Guy Wagner of Banque de Luxembourg Investments believes that Western economies will emerge weakened by the health crisis, with higher inflation and huge private debt. His fund is defensively positioned, despite an equity exposure close to 70% of assets under management.
“We have to be humble today and recognise that it is difficult to have a clear opinion on the positioning to adopt in a flexible strategy,” Guy Wagner (Banque de Luxembourg Investments) stressed at a recent presentation in Brussels. In terms of economic growth, he noted that expectations are now high for 2021 and 2022, a development that has been achieved, however, thanks to the explosion of budget deficits.
Fragilities
“I consider the recovery we are experiencing to be particularly fragile, because it is largely financed by debt. There are some elements that are not in place to have a structurally stronger level of economic activity over the next few years, including business investment that continues to lag in the US. I’m also not sure that fiscal support is sustainable over the long term, nor am I sure that this is a very healthy trend with companies that are able to survive when they should have disappeared. The process of creative destruction is no longer assured in the major world economies.”
As for inflation, he pointed out that there are now clear signs of a structural acceleration, with many previously deflationary elements now having a positive impact on price inflation, such as economic globalisation (bottlenecks in supply chains) or very expansionary fiscal policies. “We now have a clear risk of a second inflationary wave that could prove more sustainable than the first.”
Contradictions
On the bond market, he pointed out that the message today is ambivalent, to say the least, with interest rates seemingly pointing towards a slowdown in the economy and inflation. “In the short term, both the European Central Bank and the Federal Reserve have not given any hope of a change of direction for 2021 and 2022. In this context, it will be important to monitor wage growth in the US, which could lead to a quicker than expected response from the Fed.”
Guy Wagner also noted that the bond market is simply no longer reacting to economic reality, but only to the decisions taken by the monetary authorities, notably because of the increasingly high level of public debt held by central bankers (50% in Japan, 40% in Europe, 24% in the US). “The debt is always higher, and the interest charges are negligible.”
“The bond market of 15 years ago has simply disappeared, and looks a bit like the one that existed at the end of the great financial crisis of 1928 and during the Second World War, with a policy rate artificially maintained at 0% while inflation was allowed to accelerate to 10% for political reasons.”
Valuations
“Valuations are high on the stock markets, but there are not many alternatives at the moment. Currently, 70% of the S&P500 index has a yield above the US 10-year rate, compared to less than 10% in the mid-2000s. In this context, waiting for a correction to enter the markets may not be very productive, especially as prices have a habit of rebounding very quickly. “Earnings growth and the level of the 10-year yield are the main factors influencing the direction of the stock markets.”
BL-Global Flexible’s portfolio (the flexible fund managed by Guy Wagner) is currently 68% exposed to the stock markets, with a bond portfolio that has fallen to 0%, and the balance split between gold mining investments (13%) and cash (18%). “We continue to focus on quality companies with significant competitive advantages, which are likely to enable these companies to raise their prices in the current environment. The sector allocation favours consumer, technology, industrials and healthcare stocks.”
A question of risk
Asia, and especially Japan, now accounts for over 25% of his fund. For the latter country, he believes that the poor image of the Japanese market has long been caused by the low profitability of its companies, a factor that has completely changed in recent years. “We believe that the performance of these stocks does not yet sufficiently reflect the changes that have taken place.”
Guy Wagner also pointed out that a portfolio with 70% exposure to equities can be relatively low risk. “You have to look at the risk exposure of the different asset classes. I consider my portfolio to be relatively defensive today, with exposure to quality and yielding equities, while exposure to risky asset classes (growth equities, corporate bonds, small & mid caps) is currently very low.”
| ISIN | 2021 | 2020 | 3yr | 5yr | 10yr | AuM | Manager | Running cost | Volatility | Share price | |
| BL - Global Flexible | LU0211340665 | 7.61% | 1.90% | 9.48% | 6.35% | 5.74% | €1,760m | Guy Wagner (since 2005) | 1.40% | 8.96% | €208.93 |