Management Letter

Catherine Wajsman answers a series of questions aimed at explaining market trends and, insofar as possible, anticipating perspectives for 2019.

1. Your last letter from early October suggested that markets may have some bad surprises in store. Since then, markets did, effectively, plummet. What factors drove this tumble?

Consolidation phases in markets are natural. In recent months, however, financial markets have been disappointing. Slumps in October/November affected world indexes across the board and took returns made since the beginning of the year to zero and, in most cases, worse.
Latent risks are repeatedly cited as the cause: downward revisions of growth forecasts (IMF forecasts in particular), immigration issues, tax hikes, Italy’s budget crisis and rift with the European Commission, and doubts regarding emerging growth, for example.

2. What about the ongoing trade war between the U.S. and China?

On this subject, I was about to say that trade tariffs stand at $310 billion and could reach $840 billion if the clash between Donald Trump and Xi Jinping continues.
The real, underlying issue is: what does Donald Trump want? Is he looking for a better trade deal with the Chinese, or does he seek to quash China’s emergence as a “challenger” to the United States in the next 20 years?

3. Do you confirm analysts’ predictions of an inflation hike, or, to the contrary, do you think it won’t happen soon?

We’ve always felt that the spectre of an inflation hike has been waved too boldly and too soon. For this reason, and rightly so, we have never subscribed to inflation-indexed bonds.
The Federal Reserve and ECB always correctly predict increases in inflation, notably because they look at the consequences of wage increases.
For us, the process is much slower. Furthermore, statistics in general, and S&P Global Ratings in particular, clearly indicate that a wage increase of 2 % only pushes inflation up by 0.2 %!

4. In light of these factors, what advice would you give for the months to come?

Most managers believe that markets after dropping down are now at a fair value. They remain relatively positive, some more favourable in the U.S., others more favourable to investments in European products.

For my part:

• I give preference to American investments, in light of consumer spending equal to 60% of GDP, record-low unemployment rates, accommodating
  tax policies, and reasonable valuations.
• More generally, I recommend caution, which can involve a variety of things for portfolios:

– Reduce the proportion of shares
– Do not invest in vulnerable sectors (heavily indebted companies)
– Reduce small-caps, which are always weaker and have performed spectacularly in the last few years
– Hold onto leading, high-liquidity securities with irrefutable fundamentals, healthy results and a minimum 3% annual yield
– Look for the most secure investments possible, keeping in mind that in 2018, over 95 % of money market funds will yield negative or flat returns.

• On a more psychological level, investors should not look for overly impressive performance in an investment; portfolios could lose value if volatility continues or increases.
  To conclude, markets may well bounce back at the end of the year, but if it happens, it will not be major, in my opinion.

Furthermore, given interest rate levels especially, we are now obliged to plan on a longer-term basis – quite long – rather than look at year-to-year performance.
This makes fundamental investing possible. Such investments are more attractive than government bonds, which have a 100% debt-to-GDP ratio on structural deficit!

5. Do you therefore see an imbalance between the likelihood of gains and the risk of losses?

Indeed, in a more complex investment environment, in which world growth has slowed and liquidity conditions are less favourable, we believe it is important to break away from traditional asset classes and invest in alternative asset classes that are less liquid but offer interesting premiums (real estate, private debt, etc.)