Charles-Henri Kerchowe, investment director of asset management company Fidelity International, believes that the economic downturn caused by the crisis in Ukraine will quickly bring the European economy to the brink of stagflation. A climate that leads to a return to US stocks in mixed portfolios.
Charles-Henri Kerkhove began his career in Belgium at Fortis Bank in 2006, after studying at Vlerick and Ichec Business Schools. He then moved from the banking sector to fund management at Fortis Investments and UBP. About ten years ago, he joined Fidelity International as an investment director with many assets, and is now part of a team that oversees the management of all funds with many assets from Frankfurt. We met with him during his recent visit to Brussels so that he could talk in detail about the economic scenario he prefers and its impact on the balance between different asset classes.
Charles-Henri Kerkhove began his career in Belgium at Fortis Bank in 2006, after studying at Vlerick and Ichec Business Schools. He then moved from the banking sector to fund management at Fortis Investments and UBP. About ten years ago, he joined Fidelity International as an investment director with many assets, and is now part of a team that oversees the management of all funds with many assets from Frankfurt. We met with him during his recent visit to Brussels so that he could talk in detail about the economic scenario he prefers and its impact on the balance between different asset classes. TRENDS-TRENDS. Should we expect even higher inflation in the future? CHARLES-ANRI KERCHOV. At the beginning of the year, we expected the normalization of US monetary policy, and inflation will remain structurally high. This analysis was based on several elements, including supply chain difficulties, the recovery of private consumption after imprisonment, the continuation of deglobalisation combined with rising prices and the impact of the deployment of renewable energy capacity. Then the invasion of Ukraine raised energy prices in Europe, and we believe that we have not yet reached the peak of inflation. Moreover, the conflict seems to have become entangled without real negotiations between the warring parties. As a result, the impact on energy prices is likely to be long-lasting. What will be the reaction of central banks? We expect the rate to rise by 0.5% in May in the US with a key rate that should gradually increase between 3 and 3.5%. We think the market may be too pessimistic right now, expecting seven to ten rate hikes over the next few months, as rising long rates and tighter financial conditions will slow the US economy. However, the American labor market remains very tense. For Europe, we expect to leave the negative rate by the end of the year. However, the economic situation in the second half may lead to the European Central Bank gradually changing its mood. The invasion of Ukraine has also pushed the European Union into a new cohesion … The European plan to reduce gas consumption and stimulate the use of renewable energy sources is as good as the awareness of the need to diversify supply sources. But the impact of these investments will not be felt in the short term, and we now believe that it will be difficult for Europe to avoid an economic recession and therefore a stagflation scenario (recession accompanied by high inflation, ed.) Over the next 12 months. Surveys show that European businesses and households have become much more cautious. In general, stock markets have adjusted. Is the technical correction complete? Markets have tended to decline since the beginning of the year, with rotation particularly strong for sectors that have been neglected in recent years, such as the financial sector or energy. The warning signs we have issued in recent years in the technology sector have materialized. But today it is necessary to distinguish between societies. On the one hand, there are players like Microsoft or Apple who are very profitable, distribute dividends or buy back shares and have growing and visible cash flows. On the other hand, there are companies that are developing very well, for which visibility is much more uncertain. This last segment, the valuation of which was particularly inflated, will constantly affect the increase in bond rates. And what about market volumes? We notice that people are retreating more now, while they were the force of growth in the markets in 2021. Excessive savings are in the process of being corrected by raising prices and recovering certain consumer spending, such as travel. Households no longer have as much money as last year. We are also seeing a return in demand in areas such as armaments, energy or the nuclear industry; a trend diametrically opposed to what we have seen in recent years. How has this environment affected your investment strategy? We are now neutral in stocks, over-cash and alternative investments (infrastructure, wind farms) and insufficient in bond markets. Geographically, the list of arguments against European stocks has grown significantly in recent months, prompting us to quickly return to American stocks. In this country, we prefer stocks with high dividends, such as bank stocks or certain industrial stocks, which will be able to maintain stable financial flows for investors. At the industry level, we believe that there are still some attractive topics, such as cybersecurity. Companies will invest heavily to protect themselves from outside interference, especially from Russia and Asia. What about developing countries? We are now more constructive about countries that are prone to rising commodity prices, such as Brazil, Chile (copper) or Indonesia. Australia can be cited in the same vein. On the other hand, even if the assessments are now very attractive, we believe that it is still premature to become openly positive about China again due to the uncertainty about the containment measures in place in the country. The current environment encourages us to maintain a good dose of caution in our distribution decisions. Will the transition from rising stocks to valuable stocks continue? It is clear that in the coming months our strategy favors more valuable stocks, but it is likely that this loss of interest in stock growth will be temporary. In the long run, real growth stocks, which are able to increase their margins and cash flow, must continue to operate attractively. Some emerging sectors today have extremely low ratings, such as Chinese online groups, which quote 10 to 15 times their earnings per share.