At the Trends Investment Summit, investment experts from major Belgian banks discussed asset management and allocations, cautioning against undue optimism amid a robust US economy, inflation risks, and shifting investment strategies for 2024.
«In general, one ought to be cautious of undue optimism,» remarked Philippe Gijsels, Chief Investment Officer at BNP Paribas Fortis, addressing attendees on the economic and financial market landscape.
During the investment summit held in Brussels on 13 March, Chief Investment Officers and investment strategists from four leading Belgian banks – Jürgen Verschaeve of KBC Asset Management, Maud Reinalter of Belfius Asset Management, Steven Vandepitte of ING Belgium, and Philippe Gijsels of BNP Paribas Fortis – deliberated on asset management for the year 2024.
Robust US economy
Steven Vandepitte projects a continued robust performance of the US economy, bolstered by significant government expenditure. «Last year, a 6% governmental deficit averted a recession, and in the election year of 2024 as well, President Biden is poised to sustain this substantial deficit. There won’t be a so-called soft landing; indeed, there won’t be any landing at all,» quipped the chief strategist from ING.
Maud Reinalter also remains optimistic about the US, citing its strong economy. She has shifted her focus towards medium-sized, resilient American companies over the larger, now overvalued, corporations. «The US holds preference over Europe due to its lacklustre growth, partly resulting from weak exports.» Currently, the Belfius strategist is divesting from pricey tech holdings in her portfolios while increasing investments in healthcare and other defensive sectors like consumer staples, deeming healthcare as a structurally growing theme and comparatively undervalued.
Gijsels noted the market is diversifying beyond the so-called Magnificent Seven – the major US tech giants Amazon, Alphabet, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. «The US small-cap index, Russell 2000, is showing signs of recovery as are many European stock markets.»
Verschaeve expressed increased caution towards US stocks due to their high valuations and adopted a neutral stance on technology stocks.
Reinalter highlighted Mexico’s benefit from the thriving US economy, earning her favour among emerging countries.
Inflation risks
Verschaeve cautioned that excessive US government spending could reignite inflation. Reinalter added, «Rising commodity prices might escalate money depreciation, impacting corporate margins adversely.» Gijsels anticipates more market volatility, especially if inflation escalates and interest rates remain elevated: «This scenario underscores the potential for active management.»
Agreeing with Gijsels, Verschaeve noted, «Numerous risks loom, including persistent inflation. It’s crucial to scrutinise companies burdened with excessive debt. Diligent managers can differentiate themselves.»
Broadening horizons
Due to his cautious stance on US equities, Verschaeve has recently augmented KBC›s investments in European stocks and significantly in Asian markets, notably Japan. «China, however, is entirely off our radar. Despite its apparent low valuation, there’s a justified reason for it. The conclusion of the property crisis remains unforeseen, impacting consumer confidence negatively,» Verschaeve commented.
Vandepitte, maintaining a slightly underweighted position in China, noted, «The country is on a collision path with the US. The prevalent acronym on Wall Street, ‹ABC› – Anywhere But China, speaks volumes.»
The Japanese yen and bond markets
In Asia, Vandepitte’s focus is on Japan, especially the potential impacts of the Bank of Japan’s monetary policy shift on the yen. Additionally, he is increasing investments in industrial stocks to bolster the cyclical component of his portfolios.
Gijsels expressed concerns over the yen’s significant weakness being under-discussed in market analyses. «A sharp appreciation of the Japanese currency could disrupt the carry trade, severely impacting all market segments.» He advocated for a renewed focus on individual countries in this increasingly multipolar world.
Bonds and defence investments
Regarding bonds, Vandepitte affirmed, «Bonds have returned to favour, attracting significant capital.» Gijsels supported this view, suggesting that the traditional 60/40 portfolio model is relevant again, allowing for the bond component to be replenished. However, he advised caution towards high-yield bonds due to low spreads offering insufficient compensation for the increased risk.
Verschaeve echoed this sentiment, highlighting the impending refinancing challenges for many lower-rated companies. He generally favours high-quality bonds over equities, promoting active duration management.
With Europe initiating a significant defence investment programme under geopolitical pressures, Verschaeve views this as a broad stimulus package that would benefit many companies beyond Germany’s Rheinmetall alone. He warned, «Similar to the EU Green Deal, although substantial funds are allocated, their disbursement into the economy is gradual.»
Defence investments debate at all C-levels
With Europe launching a heavy investment programme for its defence under geopolitical pressure, the question is how asset managers view the defence sector. Verschaeve sees the European programme as a general stimulus package and, he says, many more companies will benefit from it than Germany’s Rheinmetall alone.“We also note, as with the EU Green Deal, that it is about large sums of money, but that the money only finds its way into the economy drop by drop,” he warns.
Gijsels simultaneously points out that there is no financial institution today where defence is not debated.“On the one hand, you want to be ESG-driven as a bank, but on the other hand, we live in a very dangerous world today and we need to be able to defend ourselves. The decision around whether or not to fund the defence industry has to be taken at the sector level. Not one bank can decide this, it is a good time to come together and look at this together.”
Reaping the benefits of AI
For Reinalter, investing in AI is much broader than just through the big names everyone knows. “In recent months, we have invested massively in the semiconductor sector, including in Europe, and this is how we are trying to capitalise on the theme.”
For his part, Gijsels points out that it will take time before we really start reaping the benefits, even if it is moving fast. “What needs to happen is that the technology goes to the wider economy and companies start benefiting from it. In other words, we need to get concrete examples with a sizeable impact on the numbers like, for example, Domino’s Pizza became big by being the first to practically apply 4G technology.”
Verschaeve won high praise from the audience, but also from the rest of the panel, by announcing that KBC has two funds managed by AI and has a notional AI strategist sitting at the table with it at strategic investment meetings. KBC’s ‹AI CIO’ also pitches and defends its own strategy each time.