“Sustainability is at the heart of our investment approach” – an interview with our Managing Partner, Jean-Pascal Porcherot

Article published in Finanz und Wirtschaft, 13 February 2023

Jean-Pascal Porcherot, Managing Partner at Lombard Odier, is bracing himself for a volatile year, as the world’s major economies face periods of recession. After that, an economic soft landing is possible in 2024. In terms of asset classes, he is backing fixed income strategies. He favours investments in secondary markets and in the area of sustainability. Investors should remain wary of equities, he advises.

Jean-Pascal Porcherot, “Comeback” is the overriding investment theme of this edition. Was this a good choice?

I think “transition” would be much better.

Can you explain what that means?

The financial markets are currently going in the right direction but have not yet really done their homework. This year will be one of transition with four main drivers: inflation, China’s opening, energy price developments and, finally, geopolitical events worldwide.

So, what do you think of the latest market rally in December and at the start of this year?

Transition always involves uncertainty. The road ahead is not straight, but paved with obstacles. So investors should be cautious about this rally. Inflation may seem under control now, but if there are any surprises, investors will have to wrestle with it even more. For example, service inflation in the US is still very high. It needs to fall back before we can talk about normality again.

What is normal?

Our economists believe an inflation rate of 2-3% would signal normalisation.

Will we have to get used to inflation in the coming years?

Central banks have been pretty clear about this. They had to decide between growth and combating inflation. They opted for the fight against inflation. We assume that the Fed will continue this and raise interest rates to around 5%. The ECB will come close to the 3% mark. Both central banks will keep these levels over the course of the year. But markets assume that rates will rise further and then be slowly adjusted downwards until the end of the year. We see it differently.

Read also: Inflation’s gravity check: what goes up, must come down

What will this mean for 2023 and also 2024?

First, we expect a difficult first half of the year in 2023, with mild recessionary episodes in the major economies such as the US and Europe. When this is over, 2024 may have a gentler start, from an economic perspective. A soft landing is a likely scenario.

In your investment outlook of November 2022, you nonetheless expected a bull market in the second half of 2023. How does that all fit together?

Equity markets are still anticipating a lot from the economic recovery. This may actually mean an attractive entry point during the second half of the year, if we then expect a strong economic environment in 2024.

Where exactly should investors position themselves?

There is potential in emerging markets – specifically stocks and fixed income. We see a good entry point for China in particular. The macroeconomic situation is improving, interest rates are low. People have high savings after the many Covid-related lockdowns, which in turn fuels regional consumption. And at the corporate level, valuations are cheap and margins low. Altogether, this creates an attractive environment for investors

Read also: Emerging market resilience points to opportunities

What might go wrong?

The greatest dangers would be global recession, a hard economic landing and geopolitical risks. However, as I said, we expect mild recessions in Europe and the US.

What other upcoming markets do you favour, apart from China?

India stands out from a regional perspective. It is currently under-represented in global indices. But looking at the macro data and valuations, it belongs on the watch list.

Where are investors better positioned, in Europe or the US?

The US dollar is set to depreciate further against the euro, because the ECB may intensify its fight against inflation. Then, it comes down to the asset class. With equities, we prefer value and quality, as explained earlier. This means we prioritise European securities. Within fixed-income, we prefer euro-denominated fixed income, because the risk of default is currently lower here. And finally, we think ten-year government bonds are better than Federal bonds, to protect against a hard landing scenario.

What geopolitical risks do you foresee?

The world is split into two large blocs, and the risks of this set-up are hard to predict. A decade ago, democracy looked like the future form of government, set to become more and more widespread. The opposite is now the case. There is also conspicuous deglobalisation. Yet you shouldn’t build a portfolio on these considerations alone. When asset managers and banks talk about deglobalisation, they often advise investors to position themselves accordingly, to profit from it. Deglobalisation can, for example, mean reshoring production from a developing country to your own country.

Is it ethical for investors and companies to withdraw in this way from economically weak regions?

‘Ethical’ is perhaps not the right word. There was very strong globalisation, and now we have regionalisation.

So is this development healthy or not?

Well, if we look at the European energy sector, for example, something has happened with regionalisation. Look at how fast the solar panel industry in Spain has grown. These countries have become less dependent on their former energy suppliers. The energy crisis was a healthy catalyst for this development, so to speak.

Everyone is talking about the energy crisis. Has there even been one?

So far, Europe has been able to manage the energy crisis well. This is due to four factors: warm weather, energy storage, infrastructure improvements and lower consumption. Europe has acted quickly here, and made rapid progress.

Read also: Rethink Perspectives: Energy – crisis or opportunity?