5 minMarkets' recession fears recede
Guy Wagner The combined actions of the US Federal Reserve and the Chinese authorities could accelerate growth, says Guy Wagner, Chief Investment Officer at the asset management company BLI - Banque de Luxembourg Investments.
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- The resilience of the American consumer
- A bold move by the US Federal Reserve
- Structural problems in Europe
- ECB interest rate cuts: a premature decision?
- Fiscal and monetary stimulus measures announced in China
- Asian markets (excluding Japan) post the best returns
- Is there scope for the Asian markets to rally further?
- Equities see the start of a rotation in the third quarter
- Budget deficits at the root of the bond market’s difficulties
- Climate still favourable for gold
- Gold-mining companies lag behind, offering opportunities
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Guy Wagner, contrary to pessimistic forecasts, the US economy is holding up well. Is this a good sign?
Yes it is. The US economy is very dependent on private consumption and consumer spending remains relatively buoyant at present. On the other hand, there are some concerns about the absence of other supporting factors since private consumption is effectively the mainstay of the US economy and therefore, to some extent, of the global economy.
The US Federal Reserve cut its key interest rates by 50 basis points in a single move. How do you explain this bold action?
It shows that the Fed has changed its priority. Instead of concentrating on fighting inflation, the focus is now on supporting the job market, which has been showing some signs of deterioration.
In Europe, on the other hand, the indicators are still in the red and the economies of the traditional powerhouses, France and Germany, are sluggish, almost stagnant. What are your views on this situation?
It's important to distinguish between sectors. The manufacturing sector has been in recession for some time, which also explains the weakness of the German economy. On the other hand, services are more buoyant, although some signs of weakening are evident. But generally, there is a more fundamental issue at stake. The German economy is suffering from a kind of de-industrialisation resulting from past mistakes. In France, the main concern is the deterioration of the public finances. These signs are not encouraging.
The financial markets ended the third quarter on a rising note. Which regions are generating the most attractive performances at the moment?
Unusually, it was the Asian markets excluding Japan that performed best in the third quarter. This was due to a series of measures taken by China to stimulate its domestic market, which is heavily weighted in the indices.
At the other end of the spectrum we have Japan, which was very volatile in August due to the Bank of Japan raising interest rates and the yen’s subsequent appreciation. That weighed on share prices. Meanwhile, Western stock markets found themselves somewhere in the middle, with the US market once again outperforming its European counterparts.
The Asian markets are now some 10% below their level at the start of 2021 whereas the global index has doubled in that time. Does this suggest that they still have plenty of scope to rally?
Yes. These markets have been rather neglected in recent times. The region's indices are driven by big stocks like TSMC and Samsung. Generally speaking, they are now offering more attractive valuations and perhaps greater growth potential. That looks like an interesting combination.
What about investment sectors? Are the big technology stocks still heading the leaderboard? Could small caps pick up steam?
In the third quarter, we certainly saw the start of a rotation: the big technology stocks, which have spearheaded the markets this year, particularly in the United States, tended to underperform while other sectors and smaller caps set the pace. This is partly explained by the idea that, with the Federal Reserve cutting interest rates and China stimulating the economy, we could be heading for faster growth. The markets have clearly given up on the idea of a recession along with the notion of a soft landing. Now it's a “no landing” scenario – or even a situation where the US economy accelerates. This is good for a number of more cyclical and smaller-cap sectors.
In the current global context of deteriorating national budget deficits, the bond market seems to be a collateral victim as investors lose interest in it and turn to equities. Do you think this trend will continue?
Undoubtedly. The major industrialised countries are facing a big increase in their public debt, which explains the rise in bond issuance. But the question is, who is going to buy all that debt? We are clearly seeing a paradigm shift in the bond markets. The segment traditionally considered the least risky – developed country government bonds – is becoming much riskier, and it is perhaps other segments, such as emerging countries, or even corporate bonds, which offer more potential, but are of course more volatile.
Meanwhile, gold continues to soar...
The climate continues to be favourable for the yellow metal. Physical demand remains strong, especially due to purchases by the central banks of Eastern European countries. On top of this, financial demand has picked up, driven by falling interest rates: capital is once again flowing into gold ETFs. We are obviously not immune to a correction and profit-taking, but fundamentally the environment remains very favourable.
Could this be a good time to look at the companies that haven't so far benefited from this buoyant environment?
Since the second quarter of this year, financial demand has gradually returned and gold-mining companies are now also participating in the gold price hike. At the same time, with the fall in inflation and decline in oil prices, gold companies' costs have stabilised and, in some cases, fallen. Their profit margins have risen strongly as a result. But we mustn't lose sight of the fact that this is an extremely volatile segment and that geopolitical risks abound concerning gold mine reserves. So we need to remain very cautious, but fundamentally, at the moment it looks like a good time to take an interest in it.
