The bears around the corner
Joël Reuland, market analyst at Banque de Luxembourg, talks about the impact of current political events on the markets, the fragility of the world economy and why he recommends a defensive asset management strategy over the medium term.
LFF: In which direction are the markets heading right now?
JR: The most reliable criterion for making a stock market prediction – providing that the investment horizon is relatively long – is that of value. Following two years of strong performance by stock markets, shares are relatively expensive today. This suggests moderate returns in the medium term. Taking into account the level of indebtedness of most industrialized states, a major stock market correction – which would lead to negative stock market returns, even within a 5 year investment horizon - would not be surprising.
In the short term, stock market predictions are much less certain. A possible decision by the US Federal Reserve to make a third extraordinary easing of monetary policy, with the purpose of prolonging the stock market recovery, could temporarily prevent a major stock market correction.
LFF: What do you tell investors if they ask questions about the situations in Libya and Japan?
JR: Where Japan and the Middle East are concerned, one thing which seems evident is that current events will reinforce upward pressure on oil prices, leading to the possibility of an energy crisis. For the industrialised world a rising oil price is a deflationary, not an inflationary, factor.
It diminishes consumer purchasing power and creates downward pressure on profit margins. The risk of an energy crisis, the threat to company profit margins and the level of indebtedness in industrialised countries all argue in favour of a defensive asset management stance, with the accent on capital protection rather than profit maximisation.
LFF: How fragile is the world economy at this moment?
JR: As a result of the high level of indebtedness of industrialised countries the state of the global economy is very fragile. Extremely low interest rates and excessive budget deficits are the principal factors underpinning current growth. This situation is not sustainable.
When the next economic slowdown arrives, a further deterioration in public finances risks once again casting doubt on the solvability of industrialised states, resulting in a rebound in real interest rates. Right now, a restructuring of the sovereign debt of industrialised countries – even a reform of the monetary system at a global level – can no longer be excluded.
Joël Reuland, analyst, Banque de Luxembourg Fund Research and Asset Management. Interview: CW.