Benjamin Melman (Paris, 55 years old) is the head of investments at Edmond de Rothschild AM, the asset management division of the Swiss private banking firm founded in 1953.
Ask. What is your vision of the market with a view to 2025?
Answer. The consensus is that the trend is your friend. What you feel is a lot of optimism, I am surprised by the lack of discrepancy. That’s not always a good sign, because what the market is saying today is that . Sure, Europe is in trouble and the US will continue to do well. But betting on it next year for that reason alone is a mere extrapolation of the trend. It’s very dangerous. So far we have decided to follow the consensus and overweight US stocks. Today we are there. But at the same time we recognize that it is the most fragile strategy. We are overweighting the American stock market for a purely tactical reason.
P. What is the danger?
R. . He is like God and can destroy what he has created. What’s dangerous is that the positive things about his program are already priced into the market, such as corporate tax cuts or deregulation. In fact, US stocks rose by 20%, to which must be added the fall of the euro against the dollar. So many things are discounted today, but what we do not see any discount on is the negative things of his program, in the repercussions that tariffs or the mass deportation of migrants may have, policies that can generate more inflation and less growth. And it is not really discounted in the market because first, the trend is your friend and so far the momentum is so strong that no one wants to give up on it. And second, Trump isn’t even in the White House. So everyone is waiting. We believe the market will become uneasy the day the president-elect implements some of his program. I don’t know if Trump is going to make America great again.
P. What will be the manager’s strategy then?
R. We want to have more information about how Trump is going to implement his program to know how to position the portfolios. Inflation expectations in the US are the biggest risk in the market. . We are currently overweight US stocks, but it is a matter of days before that changes. We want to enter into European values and also into Chinese ones. Many investors do not want to know anything about the Chinese stock market at the moment due to government policies. However, in recent months many measures have been implemented to rebuild trust in the Chinese trading floor. Additionally, households have so much cash in banks, they don’t know what to do with it. So these two very interesting things coincide: high levels of cash, at the same time that the Chinese authorities want to revive the stock market.
P. He said that they want to return to Europe. At what speed? In what sectors?
R. In Europe there are many uncertainties, which is why we evaluate both companies focused on their domestic businesses and multinationals. We want to be in both and find the right balance. We are investing in companies that are reviewing their strategies to improve their margins. Furthermore, if there is something that is booming in Europe, it is mergers and acquisitions. [M&A, por sus siglas en inglés]. Companies can achieve a lot of operating leverage, boost their margins and improve return on capital with these concentration processes. Experience tells us that when there is a wave of M&A, the first operations usually go quite well, but at the end of the cycle the mergers are made under more pressure and their results worsen. Therefore, we want to take advantage of this initial phase of corporate movements.
P. And in fixed income?
R. In the US, as I said before, there is uncertainty regarding inflation data, therefore, we try to avoid longer-duration debt issues there. We may miss an opportunity if inflation continues to fall and Trump does nothing. But as clarity is lacking, we remain in Europe. We used to be overweight emerging market debt; Not anymore, because it is too linked to the . What we do view favorably is the European debt, which has two parts. The long end of the yield curve is highly correlated with what is happening in the US market. Therefore, when considering investments with maturities greater than five years, the correlation between the European and US markets increases rapidly. However, for investments with maturities of less than five years, the correlation is more influenced by the decisions of the European Central Bank. That’s why we prefer to focus on the front end of the European yield curve, where we tend to be overweight financial debt and hybrid corporate bonds.
P. How does the Spanish market fit into your investment strategy?
R. In Spain the economic boost is fantastic. The surprising thing is that the country has gained a lot of competitiveness in recent years. I wouldn’t say that Germany’s problems are an advantage for Spain, but yes, it is a bit like that. Because Germany has lost a lot of competitiveness. And, therefore, it has significantly increased Spain’s competitive advantage in the global market. Spain is very competitive and has gained a lot of traction and momentum. In fact, we are overweight Spanish stocks, but also national fixed income. Spain, today, is in the spotlight of the entire financial world.
P. Are you not worried about the rally accumulated by the market in recent years?
R. Of course, it’s always a risk. But I think, again, it’s a matter of time. What I would suggest to investors is to significantly diversify the portfolio between stocks, fixed income and even cash. Even cash! We know that cash is not going to give great returns, but it could be useful if there is a market crash… You know, it is always good to have money ready to be invested in case of falls. We are not bearish, but there is more risk than usual of a market decline, especially since liquidity is already declining.
