Nina Lagron, CFA, is an international equity manager at La Financière de l’Echiquier, in charge of the Echiquier World Equity Growth fund. Alexis Bienvenu is manager of Echiquier Allocation Flexible fund and mutual fund analyst in charge of asset allocation at the management company.
Marc Fassone: How do you see the markets evolving in the current climate?
Nina Lagron: In our view, the markets are paying too much attention to the so-called pivot, i.e., the end of the rate hike. The central bank pivot simply helps to determine where we are in the recession and to find the right timing. For us, this is the time to focus on earnings expectations.
What lessons do you draw from the latest round of quarterly results?
Nina Lagron: Despite the backdrop, it was a very positive earnings season across all markets, with some negative surprises, notably in the currency market and technology, which had an impressive decline. But the febrile market seems to have overreacted. We expect growth in the sector to continue, although we will not see the high levels of growth we once experienced. Take the cloud, for example, which still has a future, but is coming out of an exceptional growth phase.
Has the market bottomed out?
Lagron: That’s the big question. The positive thing is that the current downward movement is calm. There is no panic effect. While some concerns may have arisen, such as with the presentation of former UK prime minister Liz Truss’ mini budget, the market has not tipped.
We believe that we are still relatively far from the bottom.
Above all, the markets will become much less smooth.
Is the market becoming less readable?
Lagron: The markets will become much less smooth. We are coming out of a phase that lasted almost 20 years of very low interest rates and powerful monetary and budgetary stimuli injected at the slightest economic hiccup. We are therefore leaving bull markets, a mechanical rise that should not be confused with alpha generation. It is this ‘mechanical’ bullish environment that is now disappearing.
Cycles will also become shorter, which will lead to greater caution in market timing. Investing according to a style will not be enough. Until now, for example, being labelled ‘digital’ was enough to see immediate appreciation. While digital will always represent a significant part of portfolios-- notably via the cloud and digitalisation--a much finer analysis will be necessary... selectivity will be key.
With the state of ‘polycrisis’ and less readable markets, what is the best asset allocation strategy?
Bienvenu: At La Financière de l'Échiquier, we distinguish three timeframes in order to manage all these crises.
First, the very long term, relying on historical returns and results on which we apply our Sharpe Ratio assumptions to determine what is optimal for an investor today. It is within this framework that we project the impact of major risks on portfolios, such as climate change, demographic ageing, declining productivity and government debt. This allows us to assess potential deviations in the medium and short term.
In the medium term, we pay particular attention to the management of crises by institutions--central banks and governments that provide stimulus or withdraw it depending on their concerns--and to the economic cycle. In the very short term, we adjust to intense but short-lived crises that do not necessarily impact the markets in the long term, such as covid, the conflict in Ukraine or the speech of a central banker. In these cases, our positions are taken on a daily or even hourly basis.
The idea is to adjust on a daily basis to short-term developments, within the framework of the medium-term cycle, in order to achieve the hypotheses developed over the long term.
In general, do you think that the markets will generate less performance in the future than they have over the last 20 years?
Bienvenu: It would not be surprising if equity returns declined. Our assumptions for the 5-10 year horizon are that sovereign bonds will be less attractive than in the past. On the equity side, given the long-term trends of slowing population growth, ageing populations also in Asia, very long-term crises such as global warming, rising government debt and structurally declining productivity, equity returns should also fall over the long term, as a matter of logic.
Despite these structural trends, despite the crises to come, opportunities exist. There are no crises without opportunities.
So what should your clients’ return expectations be now?
Bienvenu: It all depends on the time horizon. Given the probable slowdown in economic growth compared to what we have seen over the past 60 years, we should be looking at an average of 5% to 6% for equities over the next 20 years, compared to 6% to 8% for ‘historical’ growth.
Despite these structural trends, despite the coming crises, opportunities exist. There are no crises without opportunities. Very promising themes will emerge, perhaps with less frequency overall. But with the right selection of markets and companies, we believe this selectivity can compensate for the risk of losing overall returns within the MSCI World.
The period of very low interest rates since 2008 has encouraged the emergence of new asset classes, particularly private markets and cryptoassets. Does the new macroeconomic environment of higher inflation and higher rates call into question the relevance and returns of these two asset classes?
Bienvenu: Our caution towards cryptoassets has always been marked. These assets do not offer a return, are not accepted by major institutions, nor are they regulated by central banks. And there is no method of valuing them, apart from the energy expenditure it takes to mine in an almost sterile manner. Their value is purely ideological and speculative.
The picture is different for private assets. We have a real valuation model and there are many reasons to invest, subject to liquidity. The main reason we don’t invest in these assets is because we want to keep the freedom to move portfolios very quickly. But these assets have value and real economic utility.
This article was published for the Paperjam+Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link. Read the original French version of this article on the Paperjam site.