Yves Bonzon, Chief Investment Officer of Julius Baer, presented "Understanding the Economic and Investment Landscape" to a full-house at the Swissôtel Metropole on April 24th. Mr. Bonzon provided a cohesive economic vision of where we are today, and where markets are potentially heading.
Mr. Bonzon stated that the zero-interest-rate/disinflation environment will remain in the short term. In this environment, traditional valuation measures like price/earnings ratios are less significant on a one-to-three year time horizon. He noted that since 2010, US equities (+13% annual return) and European equities (+9%) have been the top-performers, driven by the technology sector.
Gold, on the other hand, has been a weak performer. Mr. Bonzon refuted the conventional wisdom of gold being an inflation hedge. Instead, he viewed gold as a hedge against systemic risk such as a catastrophic event. Gold has no counter-party risk. Its value is certain. Thus, when uncertainty is high, gold's value rises, according to Bonzon.
Mr. Bonzon said that the ECB missed a recent window of opportunity to move up interest rates to non-negative territory. He opined that negative interest rates will have inflationary consequences later on.
Generally, Mr. Bonzon had a sanguine view of the markets over the next twelve months. By late 2018, however, a bear market may be triggered by a few more US interest rate hikes and an economic slowdown. In this environment, he noted that small-cap stocks, which are currently outperforming in markets such as Switzerland, will be the hardest hit.
Mr. Bonzon frankly addressed audience questions about the zero-interest rate environment's adverse impact on retiree income. He said that there is no magic solution, and retirees will have to work longer. Mr. Bonzon mentioned that recent studies show that employees in their late 50's and early 60's are actually more productive, and are increasingly being retained by corporations. He added that the days are numbered of protected workers retiring with full benefits at the age of 50 years.
Mr. Bonzon also addressed audience queries about the impact of the French election on the markets. He foresees an Emmanuel Macron victory next month, which will be good for stock markets and the economy in the short run. Over the long term, however, he cautioned that Macron's policy does not address the EU's core problems. "The EU put the cart before the horse with a forced monetary union" in the 1990s (without first having a fiscal union). Also, the EU expanded too quickly. Some EC ministers are complaining that it is hard to implement policy with so many countries, according to Bonzon. He sees Macron as "postponing the inevitable".
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