What should you be alert to in the next six months? How can you take these factors into account when managing your portfolio? In an article by Isabelle de Laminne published in La Libre Belgique, Damien Petit, Head of Private Banking Investments offers his analysis.

The economic environment is buoyant and global growth is firm and synchronised. However, the risks are omnipresent. “We have seen market volatility pick up on the back of three concerns. The first question is to decide whether growth has peaked. The second concern is the resurgence of inflation. On top of that, there are risks of a trade war looming over the markets,” notes Damien Petit.

After nine consecutive years of growth, should we fear a recession?

The cycle is already well advanced but the growth we have seen in recent years has been weak. National debt levels will certainly put a damper on future growth and we can see signs of weakening and a drop in confidence in the eurozone. “Admittedly there are pointers to the economy slowing but they are not particularly worrying. The yield curve could suggest a downturn. But despite signs of flagging, we are maintaining an upbeat scenario even though growth will continue to be weak,” adds Damien Petit. As regards inflation, there are contradictory factors are at play. The unemployment rate in the United States is falling but the surge in online shopping is generating downward pressure on prices. “We are not convinced about a return to inflation but we can’t totally rule it out.” Thirdly, the danger could well come from an increase in tension prompted by trade wars. Continuing healthy growth depends on international trade. Any brakes on trade would have a negative impact on global growth. Donald Trump’s trade rhetoric and geopolitical tensions are now the predominant risks on the markets.

How should you shape your portfolio in these circumstances?

Banque de Luxembourg is renowned for its defensive approach, a strategy which factors risk into portfolio construction. “By adjusting our performance to risk, we manage to outperform during bear markets because we focus on capital preservation,” explains Philippe Celis, Head of Investment Advisory. From this perspective, Philippe Celis considers that volatility is a risk for investors with a short-term view but that it represents something of an opportunity for long-term investors as the dips offer buying opportunities. It is also the case that the longer an investment is held, the less its volatility. So it is wise to take a long-term view for your portfolio.

Active management but no radical shifts

“Most of all, extreme changes in the portfolio should be avoided. Don’t completely abandon equities, for example. We recommend having the discipline to remain invested,” adds Philippe Celis. At the Bank, we select stocks of companies which offer a competitive advantage, high profit margins that generate surplus cash flow, sound balance sheets and decent dividends over the long term. At the moment, our portfolios are slightly underweighted in equities. In our bond portfolios, US Treasuries are currently seen as safe havens.

Quotes collected by Isabelle de Laminne, La Libre Belgique