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As financial markets flirt with all-time highs, Guy Wagner, Managing Director of BLI - Banque de Luxembourg Investments, believes in the positive opportunities generated by companies with long-term prospects.

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Mr Wagner, we are mid-way through 2021. The lights are green and the outlook for global economic growth continues to be very positive. Is this good news?

Generally speaking, yes. Growth is what everyone wants. 2020 was a negative year and we all know why. This year, the widely-anticipated rebound seems to be on track at present. So that's good. 

The historically low interest rates are contributing to this economic upturn since they enable governments to take on debt without it being really expensive. Will they stay low for much longer? 

There is nothing specific to suggest that interest rates will rise anytime soon. Short-term interest rates are controlled by the central banks, which have already more or less indicated that they don’t intend to raise them in the near future. On the other hand, long-term interest rates are theoretically controlled by the bond markets, but they are increasingly influenced by the central banks where once again there is no impression of upward pressure. So on that front, the situation is calm. 

The lights are also green on the financial markets and some markets are nudging record highs. Does this mean that the trend is bound to reverse soon?

Not necessarily. Just because the markets are at all-time highs doesn’t mean that the trend will automatically reverse. The markets are currently enjoying an almost ideal environment, with a recovery and accelerating growth against a backdrop of a low-interest-rate environment. The only reasons for a reversal would be if growth turns out to be weaker than expected or if interest rates rise sooner than anticipated. 

Are either of these scenarios plausible? 

As far as interest rates are concerned, they are unlikely to rise anytime soon. As regards growth, there is obviously always the worry of the impact of a new wave of virus variants, which could cause another economic shutdown. 

Investors are closely watching the data and noting the recent rise in inflation. Should we be worried about this trend? 

That's the big debate right now: are we in a new price regime with permanently higher inflation? Or is it just temporary? On the one hand, the US Federal Reserve seems to be leaning towards the temporary scenario. The US inflation rate is currently above 5% but the Fed expects it to fall. On the other hand, some people think that the inflation rate will be higher for some time to come. This could certainly happen. 

What is the outlook for the financial markets in the second half of the year? Given the context, isn’t it reasonably favourable? 

On the face of it, yes, but a lot of the good news has already been factored into share prices: the markets are close to all-time highs and valuations are high. So there is always the risk that something will crop up that starts to worry the markets and that this will trigger corrections, although that would actually be quite healthy. 

What are the most attractive investment categories at the moment? 

We remain focused on quality companies with competitive advantages and valuations that are not yet overly high. That's why we find the traditional debate between ‘value’ and ‘growth’ stocks is a bit sterile. Value stocks are usually associated with companies in commodities, cyclicals or financials – all sectors we don’t usually invest in. Our view is always that the idea in buying a share is like buying a stake in a business. So we take a long-term view and choose companies that we have confidence in for the future. 

What about bonds? 

In the current environment, bond investments are almost a guarantee of losing money, especially when we are talking about quality bonds, like government debt. Either interest rates will go up and you will lose on the price; or interest rates won’t go up, but there is a strong chance that inflation will increase and that will gradually destroy the bonds’ purchasing power.

What about gold. Hasn’t its price been quite volatile recently? 

In our view, investing in gold continues to have a place in a balanced portfolio. Historically, gold has a very strong correlation with interest rates, especially real (i.e. inflation-adjusted) interest rates. With real interest rates being negative, and likely to remain so for some time, this is good news for gold. There is also the question of supply and demand: gold-mining companies have invested very little in new exploration in recent years. So supply is not likely to increase in the near future – and that’s another positive for gold.


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