Catherine Wajsman answers a series of questions aimed at understanding market trends in the past quarter and anticipating the next few months.

Markets surged this first quarter 2019. Why, in your opinion?

Interest rates are a fundamental factor. Mario Draghi declared that the European Central Bank was prepared to intervene via the acquisition of assets and via interest rates. The Fed has left the door open on prime rates. The general consensus – a partial cause of this market surge – is that rates are not about to follow suit.
Investors know that central bankers are willing to do what it takes to prevent fires on financial markets, particularly in the event of an Iran crisis or trade war between the U.S. and China.

The global stock of negative-rate debt is nearing historical heights. Ten-year French bond yields have fallen to less than 0%. What are the upsides and risks of this situation?

In no case should the unnatural aspect of negative yields be ignored. Take France, for instance, where risk-free saving has always been preferred; savings are massively invested in euro funds within life insurance policies. Yields on these funds continue to sink year after year. For banks, margins on loans are becoming ridiculous, and insurance companies are not faring any better. Private-sector debt is a source of concern for financial regulators. In France, household and company debt-to-GDP rates were among the highest in the largest countries in Europe: 132 % at the end of 2018, compared to 119 % on average in euro-zone countries. The continued gradual easing of credit conditions, particularly in real estate, is not reassuring: certain economists are now predicting low prime rates in the next 5-10 years. Let’s not forget the spectre of the Japanese model – 25 years of 0% rates without inflation.

What political and financial events stood out in the first half?

In no particular order, Apple’s slide in January, remarkable results in the luxury sector, the about-face in central bank monetary policy, a serious slowdown in growth in Germany and Italy, a gloomy automotive industry, Fiat Chrysler’s attempt to merge with Renault, the delay of Brexit to October 31, and Donald Trump’s announced tariffs of $200 billion on Chinese imports.

Can we expect a summer ‘burn’?

Summer is often a period feared by investors. In four of the last 20 years, we’ve seen losses of 10-20% in the summer months. This said, financial history has shown us not to rely on timing – certainly not on short-term timing. It is wiser to opt for long-term value investments, even if this means ‘grinning and bearing it’ through storms.

Do you have an opinion on the so-called trade war between Uncle Sam and China?

We need to look at this from the right angle. What happened with Huawei – the world’s second-biggest smartphone manufacturer and a key figure in the deployment of 5G – is more than symbolic. Intel, Qualcomm and Microsoft are no longer allowed to supply components to Huawei. This is a way for the U.S. to maintain economic dominance in a context where the Chinese government favours growth: in other terms, it is a struggle of two giants for supremacy in which trade issues may even be supplanted by national security ones. In 2018, Huawei sales in Europe shot up 66 % while Apple took a 23 % hit.  According to the World Intellectual Property Organization, China filed 1.38 million patents in 2017 (43.6 % of the worldwide total; only 19.2 % were American).
The technological dimension of this conflict has undeniably rallied Americans on a large scale to defend and support their country and system.

Coming back to France, what is your take on the H2O incident?

It was unfortunate that a serious paper like the FT was behind an incident that, in my opinion, never should have happened. Process is essential in finance, but trust in managers – when earned over time – is just as important.
H2O strategies primarily consist of futures contracts and foreign exchange forward contracts. I also don’t see how a little less than 10 % (often 4 %) of illiquid assets in a portfolio – a very marginal percentage – can tarnish overall performance. Despite the tidal wave the article caused, and the lightning speed at which the information spread, H2O managed to get back on track – in the case of our ‘mascot’ H2O MULTIBONDS fund at least – by repositioning the fund in less than a month, at the top of the top.
I will pay tribute to managers who, over many years, applied their macro-economic vision and management techniques – which involve risk – to achieving unparalleled gains.

And second half 2019?

The bounce back in markets should be seen as a return to average conditions after the sharp declines seen from October to December 2018. In terms of asset categories:

In the case of currencies, we traditionally stray as little as possible from the reference currency of client portfolios while still giving ourselves leeway on dollar diversification.

• Bonds: We’ve seen confirmed interest in corporate and, where applicable, convertible bonds.
• Shares: Our preference goes to European and American securities in growth sectors: Healthcare, technology, and why not Asia: the four-fold weight increase of Chinese stock in the Emerging Market Index to 3.3% of the total could bring up to $70 billion in flows.
• Diversified: After a many-year hiatus from hedge funds, we’re looking for high-performing long/short products again.
• Gold: A dash, deep in a portfolio, in the event of a noticeable economic slowdown.

In conclusion

Any lessening of political risk paired with satisfactory economic results would drive us to increase equity risk exposure.