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Even though equity prices are generally quite high, Guy Wagner, Managing Director of BLI - Banque de Luxembourg Investments, believes that the context of low interest rates and very high corporate profits still makes real assets an attractive investment strategy.

Listen to the podcast 

  • Introduction – Predictions for 2022
  • Inflation: what should we expect?
  • Real assets: still the best option?
  • Equities: is this the right time to invest?
  • Index tracking: is this a valid strategy?
  • Asia: are there good opportunities?
  • Gold: still an attractive investment?

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Guy Wagner, as the new year gets underway, have you been tempted to engage in the traditional round of predictions?

No, because I can't see why we would want to change our investment strategy just because a new year is starting. Everyone knows that this kind of exercise is relatively futile in the end.

The beginning of this year was marked by inflation returning to the top of the agenda. Even the Fed is now considering the possibility of raising interest rates. How do you view the current situation?

The discussion has clearly evolved. In 2021, inflation rose sharply, but for a long time the central banks just considered it to be a temporary increase. However, inflation rates ended the year on a high, which led the monetary authorities to start changing their position, especially in the United States. Nine months ago, the chairman of the Federal Reserve did not envisage raising interest rates before 2023. Now there is talk of three or four hikes this year.

How do you expect the European Central Bank to respond?

According to the ECB's latest statements, the idea is not to follow the Federal Reserve’s approach and to leave interest rates unchanged. But you have to bear in mind that the ECB plays a much smaller role than the Fed in the financial markets.

The central banks in Europe have been locked into the idea of extremely low interest rates and a policy of quantitative easing for more than ten years. When you add it all up, I'm not sure it has worked.

Inflation is currently running at around 5% in the eurozone but the ECB is persisting with its policy. It's unorthodox but, as an asset manager, that's what we are faced with.

In this context, you recommend that investors concentrate on real assets rather than monetary assets...

Absolutely, because even if the Fed do raise interest rates, they will still be well below inflation. This means that monetary assets have lost their appeal since they can’t protect investors’ purchasing power.

So it’s better to concentrate on real assets, like shares, as this is the best way to preserve purchasing power over the medium and long term.Guy Wagner, Managing Director de BLI - Banque de Luxembourg Investments

On the other hand, they are more volatile than monetary assets. Would you say that this is the price to pay?

Yes – share prices always fluctuate more than bond prices and you can get temporary corrections of 10 or 20%. This is the kind of volatility that you have to be prepared to accept financially and psychologically.

The current situation on the markets – low interest rates and high corporate profits – is very favourable. Can we hope that this set of circumstances will continue for some time to come?

No, I think we should expect a difficult year ahead. Corporate profits should hold up, as expectations are not excessive and the global economy is doing relatively well. But the interest rate situation may change, which will make the current environment less favourable.

So would this be a good time to go into the markets with equities?

Timing is always fraught with uncertainty. In absolute terms, valuations relative to revenue and profits are certainly high compared to the historical average. But taking interest rates into account, on the whole these valuations are still attractive compared to bonds.

Given the high market capitalisations of some of the ‘heavyweights’, is there still any point in following an index-based investment strategy?

To my mind, this kind of passive management no longer makes sense. Tracking an index is a good strategy when valuations are low, but that isn’t the case now.

Take an index like America’s S&P 500: because of market capitalisations, we have an extraordinary situation where just over 1% of the 500 stocks in the index represent almost 20% of the index!

What about in geographical terms? Europe and the US account for the vast majority of the global stock market capitalisation: does this mean that there are good opportunities in other markets like Asia?

It might not be a bad idea to shift one's view from west to east. Last year, the Japanese market generated little growth and the other Asian markets declined. If you want to take a contrarian stance, that's where you should look for opportunities.

Compared to what has been done in the west, the Chinese authorities have made less use of extreme stimulus measures. In terms of economic fundamentals, it's not a bad situation. In the medium term, the Chinese economy will continue to play a very significant role. It’s clearly a region that no portfolio should ignore.

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