Equity markets have seen significant gains since early February, although long-term interest rates have rebounded strongly. Are stock markets overrated and what is the best investment strategy? Four professionals present their insights.
After a break in January, stock markets have returned to higher levels in recent weeks. The Belgian and European bourses and Wall Street are trading 4 to 6 per cent higher than at the beginning of this year and many investors expect the increase to continue in the coming months.
Investors assume that vaccination against the Coronavirus and stimulus from central banks and governments will revive the economy. The optimism about the economic outlook outweighs the negative impact of a hike in long-term interest rates for now.
In the US, the ten-year interest rate has already risen by more than 40 basis points to more than 1.3% this year. Europe is following this trend partly, but the interest rate is still much lower here. In principle, higher long-term interest rates are bad news for equity markets, as it reduces the present value of future earnings and makes bonds more attractive.
A more sustainable rise in real interest rates can quickly reduce the relative attractiveness of stocks.
“A more sustainable rise in real interest rates could quickly reduce the relative attractiveness of stocks,” said Isabelle Schnabel, member of the European Central Bank’s board of directors, at the European Central Bank’s latest monetary policy meeting. The International Monetary Fund has indicated several times that stock prices are high and disconnected from the real economy.
There are still signs of a possible overheating. What about the uproar that surrounded the US video game series GameStop in January? Close to home, the Vranken-Pommery champagne set was up 23 percent on Monday. The stake was mentioned in the weekend newspaper from De Tijd as a possible winner of the upcoming freedom.
The number of empty spaces or payment companies is also increasing. Investors are confident that the initiator of spac will succeed in achieving a profitable acquisition with their money.
De Tijd asked four professionals for their views on stock markets and asked them what advice they could provide to investors.
1. Was the recent rally in stock markets overrated? are you worried
2. What are the main risks facing stock markets?
3. Have you modified your investment strategy?
4. What is your advice to investors? Can they protect themselves?
5. Is it too late to take your first step in the stock market?
Véronique Goossens (chief economist of Belvius)
1. It is true that equity markets are high, but earnings expectations are very favorable and there is optimism about reopening the economy. Coronavirus vaccination is progressing well in the United States and the United Kingdom and is also appropriate in Europe. In the US, additional stimulus is on the way with President Joe Biden’s plan. The European Union will benefit from this. The conditions necessary for a further rise in the equity markets have been met. Interest rates are still low and some massive support from governments has yet to be brought up. These are all good signs.
2. The main danger is the negative surprises around the epidemic. How effective are vaccines against the Brazilian alternative? What if an error occurs in the vaccination? It does not seem to me that a further rise in long-term interest rates is the greatest risk, although it may go up somewhat.
3. We have gradually built up our equity positions since November by buying when the market is weak. We buy stocks mainly from emerging markets and Europe. European stocks are somewhat behind and SMEs will benefit most from reopening the economy. We are looking objectively at technology, climate and healthcare. There are more tech stocks than FAANG (Facebook, Amazon, Apple, Netflix and Google’s parent Alphabet, editor). We protect our portfolios with derivatives, among other things.
4. Clients’ advice is based on their risk profile and time horizon. It is best for the average and novice investor to grow gradually. A private investor can protect his portfolio with some gold, at a fixed value. The Japanese yen and the Norwegian krone also provide protection.
5. It is better for the novice investor to invest the same amount every month. Then the feelings are extinguished. If you invest a fixed amount and the stock market is high, you cannot buy much, and vice versa. If you keep in mind the long run, stocks offer the most potential. A savings buffer is necessary, but it should not be too large. Cash is a loss and bonds are of little or no return.
Danny Van Quathem (Econopolis fund manager)
1. I look at individual stocks more than the market as a whole. Some parts of the stock market are very overheated and the “middle” market is expensive, especially in the United States. The reason is known: the massive monetary stimulus and from the government. The Bel20 isn’t too expensive, either in terms of prices or reviews. But there are big differences between companies.
2. I don’t see any sign that the stock market has peaked and that a major correction is imminent. I don’t know what the market will do – you can’t predict it. Potential catalysts for a correction are an additional rise in interest rates or an increase in inflation. Like everyone else, I am suspicious of what is happening in the interest markets.
At the start of this year, my scenario was a correction during the first quarter. But when and how? I do not know.
3. In recent weeks, I have just made some improvements in our Belgian box. I am still in the minimal cash position. My beliefs haven’t changed. The biggest positions are UCB, Tessenderlo, Ackermans & van Haaren, and Bekaert. Tessenderlo and Bekaert are cheap. Melexis is pricey, but I feel comfortable with this post. Products and management are of good quality. Insiders continue to buy stocks like Tessenderlo and Sofina. If I get scared tomorrow, I can sell stocks quickly and increase the cash position.
4. The investor must do what he must always do: do his duty, browse his share in his equity portfolio and account. What is evaluation and should I change my conclusions? There are still many positive business stories in Brussels.
5. The investor with little experience should be diverse. This can also be done with a box. He has to spread the investment over time. There are more opportunities in Europe and emerging markets than in the United States.
Johan Van Geeteruyen (Fund Manager Degroof Petercam)
1. Here and there I see exaggerations, for example Tesla and shares of renewable energy producers. But the market as a whole is not overrated. Monetary policy remains flexible and the Coronavirus vaccination will boost the European economy. Some fuel left. The results season was better than expected and there is much money on the sidelines. If there is a correction, it will not take long.
2. The greatest risk is another rise in interest rates without commensurate economic growth. If economic growth supports higher interest rates, then there is no problem. A boom in inflation without the relative growth of the economy can cause a shock reaction. Covid is also a risk.
3. We have not adjusted our portfolios, with the exception of some profit taking on stocks in the defensive portfolios. This was necessary to prevent the weight of the arrows from getting too large. We will continue to invest in stocks more than usual. We are growth oriented.
4. Investors should diversify well across sectors and regions. The United Kingdom and the United States will emerge from economic hardship faster thanks to the faster Coronavirus vaccination. But Europe has many cyclical companies that will benefit from the economic recovery. Little gold and inflation-linked bonds in the portfolio can cushion against inflation.
5. Stock markets still offer the best potential. Equity markets will receive another boost as the stimulus is approved in the US. Beginners can take the first step carefully in the stock market and buy more on dips. I will not wait for the correction, what do you do if it does not come? The economic recovery will continue in 2021 and 2022. The stars remain favorable for the stock market.
Mark Stephens (Topman Leo Stevens & Cie)
1. Stock market valuations are not an exaggeration in and of themselves, but I believe the stock markets are moving very fast. Long-term interest rates in the United States are on the rise, and I see that investors are reacting irrationally to some corporate results and there is a mismatch between the prices of buy and sell options (with
Option, the investor can buy (call) or sell (sell) a share at a predetermined price. Many connection options are purchased at high premiums. The stock market is decoupled from economic fundamentals.
2. The main risks facing stock markets are an increase in interest rates, an increase in inflation expectations, and the absence of new stimuli that may lead to an increase in prices.
3. We took profits in our equity funds and decreased the weight of stocks from 98 to 80 per cent, by selling futures contracts on the US stock exchanges. We now have about 20 percent cash, usually a maximum of 2 percent. We step back a little and rarely do. This is one
A tactical, not a strategic, decision. We usually buy and own investors. We are basically dealing with anti-market timing, but we do it now exceptionally well anyway. If the stock market corrects by 5 or 8 percent for example, we will increase the weight of stocks again.
4. We do not recommend continuing in the stock market completely now.
5. Anyone with a ten-year time horizon can still take the first step in the stock market. No one looking at their investment today in 2031 will wonder if the stock market in 2021 will be so expensive. The novice investor should invest in a variety of ways and invest in sectors such as health and technology with sufficient attention to sustainability.
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