Between hope and doubt
“There is no room for complacency in 2012, but hope is allowed.” This is the analysis of Fréderic Buzaré, equity strategist at Dexia Asset Management. Everything seems possible at this point in time. In the context of macroeconomic uncertainty, an investor can choose between two paths: a daily fight with uncertainty or a long-term approach on future tendencies.
“You do not construct a portfolio on a doomsday prophecy. If you have three to five years, it is all about identifying long term trends and structuring your portfolio around this strategy without looking at performance on a daily basis.” Fréderic Buzaré tries not to follow the current mainstream approach, which tends to overreact to all the bad news spread by media.
Therefore, he suggests that investors not be discouraged by setbacks. He lists three promising investment areas. First, he points out innovative companies in Western Europe, which should profit from a rise of their valuation multiples. Secondly, he suggested international companies that are regarded as solid buy and hold growth stocks. Last but not least, commodities are on Mr. Buzaré’s radar screen because of emerging markets, which organise their energy supply.
According to this equity strategist, emerging markets could become “the wild card” in 2012. They emerged stronger from the crisis and continue to grow in importance, though they have underperformed in 2011 because of China. He is slightly worried about the specific problems of the Chinese market.
” China has underperformed for the last two years. There is the problem of a shadow banking system that is not monitored and controlled. Banks keep bad and risky debts that are difficult to quantify. China officially has a debt of 40% of GDP. But some of its regions are riddled with debt. China’s unofficial sovereign debt rate is actually around 85%, the same level as France and Germany. That is why the Chinese stock market does not rebound,” he explains.
The sick man of Europe
Global financial stability is on its way, but not yet complete. “In this new world economy, a better cooperation between budget and monetary policies is needed,” Fréderic Buzaré says. He underlines that economically developed nations face the growth-debt dilemma: “ If you reach a debt level of 90% of GDP, growth automatically drops by 1%. This has been the case in Italy for the last decade. So we should not expect miracles in the coming months, knowing that the sovereign debt crisis will remain our companion for a long time.”
Europe is confronted with three major challenges. A solvency crisis, which is being countered by governmental austerity plans in order to bring down public debt; a liquidity issue which is supposed to be solved by the European Central Bank; and finally a growth problem to which no solution has been found yet.
Fréderic Buzaré quotes German Chancellor Angela Merkel, who said that a solution to the growth problem would not be settled upon at the European Summit. In this context, he reminded us that Germany was called the sick man of Europe just six years ago, but now is leader of the pack. So things can change very fast macroeconomically speaking.
Investors have to show some patience before better days will come. “A deleveraging process is long and perilous. One of the goals must be to bring down the risk premium. To achieve this, a new economic balance has to be put into place and political errors of the past should not be repeated,” Buzaré insisted.
However deep the crisis, structural developments will continue. This means that Asia will play an increasingly important role in the world economy and that commodity process will continue to rise due to rising demand from emerging markets. Regarding Europe’s future, Fréderic Buzaré says that decision makers have two choices: economic decline or political reforms. CW