Considering inflation, disinflation and recession, Guy Wagner, Chief Investment Officer of asset management company BLI - Banque de Luxembourg Investments, gives us his analysis of the investment outlook in light of the international macroeconomic context.
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- First half of the year influenced by the markets’ performance
- What is the impact of the central banks' monetary tightening policy on the markets?
- Will the rally on the equity markets persist?
- What are the prospects for the end of the year?
- What is the reason behind the US economy's resilience?
- Europe and Asia: is recession inevitable?
- Is inflation finally slowing down?
- What opportunities are there for investors to generate performance?
- What will the impact be on the gold price?
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Guy Wagner, what can you tell us about the economic situation in the first half of the year?
So far, the economy is holding up relatively well as the fears of recession that were so dominant last year haven’t materialised. From that point of view, things are rather reassuring.
Then, of course, there is the theme of artificial intelligence, which is kindling investors’ dreams again, and also explains why growth stocks – particularly technology stocks – were easily the winners in the first half of the year, with a consequent rise in their valuation multiples. This is something of a revolution. It has had the effect of creating a two-speed market, since many of the more 'traditional' stocks have suffered quite a bit in the meantime and are rather lagging behind.
Will the rally on the equity markets persist?
In view of current levels, we are unlikely to see a bullish cycle over the next few years. But right now, it's hard to say how the next few months will pan out. Everything will obviously depend on how the economy performs in the second half of the year.
It's usually reckoned that there’s a time lag of around 18 months between the first interest rate hike and the initial impact on the economy. Given that the Fed reversed its monetary policy in March 2022, we are now coming to the moment of truth and we will see whether the economy manages to escape recession, bearing in mind that this hypothesis is not currently factored into company share prices.
What about the scenario of recession by the end of the year?
Common sense would argue in favour of a recession scenario: the central banks have raised interest rates sharply in a heavily-indebted economy. So if the cost of debt rises in this context, sooner or later it will have an impact. In the end, this cycle is unfolding in a fairly classic way, except that the lag has perhaps been a little longer than expected.
Would you say that inflation is slowing throughout the world?
Yes, and we said so at the start of the year. This is logical, since inflation is measured against the previous year's levels. In 2022, inflation was relatively high. Even so, apart from the energy and food sectors, the figures are still a little worrying.
The big question is whether inflation will really fall towards 2% (or even lower), which remains the official target of the central banks, or whether it will be more volatile, with phases of disinflation or even deflation, followed by another phase of inflation. This is more or less the scenario we expect.
In this global context, what opportunities are there for investors to generate performance?
For a traditional investor, fixed-income investments, such as term accounts or the bond markets, are once again offering returns, whereas this had ceased to be the case two years ago. They are once again an alternative to equities.
On the other hand, we still believe in the virtues of good companies, hence predominantly in equities, which we advise favouring over money market investments, provided you have a sufficiently long investment horizon.
Let’s end with a few words about gold... we saw an all-time high of $2,048 an ounce in the spring. The impact of both the rise in nominal interest rates and the fall in inflation has been more limited than feared. Why is this?
It's an interesting situation. It can be explained by a purchasing policy pursued by certain central banks, particularly in Eastern Europe. This clearly boosted the gold price. At the same time, when there is too much debt and ever-increasing budget deficits, the supply of paper money – whether in euros or dollars – continues to increase, while the supply of gold is relatively stable. This tends to boost the gold price against these currencies.
