"By evolving towards long-term investment models" Guy Wagner, Chief Economist Banque de Luxembourg

 

What is your assessment of the current economic situation?

Over the last thirty years, the global economy has been driven by the American economy, itself fuelled by the consumption of American households. Their consumption continued to grow while their revenues stagnated. They chalked up debt and their savings levels fell... In short, American households started to live beyond their means with the consequences we now know only too well, especially for real estate. To me, this model has now run its course. Given the situation in the United States and the unemployment rate, I don’t see how US consumption can continue to drive the global economy.

What are the possible solutions for the future?

We will need to find a new engine! Eventually, Asia will certainly be able to play this role, but that will take time as the Asian growth model is still based on exports, especially to America, as well as a very high household savings rate. For Asia to dominate, it will have to increase its domestic consumption, which will involve a series of complex developments, such as the establishment of a social security system in China. How can we expect Chinese households to free up their savings if they live in fear of health problems?

What does this situation mean for foundations' asset management strategies?

Interest rates might remain low for quite some time. They are linked to inflation and, given unemployment and production overcapacity, we're now in more of a deflationary era. Therefore, and almost inevitably, to obtain a steady low-risk income, a foundation will have to accept a fairly low return on investment. Ten-year government bonds are now yielding around 3.30%. If a foundation wants to limit its risks and not jeopardise its endowment, that is the type of return it can expect. Protecting capital and aiming for a return of 5% is not impossible... it's just impossible to promise.

What advice would you give foundations?

The foundations we advise tell us what their requirements are so we can safeguard their operating budget. Our role is to generate this set amount of income, often through a money-market and bond portfolio. Once we have achieved this objective, we can consider other types of investments focusing on higher performance, by looking for example at stock market investments. The important thing is that foundations that currently concentrate on income from a short-term perspective rethink their approach. We are there to help them evolve towards long-term investment models in order to provide a steady stream of income.

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