The European Central Bank's intention to start cutting interest rates this summer could benefit certain sectors, particularly property, says Guy Wagner, Chief Investment Officer of the asset management company BLI - Banque de Luxembourg Investments.
Listen to the full podcast
- Can we escape the spectre of recession?
- No recession in the US for the time being
- A worrying situation for the European economy?
- Will interest rates fall in Europe this summer?
- Financing public debt: a dilemma for the central banks?
- Equity markets are still rising, but how far can they go?
- A risk of overheating in technology stocks
- Persistent inflation: bond markets are suffering
- The attractiveness of emerging market bonds
- The Japanese market, one of the best performers
- Outlook for the Chinese market
- Gold, an investment that continues to grow
Follow our podcasts!
Guy Wagner, growth remained sluggish in the first quarter and the spectre of recession still looms large: what can be done to avoid it?
"For the time being, the resilience of the US economy is still acting as the locomotive. Even though many indicators were pointing to a recession, it has managed to maintain decent growth. This is due both to the accumulation of savings during the pandemic, which are now stimulating consumer spending, and to the relatively substantial level of public spending. Nonetheless, behind these fairly positive figures, on which the markets tend to focus, there is a certain deterioration that is becoming increasingly visible.”
In Europe, between falling industrial production and rising interest rates, the economy is suffering. To what extent is this a worrying situation?
“Basically, Europe's growth potential is lower than that of the United States, if only for demographic reasons. What's more, Europe is also more dependent on the manufacturing sector, especially in its largest economy, Germany. And as it is this sector that has suffered the most, we don't see much reason for sudden optimism.”
The European Central Bank announced at the beginning of April that it wanted to keep interest rates at the present high level, but with the prospect of lowering them in June to stimulate the eurozone economy. Does this amount to good news?
“The ECB is faced with a dilemma: while weak growth would justify cutting interest rates, inflation is still high. But since the ECB's primary mandate is to fight inflation, there is nothing to justify a rate cut. This is a rather special situation. Still, we can say that the announcement of a first rate cut this summer is good news for certain sectors, particularly property.”
On the financial markets, on the other hand, the indices are posting solid performances and equity markets are continuing to flourish. How far can this momentum go?
"The equity markets certainly had a very good first quarter, but the spectacular rally had already begun at the end of October. It has to be said that there is a growing divergence between the factors behind this rally and economic reality: investors were anticipating six Fed rate cuts, falling long-term interest rates, a return of inflation to around 2%, and accelerating earnings growth. In reality, none of this has happened. This divergence is somewhat worrying.”
More than ever, it’s technology stocks that are driving the indices. But isn't there a risk of overheating?
"Clearly, yes. Today, the markets are increasingly influenced by passive management and index tracking: people buy the indices, in which the biggest weightings are the stocks that have risen the most. This means that investors buy the stocks that have risen the most and which will then go on rising. The usual fundamentals are not the main consideration. And for the time being, the technology sector is benefiting from fairly favourable long-term trends, both in artificial intelligence and digitalisation processes.”
However, you mention in the latest edition of Perspectives, which has just been published, that the bond markets of the so-called ‘emerging market’ countries are regaining their appeal. Is this a potential vein of opportunity?
"Yes. Many of these countries have continued to pursue much more orthodox monetary and fiscal policies since the pandemic, while Western countries have instead done precisely what they criticised these countries for traditionally doing, i.e. having extremely expansive monetary and fiscal policies. This explains why the government bond index of these emerging countries has largely outperformed that of the industrialised countries. But many investors still regard this asset class as extremely risky, and prefer to steer clear.”
You also mention, on the equity market, that Japan continues to look healthy. Is this an obviously attractive destination for an investor today?
“The Japanese market is perhaps one of the most attractive markets for the years to come. The main argument is the improvement in corporate governance, which places greater emphasis on improving profitability and profit margins. It’s also a market that has been neglected in recent decades after peaking in the 1980s. Many investors still shy away from it, but it is a market that has outperformed others in recent years, even though its performance has been partly undermined by depreciation. But in local currency, it is clearly the market that has performed best in recent years and I think that trend will continue.”
And then there is gold, which keeps on rising...
"Gold remains a very attractive investment for me today. The price of gold will continue to rise in the medium and long term. What's interesting is that the price continues to rise despite factors that might normally have justified a pullback, such as rising interest rates or a strong dollar. There is still strong physical demand, as opposed to financial demand, particularly from central banks in Eastern Europe. Combined with the fragmentation of the global economy and a growing mistrust of paper currencies, this should contribute to further boosting its price.
But if we adjust this rise for inflation, we are still a long way from the record levels of 1980 or 2011. So there is clearly still upside potential, even if a correction is still possible.”
