I am writing this in early June, so goodness knows what the state of play will be when you read this in August! But for long-term investors that should not matter. Of course, there are plenty of things to worry about; there always have been and there always will be. Nevertheless, there is a saying in finance, that “stock markets climb a wall of worry”, and there is much truth in that.
One thing that can accentuate this phenomenon is that bad news sells, so the media tends to focus on negative stories, rather than positive ones. In the economic world, that means fretting about Donald Trump’s tariffs, as well as inflation.
It does seem that we have entered a new era, with globalisation being toned down somewhat, meaning supply chains are more likely be hit, from time to time, as they realign. This is probably a legitimate fear and does suggest we may get occasional bouts of inflation. Nevertheless, companies are usually able to put up their prices (indeed, a cynic might argue they are happy to take advantage of the cover excuse of inflation to do just that) so stocks and shares do provide some protection from inflation deflating capital held on deposit.
With regards to President Trump, he is certainly unpredictable, and at times inflammatory, but he is a businessman at heart, so I think we have to assume that he would not want to go down in history for crashing the US economy and markets.
Here in France, we have our own political worries, in that we have a government with no clear majority, meaning it is very difficult to get anything done. However, taking the other side of this statement, it could be argued that companies in France now have relative clarity in the knowledge that no radical new (thus potentially damaging) policies are likely to be introduced by government until at least the next presidential election in 2027.
So is there any good news out there? Or at least, reason for hope?
In France we can be grateful that in May inflation has fallen to just 0.8%, well below the EU average of 2.4%, whilst both these readings have allowed the European Central Bank to lower interest rates in the Eurozone to 2.15%. Lower interest rates should encourage investment, although it seems unlikely the Eurozone will be the driving force of growth in the global economy.
Indeed, investors need to have diversified investments and consider the global economy. Over the next 5 to 10 years, the most likely sources of growth would appear to be the US and Asia.
If we can look past Trump fears, there is plenty to like in the US economy, which continues to tick along at a reasonable, but not (yet) brisk, clip. Tax levels are almost certain to be maintained (not raised) and deregulation is very likely on the way, both of which are positive for stock-markets.
However, I would pertain the real reason for cautious optimism is Artificial Intelligence. As ever, there has been a lot of scaremongering around AI, some of which is of course right and just. Nevertheless, the fact is that AI will make companies a lot more efficient and, hence, a lot more profitable. Furthermore, such advances could come at exponentially increasing speeds.
China, whilst it has its problems, in particular a burst housing bubble, is very much at the forefront of AI and high tech industries, including electric cars, so shouldn’t be dismissed. Asia as a region, which of course includes India, is likely to be a key driver of growth over the medium to long term.
What is the best investment solution for a French resident?
Over the long term, on an inflation adjusted basis, equities (shares) have consistently outperformed all other asset classes (property, bonds, gold) over time. This is quite simply a fact; so it is important to have at least some exposure to equity markets.
Today, any investor should look globally. It is important to diversify, not only to reduce risk, but also so as to benefit from the key drivers of growth. Secondly, it is important to keep costs low, as fees can eat into an investors’ profits. Finally, it is important to invest in a way that optimises tax efficiency in France, and in the UK, in case UK citizens wish to return to there.
The good news is that the above combination is not only essential, but is absolutely possible (except, unfortunately, for our American friends). Holding shares directly is generally not attractive for tax and investment efficiency, thus we would recommend that you take qualified investment advice from an independent adviser regulated in France.