Financial markets dialogue for the second quarter | Banque et Caisse d'Epargne de l'Etat, Luxembourg
8th July 2019

Financial markets dialogue for the second quarter

Marc Fohr, Head of Investments at BCEE Asset Management, considers the current economic climate.

Could you take us on a world tour of the current political and macroeconomic climate?

Here we go again. We thought China and the US were close to agreement, but Donald Trump could not leave matters alone. The escalation in customs duties continues but, in reality, it’s just a pretext to avoid technological conflict between the two nations. This conflict is weighing on global confidence, prompting the International Monetary Fund to revise down its 2019 growth forecasts.

The World Trade Organisation followed suit: it forecasts that trade tensions will drag out the slowdown in global trade, which began in late 2018. This slowdown is also set to affect industrial activity on a global scale.

The United States are somewhere between fatigue and endurance: real GDP growth may well be above expectations, but we note that household consumption has dipped – an early sign it is running out of steam. For its part, Europe is beset by political and budgetary preoccupations, and suffering from weakening confidence. However, accommodative monetary policy means an environment of low interest rates and conciliatory financial conditions can be maintained, not to mention a dynamic, well-established labour market. Overall, the outlook is encouraging, but only up to a point: the trade tensions call for prudence and mean we are lowering our exposure to cyclical sectors that are more dependent on the good health of the economy.

How are bond markets faring? What tone are central banks adopting?

Bond markets are seeing lower yields, following the same pattern as growth. Europe is held hostage, with the 10-year Bund yield falling into negative territory. On the European credit market, lacklustre returns mean we are remaining cautious and holding back from this segment.

In the United States, the Federal Reserve's tone is more accommodating, against a backdrop of stagnating inflation and an interest-rate curve whose shape points to a recession.
Marc Fohr

However, this is not imminent, in our view. This is why we are maintaining our neutral stance towards the US interest-rate curve. Moreover, the outlook is sunny for the investment grade credit universe: our approach involves favouring high-quality stocks with only weak links to the economic cycle and yield demands, and we are remaining positive about this segment.

How are equity markets developing?
How are equity markets developing?
For equity markets, at first sight, all is well: in the United States, this is demonstrated by their energy and the historic highs they are reaching. The Fed's stance is supporting them, equities are appreciating in value and the low interest rate policy could encourage US consumers to spend and borrow more, radiating positively through the economy and markets. Initial public offerings are continuing in large numbers, including the famous unicorns, or start-ups valued at more than one billion dollars. That said, since the start of the year, most companies that have listed have not been profitable, which provides food for thought.
Why does this good progress leave you with doubts?
Why does this good progress leave you with doubts?
In reality, if you consider the submerged part of the iceberg, we know that financial markets need an expert mix combining adequate doses of productive investment, future-oriented political decisions and financial regulation. Yet what concerns us is the excessive complacency of the markets in a feverish environment, and the fact that a large number of crucial political events risk disrupting the appropriate allocation of investments and resources.
So what is your current position?
So what is your current position?
We remain unmoved. We are maintaining our negative position towards the materials sector, and are reducing our exposure to the semi-conductors sector. With a view to reducing the cyclical exposure of our portfolios, we have brought our energy sector outlook into line with current trends by reducing its weighting: although elements underpinning the sector’s development are positive, investors' interest in the sector is waning. In fact, our trajectory is defensive: our exposure to the real estate sector is positive and we are choosing services and communication companies with a bright future ahead of them.

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Panorama Financier 2019-06

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