Breaking the addiction
«The financial crisis is spreading to the real economy, asset prices are rock bottom, psychologies are extremely negative: the temple of opportunities is wide open!” No doubt, you will respond that after nine years of rising prices it is easy to repeat these particularly optimistic remarks of our November 2008 editorial. Easy indeed, because the prophecy has ultimately come to pass… and it is very tempting today to forget to what extent the road has been long and winding.
Since then central banks have deployed “nonconventional measures” and kept the economy on life-support. Exceptional became part of the new normal of our day-to-day existence: the injection of liquidities, the notorious quantitative easing (QE) used as a shock therapy without precedent in economic history. As much as US$4.5 trillion was injected by the US Federal Reserve to stimulate growth though without succeeding in triggering inflation. A life-saving measure for some, a Mephistophelian stratagem1 for others. In either case, the program involving massive asset purchases is coming to an end after eight years of good and loyal services. A page in the history of monetary policy has been turned.
Since this announcement, markets have remained calm and nothing appears capable of disturbing their peace of mind. Neither devastating hurricanes or the bellicose posturing of Donald Trump and Kim Jong-un have shaken their confidence in the future: in mid-September, the S&P 500 closed above 2500 for the first time and the CAC 40 have lined up a number of positive trading sessions, registering highs in July and returning to levels approaching those of the end of 2007.
However, let’s be objective. The change in scenery is irreversible and the window of opportunity is now closed. We are entering a new market cycle with its own indicators: generous prices, moderate growth levels, interest rates – that can only rise. The result is a global economic backdrop considerably less favourable than the ten-year period just ended. The detox treatment to come is necessary and will bring with it challenges, without however being of a catastrophic nature for financial markets. Put simply, returns that may be expected from investments in stocks will be aligned with interest rates which will remain low in developed countries.
So let’s look at the bright side of this development: active management is back! Since 2008, equity prices were dictated less by fundamental analysis of companies than by macroeconomic trends and accommodating central bank policies. The absence of volatility among asset classes fuelled the development of passive management. Our funds all outperformed their benchmarks because we have remained faithful to our convictions as stock pickers investing in companies. These performances have been rewarded – a source of considerable satisfaction – by La Financière de l’Echiquier’s noteworthy admission into the Alpha League Table2 and the industry recognition as one of the top asset management companies based on annual figures.
Maintaining our focus on long-term performance, we remain convinced that virtuous cycles are generated when savings are invested in companies. There are always extraordinary projects in which you can invest your capital: active management will once again provide fertile ground for the growth of your savings.
Didier Le Menestrel