4 minWhat are the impacts of a weakening dollar?
Equities continue to soar; despite a sluggish global economy. Can you explain this paradox? Guy Wagner, CIO of BLI; Banque de Luxembourg Investments, talks to us about current trends in markets from the US and Asian to the EU.
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- How do you explain what’s happening in the stock markets?
- Investors are falling out of love with bonds. How will this affect the markets?
- Emerging markets are pulling ahead of developed countries in the debt markets
- Are the record valuations in the US an opportunity or a disadvantage?
- Legitimacy of current US market levels
- Is Japan a new opening for investors?
- Do Asian markets represent an investment opportunity?
- The euro’s rise against the dollar – monetary development or a signal for the economy?
- Impact of the US government deficit on global investment strategies
- What will slow gold’s rise after the surge in price?
- Comparing investment prospects: gold vs. gold mining companies
Equities are buoyant despite a subdued global economy. What's behind this?
This contradiction is even sharper when we consider the negative impact President Trump’s tariffs will have on both growth and inflation. No doubt, the climb in equity markets is down to a combination of strong company results in the first half of 2025, the ECB’s rate cut, and the expectation of lower rates in the US.
The US public debt pile continues to grow and industrialised nations’ bonds are no longer in demand. Does this create an imbalance between supply and demand for investors?
You could say that another reason for the markets’ strong performance is that investors are increasingly wary of other asset classes – industrialised countries’ bonds and government debt. The more budget deficits spiral, the higher the debt pile and the more investors shy away. Turning to the stock market, buybacks by the best performers have tightened supply and this scarcity is attracting investors.
Emerging market government debt is outperforming the debt of developed countries. What’s happening here?
What we’re seeing is the emergence of a new paradigm. A reversal. Where once emerging countries were criticised for lack of fiscal discipline, the finger is now pointed at the developed world while emerging counties are more disciplined.
US equities are at an all-time high. Is this good or bad?
We should remember that the US stock market accounts for almost 70% of the global index! This seems out of proportion since the US economy makes up “only” 20% of the global economy. Foreign investors hold a big slice of this market. They “overbought” and bid up prices – which means caution is called for. Keep in perspective also that behind these market indices lie companies whose share prices have fallen significantly.
Is this record high justified?
In my opinion, US equities do deserve to trade at a premium since US companies – especially tech firms that are almost monopolies – tend to be more profitable than companies elsewhere. Still, I think the premium is too high.
In the latest edition of Perspectives (no. 183), you take a closer look at the Japanese market and economy. Should investors look to Japan for opportunities?
Absolutely, the outlook for the Japanese market is excellent over the medium and long terms. Naturally, we can’t rule out the risk of a correction: the market is cyclical and could be impacted by a global recession. But, fundamentally, improved corporate governance is a powerful supporting factor for the Japanese market. In other words, the idea of returning profits to shareholders – common in the US for nearly 50 years – is only just taking hold in Japan. And it’s clearly a trend that can only make Japanese companies more profitable.
In general, should investors consider Asian markets?
Being selective is key. Robust economic growth in this region of the world hasn’t always translated into higher profits. But once again, things are changing and Asian markets broadly speaking are attractive.
In Perspectives, you also point out that the United States’ net international investment position shows a large deficit. What impact could this have on investment strategies?
Foreign investors own a large slice of the US asset pie and are earning higher income from these assets than Americans are earning from their investments abroad. If these foreign investors decided to sell their dollars or repatriate capital, the dollar would fall even further.
Let’s finish with a word about gold. The price of the yellow metal has soared more than 27% since January. What could slow its rise?
We could still see a correction from current levels. For example, China could halt gold purchases for three months. That said, everything in the current climate favours gold.
Would it be better to invest in gold as a commodity or in gold mining companies, which have also been performing very well recently?
Both! Gold itself, for the reasons we all know – especially mistrust of paper money in a world of ever-growing debt. And in gold mining companies, which is an asset class whose earnings are leveraged to the rise in gold prices. Put simply, when gold as a commodity is rising, the share price of gold mining companies also rises, and vice versa. The resulting increase in cash flow allows these companies to repay their debts, increase their dividends or buy back their shares.
