Recently at the Frankfurter Hof, Guy Wagner, Chief Investment Officer (CIO) of BLI - Banque de Luxembourg Investments, and manager of the global mixed fund BL Global Flexible, gave the press a noteworthy assessment of the markets.

„We should continue to prefer stocks over bonds,“ Wagner argued, with a focus on quality investing. He currently does not hold any German stocks in his fund. He owned SAP, but has since sold it. The software giant no longer looks cheap either.

But first things first. The renowned investment strategist first addressed the economic environment. This is characterised by the demographic challenge with an increasingly ageing population, a trend from a market economy to a more planned economy including an expansive fiscal policy, high national debt, and the geopolitical environment. This is characterised by a crisis of democracy and the rise of populism, the questioning of the dollar-based financial system, and the weakness of multilateral institutions.

In the USA, the budget deficit and national debt are rising. „China is no longer financing the US national debt,“ Wagner pointed out. After the end of the low interest rate phase, net interest payments in the USA as a percentage of government revenue rose noticeably. According to the strategist, the consequences of the changed economic environment are lower growth potential, higher inflation, less room for maneuver for central banks, falling real interest rates, and pressure on corporate profit margins. „Structurally higher inflation is very likely despite advancing digitalisation,“ he said.

The consequences for investors are significant. „Protecting assets and purchasing power is more important than striving for high returns,“ said Wagner. Investors should also think in terms of inflation. Volatility is the price of capital protection. „The real risk is that you lose your capital permanently,“ he explained.

The past few decades have been very good for the financial markets, with a significant drop in inflation, but now the environment is becoming more difficult. „The price determines the return,“ is one of the financial professional's basic beliefs. However, the US market is already relatively expensive, which reduces long-term return expectations. Nonetheless, many people are buying the index via ETFs. „ETFs can make sense if you buy a market that is cheap,“ said Wagner. With a passive investment, especially in the S&P, you are buying the winners of the past. But the winning stocks rarely stay at the top in the long term.

In the current environment, in which inflation is still above the central bank's targets, investors should put stocks ahead of bonds, he argues. The focus should be on quality companies – though there are fewer and fewer of these. Stocks remain much better suited to securing wealth than government bonds. And the power of the dividend is important. Companies that increase their dividends every year have achieved above-average performance. Paying dividends on a steady basis is a quality feature of a share. In the fund managed by Wagner, all of the companies included pay a dividend.

The financial professional sees the Japanese stock market in particular as promising. For decades, shareholders were not viewed as very important in Japan, but that has changed in recent years. Corporate governance is becoming increasingly important. „And the profit margin has picked up speed,“ explains Wagner. And if something changes in Japan, everyone will start to participate.

The strategist sees the Chinese stock market as inexpensive, since China has lagged behind global indices for years. „And the people who wanted to get out of China are already out", he notes. In this respect, the Chinese stock market certainly has potential.

On the bond market, Wagner advises moving off the beaten track, and investing in inflation-linked bonds, or bonds from emerging markets. Since the pandemic, the bond markets in the periphery have performed significantly better than those in industrialised countries. The financial situation in many emerging markets is also far better than in industrialised countries, which often have rampant government debt.

There is also much to be said for adding gold to a mixed fund as a hedge. Wagner expects a higher price for gold in the medium to long term. The yellow metal is benefiting from high physical demand from central banks. They are increasingly replacing dollars with gold in their currency reserves. And financial demand should also increase with slightly lower interest rates.

Wagner puts his convictions into practice in the mixed fund he controls. The equity quota there is currently 65%, while bonds make up 13%. Fixed interest is virtually all inflation-protected US Treasury securities. The fund manager invests in gold primarily through gold mining companies, though not through producers, but rather royalty companies. On the equity side, Roche, TSMC and Hongkong Exchange & Clearing are among the top positions.