, the US stock market offers an excellent risk/return ratio. Historically, US equities have generally held up better during market downturns, while rising faster during upturns.

And most importantly for a methodology based on individual stock-picking, the US equity market provides access to a large number of highly innovative companies with a strong entrepreneurial culture.

How can investors make the most of these advantages?

Under our discretionary management mandates, our portfolios invested in US equities are particularly well suited to these characteristics. The emphasis is on selecting individual companies with strong, lasting competitive advantages that are attractive, have low debt levels, generate strong cash flows and focus on creating long-term shareholder value.

At Banque de Luxembourg, we approach investment from the perspective of a long-term shareholder. We allocate assets with the aim of building a diversified portfolio that fits each client’s investment strategy. We invest in companies with clear business models and transparent balance sheets, that generate attractive long-term profitability and are reasonably priced.

This information does not constitute investment advice or a recommendation or solicitation to invest, and should not be interpreted as legal or tax advice. Investors are also reminded that the past performance of a financial instrument is in no way an indication of future results.

How do you select quality stocks in this vast, fragmented region?

Asia is home to 60% of the world's population and encompasses economies functioning at various speeds. How can we identify quality companies with growth potential, both in geographies with a rapidly growing middle class (emerging countries) and in countries in demographic decline (Japan)? How do the growth drivers of domestic and export-oriented companies complement each other?

The Asian continent is vast, and the countries that comprise it have very diverse sociological, political and economic characteristics. A number of Asian countries are enjoying strong economic and demographic growth, while others, such as Japan, have more mature economies and declining populations.

Against this backdrop, when investing in these markets, our asset management company, BLI – Banque de Luxembourg Investments believes in the importance of being selective and identifying companies that will stand out from the crowd, regardless of the challenges they face. These companies all have one thing in common: they are quality companies that generate long-term value for their shareholders through strong, lasting competitive advantages.

However, while there is a common investment approach, the global context in which each company operates is different, and the attractiveness of companies may differ depending on their geographical origins and their target markets.

For example, Japanese companies often have the distinction of industrial and technological expertise, underpinned by a long tradition of craftsmanship and meticulousness rooted in the DNA of Japanese culture.

Whether in the field of digitalisation (for example, the supply of equipment for the production of semi-conductors or electronic components), robotics, automation or medical innovation, the Japanese companies in our portfolios are often considered world leaders in their sectors and enjoy a strong technological lead; we see these competitive advantages as one of the keys to generating long-term value.

On the other hand, while it is true that there are a number of technology leaders in emerging Asia, this market is characterised more by the strong presence of local companies with a dominant market share. With strong brands and well-established distribution networks, these companies, which often come from the consumer sector, are able to address their local customers directly and are therefore ideally positioned to meet the ever-growing needs of a burgeoning middle class, particularly through premiumisation strategies.

By combining our knowledge of the long-term themes and trends in the various Asian markets with a rigorous stock-picking methodology focused on quality and the long term, as asset managers we are able to identify the companies best positioned to take advantage of the specific characteristics of each region and generate attractive returns over the long term.

At Banque de Luxembourg, we approach investment from the perspective of a long-term shareholder. We allocate assets with the aim of building a diversified portfolio that fits each client’s investment strategy. We invest in companies with clear business models and transparent balance sheets, that generate attractive long-term profitability and are reasonably priced. The companies selected have tangible competitive advantages that create long-term value.

This information does not constitute investment advice or a recommendation or solicitation to invest, and should not be interpreted as legal or tax advice. Investors are also reminded that the past performance of a financial instrument is in no way an indication of future results.

What approach should we take to rising interest rates?

After a long period of low interest rates, which were less favourable for bond investments, the return of inflation has forced central banks to review their monetary policy, making debt instruments more attractive. What strategies can assets managers apply to build a bond portfolio that both generates returns and protects their investments in the event of stock market turbulence? Corporate debt, sovereign debt, debt from developed and emerging countries: how can we take advantage of the different types of bond issues?

A changing environment

For more than a decade, interest rates in developed countries, and especially in the euro zone, remained at record lows. In June 2016, for example, the German ten-year government bond fell into negative territory for the first time.

This environment of very low interest rates and therefore low bond yields made the bond markets unattractive for many years.

However, over the last few months we have witnessed a paradigm shift. In the wake of various shocks (mainly the Covid crisis and the outbreak of the Russian-Ukrainian war) inflation rose sharply, forcing central banks to revise their monetary policy and raise their key rates (significantly). For example, between July 2021 and now, the ECB's key rate has risen from 0% to 3.75%.

As a result, it is becoming more expensive for individuals, businesses and governments to access credit, as borrowing rates return to their levels of the early 2010s.

Because interest rates and bond prices are inversely linked, this sharp rise in interest rates has led to a significant depreciation in bond assets, which have corrected massively over the course of 2022. Some bond strategies recorded double-digit losses.

Bonds have returned from their years in the wilderness and now once again offer positive yields. In various segments of the bond market, we have seen yields rise significantly and regain their attraction.

How will this affect our bond strategies?

The universe of bond investment is not uniform. It includes various segments with different risk-return profiles.

Based on a prudent management approach that prioritises quality and capital preservation, BLI – Banque de Luxembourg Investments’ bond strategies combine this variety of asset classes in a differentiated way, taking into account their respective risk-return characteristics.

However, depending on the macroeconomic scenarios envisaged, certain sub-classes of bond assets will be more or less well positioned. We currently favour a scenario for the next 18 to 24 months based on a moderate slowdown in economies and a fall in yields that remains relatively favourable for bond assets.

This information does not constitute investment advice or a recommendation or solicitation to invest, and should not be interpreted as legal or tax advice. Investors are also reminded that the past performance of a financial instrument is in no way an indication of future results.

 

Banque de Luxembourg’s discretionary management mandates can include European, American and Asian equities and, depending on the risk profile, a greater or lesser exposure to bonds.

The information shown does not constitute investment advice or a recommendation or solicitation to invest, and should not be interpreted as legal or tax advice. Investors are also reminded that the past performance of a financial instrument is in no way an indication of future results.


For further information, please contact your adviser or our teams

Angela Murrell
Private Banking Adviser
Peggy Damgé
Private Banking Adviser
Frédérick Hubert
Senior Private Banking Adviser
Anthony Cuvelier
Senior Private Banking Adviser