Real assets like stocks and real estate are expensive but remain a way to maintain purchasing power. And inflation will remain high. This is BNP Paribas’ outlook as explained by Philippe Gijsels, chief strategist, and Koen De Leus, chief economist.
“The message for investors is clear: real interest rates, the difference between nominal interest rates and inflation, will remain very low and even negative for quite some time,” said De Leus. “This means that cash will continue to depreciate at an unprecedented rate, making it very uninteresting and even toxic, and that money will continue to flow towards real assets.”
Buy real assets
“At the heart of our strategy remains the purchase of real assets in any potential downturn. In doing so, we want to nuance the view that they are all too expensive, explained Gijsels. “The US indices, in which growth values are strongly represented, have indeed already risen sharply. But if we dig a little deeper, we see that currently only about 60% of the shares are participating in the rise. In other words, there are quite a few laggards. If we look at the European indices in which quite a few value shares and cyclical values are included, we also see a nice rise. But it is a lot less pronounced. The French Cac40 has only just broken its 21-year high, and the Bel20 is still some 7 per cent away from it.”
“On top of that,” he continued, “low interest rates continue to ensure that if we calculate all profits, dividends and cash flows from the future back to today, it gives a much higher value.”
“With the global economic recovery still at its beginning, the risk of stagflation, a combination of low economic growth and high inflation, looms large”, said De Leus. “We urge you to dispel this narrative. It is true that the long-term effects of the current accommodative monetary policy are threatening to push future inflation expectations higher, but many other factors, such as normalising energy prices and transport costs, convince us that the price acceleration will be temporary.”
The Barbell strategy
“That leaves the question, what to buy?”, asked Gijsels, rhetorically. “And we still see a number of opportunities. First of all, we continue to use our Barbell strategy of trying to pick up laggards, but still in combination with technology values that will continue to be a drag on the future. Completely ignoring the technology and biotechnology sector over the past 12 years has not been a great success.”
In addition, there are a whole number of attractive longer-term themes according to BNP, such as the greening of the global economy, infrastructure, the undervaluation of listed real estate compared to the “physical” real estate market, among others, the new capex investment cycle, robotisation, internet security, near-shoring, energy efficiency and the metaverse.
“It is clear that the market will be a lot more volatile in the coming years than the abnormally low volatility of this year”, explained Gijsels. “But this will certainly provide good opportunities. There is no lack of themes and ideas.”