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Although an economic recovery is fraught with uncertainty, equity valuations are soaring. However, Guy Wagner, Managing Director of BLI - Banque de Luxembourg Investments, believes in the benefits of active portfolio management to identify good opportunities.

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Mr Wagner, 2020 is finally behind us. Can we expect 2021 to be better?

Unfortunately, we just don't know! There’s certainly a degree of optimism on the financial markets, with the arrival of vaccines and their potential rapid rollout. But on the other hand, the pandemic still isn’t under control and there’s increasing talk of the virus mutating. Not to mention a complete lack of visibility on when economies will fully reopen.

But on the other hand, the financial markets are in good shape and at higher levels than before the pandemic. How do you explain this striking contrast?

There is a complete disconnection between the markets and the economic fundamentals. For example, even with optimistic assumptions, it is estimated that the levels of company earnings expected to be reached in the third quarter of 2020 won’t now be reached until the third quarter of 2021 at the earliest. So a whole year has been lost. But despite this, many indices are at all-time highs.

This is mainly due to the fact that the sectors suffering most from the shutdown of economies, such as the hotel and catering industry or tourism, are poorly represented in the indices, in contrast to sectors that have performed well, such as technology.

Also, the measures implemented by the central banks are more favourable to the financial markets than to the real economy.

In the end, this makes equities more expensive and, to some extent, that reflects the great problem of increasing social inequalities affecting our societies. Over the last 10 years, the people who have benefited most from falling interest rates are those who own shares and property. For everyone else, ordinary people with savings in bonds or deposit accounts, the situation has deteriorated.

Is the current very high valuation of equities the beginning of a bubble?

There are increasing signs of speculative excesses. But I’m cautious about the concept of a bubble, because it implies that share prices are completely disconnected from the fundamentals, a bit like what happened in 2000 with dotcom stocks. However, although share multiples are historically high, it is still possible to justify this by the very low level of interest rates, which still play an important role in valuation calculations.

Since even high-quality bonds no longer offer a return, equities are preferable as they are real assets. But it’s important not to give in to the temptation of passive or index-tracker management – that may make sense when markets are very low, but it’s not the case now. So we must embrace active management because, even in markets that appear to be expensive, some good opportunities can always be found.

If we have to talk about a bubble, then, in this particular context, I’d prefer to call it a rational bubble. Guy Wagner, Managing Director of BLI - Banque de Luxembourg Investments

What about Bitcoin, which some people describe as the new digital gold?

Cryptocurrency doesn't yet have a place in our management strategy, but that doesn’t mean that we aren't following it closely. It is becoming more accepted by institutional investors, and is starting to be seen as an alternative asset class to be taken seriously. Obviously you wouldn’t want to devote 30% of your portfolio to it, but why not 4% or 5%? On the other hand, looking at Bitcoin’s price history, its high volatility definitely calls for caution.

 

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