Guy Wagner, Chief Investment Officer of the asset management company BLI - Banque de Luxembourg Investments, still believes in the strength of the real economy for long-term investment horizons.
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- The economy: heading for a global recession?
- Inflation: any hope of it easing?
- Interest rate hikes: is this a good strategy?
- United States: what impact will slowing growth have?
- Europe: any answers to the energy problem?
- UK: a worrying crisis?
- Asia: what are the chances of the Chinese economy collapsing?
- Financial markets: will the slump continue?
- Investments: what opportunities are out there?
- Gold: still a safe haven?
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Guy Wagner, the economic situation is hardly improving and the approach of winter is creating a lot of uncertainty on the energy front. Economies are clearly slowing down: are we heading for a scenario of global recession?
"The situation is continuing to deteriorate everywhere, with inflation reducing household purchasing power while, at the same time, interest rates are rising. There are many elements currently weighing negatively on economic activity.
It doesn’t look as if there is very much we can do about the surge in inflation...
"The central banks can raise interest rates as a way of reining in demand to fight inflation. On the other hand, this increases the risk of recession, bearing in mind that some of the components of the price increases are on the supply side, against which raising interest rates is not very effective. Looking at the root of this inflation, not taking energy and food prices into account, there is no sign of it declining at present.
Unsurprisingly, the financial markets have trended downwards since the summer. Is this deterioration likely to continue?
"The financial market environment remains very difficult, with short-term interest rates rising and the central banks continuing to tighten their monetary policy. The financial markets prefer low interest rates and this is not good news. The second risk, which is not yet discounted in prices, is that of a pronounced slowdown in the economy with a decline in corporate profits.
If share prices are low at the moment, is this a good time for an investor to enter the equity markets?
"I don't think share prices are low. If you put the slide we've seen this year into perspective and consider it in the context of the last five years, the indices are still relatively high, especially valuation multiples. Two factors are important for equities: interest rates and earnings. At the moment, these two factors are not moving in the right direction.
Should we be looking at other financial markets, like Asia and, in particular, Japan, which is not performing as poorly as others?
"Japan is indeed an interesting market, because it is doing better – in local currency. The main reason is the structural increase in the profitability of Japanese companies. In the past, they had less motivation and were less focused on creating value for their shareholders. This is changing and the Japanese market’s valuation multiples are currently relatively low, which makes it a relatively attractive market at the moment.
In concrete terms, with investors inevitably being torn between so many uncertain and not necessarily positive variables, what is their best approach?
"It always depends on their investment horizon. If investors are thinking short term, logic would say don’t enter the equity markets today. They could do better with a deposit account, where returns are now more attractive than in the past, in euros and especially in dollars. For longer-term investors, the best approach is to focus on real assets, not on monetary assets. It is therefore important to select the right stocks rather than bonds or money market investments.
What about gold? Could this safe-haven asset come good?
"Gold's performance is disappointing as it is falling. But in the face of the US central bank's monetary tightening, and given that gold is normally negatively correlated to interest rates, it is doing relatively well in euros. If the central banks were to stop their monetary tightening policy or if they claim victory in the fight against inflation too early, before inflation is firmly set on a downward path, gold would be the leading beneficiary and should once again do well.