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With dismal economic and geopolitical prospects looming over the markets, portfolio quality is more important than ever for investors, says Guy Wagner, Managing Director of BLI - Banque de Luxembourg Investments.

Listen to the full podcast

  • Introduction 
  • Interest rates: central banks are changing their tune
  • Financial markets: the environment has deteriorated
  • Investing in the stock market: is it still worth it?
  • Asia: what’s the outlook?
  • Investments: selecting the right assets

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Guy Wagner, the invasion of Ukraine by Russian troops has completely overturned the economic landscape and reshuffled the cards. Are we heading for a new period of economic hardship?

Obviously the economic situation has deteriorated in recent weeks. The inflationary pressure that we have been experiencing since the end of last year has increased sharply with the rise in raw materials prices.

On top of that is the impact on consumer and business confidence, which will also play a role in the medium term. And we mustn’t forget the situation in China, with its 'zero-Covid' policy, which isn’t working very well and which is causing regular shutdowns in its economy. This is adding to the supply chain problems.

Economists have started to use the word 'recession' for Europe. Is this the inevitable outcome?

It may not be inevitable, but the chances of a more or less pronounced slowdown have significantly increased recently.

Meanwhile, the US economy is doing quite well. Can we expect a positive macroeconomic impact from its healthy position?

It’s always said that the US economy is the engine of the world economy and that the engine within the US economy is private consumption. And it's not running too badly at the moment.

The US economy has been less impacted by what’s happening in Ukraine, but it’s also starting to feel the effects of rising short and long-term interest rates and inflation of around 8.5%. So even though wages are rising, disposable incomes in real terms are tending to fall at the same time as business costs are rising. In the medium term, there’s a risk of a slowdown in the US economy too.

The Federal Reserve surprised everyone by announcing a 25 basis point interest rate hike in mid-March. Will the European Central Bank follow suit?

Central banks are now faced with a new choice: either they fight inflation or they continue to support the markets. I don't think the ECB will be as aggressive in its policy as the US Federal Reserve, but it has hinted at an interest rate hike in the second half of this year, whereas it hadn't previously been considering anything until the second half of 2023. What is surprising is that with inflation at around 5% in the eurozone, the ECB is still buying €20 billion of bonds with a negative interest rate every month.

The environment on the financial markets has deteriorated in recent months. Is it still worth investing in the stock market?

Absolutely! Every investor’s prime objective is, at a minimum, to protect their purchasing power, but hopefully even increase it. This is all the more relevant in this context of higher inflation. Since purchasing power can no longer be guaranteed by cash, bonds or deposit accounts, focusing on equities is the only option. But it is obviously necessary to accept the rules of the game. As equities are more volatile, you have to consider a slightly longer investment horizon.

As an investment specialist, what are your thoughts about the current environment?

We need to adjust our expectations. We know that the factors that have been particularly favourable for the financial markets since the beginning of the 1980s – the fall in inflation, declining interest rates, globalisation and the peace dividend – are now disappearing or reversing. The tailwind is turning into a headwind and we know that over the next few years, we are unlikely to see such strong returns.

In terms of assets, this means it is essential to select the right securities to invest in.

Does this also mean reinventing yourself?

Of course, we must always keep reinventing ourselves! But the fundamental principles remain the same: our philosophy is always to consider the act of buying a share as taking a participation in a company. It’s important to find the right companies and not pay too much for them. These are undeniable rules. What is changing, however, is what is happening all around, and in particular, greater consideration given to socially responsible investments.