1. Mr Villamin, the storming of the US Capitol has shaken the US. How important do you consider the incident?
It could have far-reaching consequences in the long term. It has been apparent for some time that the US's centrist nature is changing and the country is becoming increasingly polarised. The attack on the Capitol has accelerated this process.
2. What does this mean for the rest of the world?
It is a wake-up call for Europe to shape its own foreign and economic policy autonomously without relying on the US. The debate on the EU's investment agreement with China demonstrated that Europe has not yet chosen a side in the bipolar world and is seeking its own course.
3. So the US is no longer a reliable partner for Europe, but do you trust the 'old continent' to go its own way alone?
Europe is about as important as the US in purely economic terms. The surprisingly quick agreement on a European recovery fund demonstrated that the EU is capable of finding its own solutions. In the past, Europe was incapable of acting in difficult times and was dependent on assistance from the US and its loosening of monetary and fiscal policy.
4. How should we interpret the financial markets' positive reaction to the Senate elections in Georgia?
There is now a fifty-fifty split in the Senate. This is a far cry from the 'blue wave' expected in October, before the presidential election. With this slim majority, the Democrats can increase spending, but raising corporate taxes will be difficult. The first step will be to raise the stimulus cheques from USD 600 to USD 2000 per person. This will bridge the difficult period until vaccination is sufficiently advanced and the economy has regained its foothold. It also buys time to set up a major infrastructure programme. This means the fiscal stimulus will be much higher in the next three to six months than previously assumed.
5. Rising bond yields reflect this confidence. At what point will higher interest rates become a problem?
The recent rise in yields on longer-maturity government bonds is not a cause for concern because credit spreads have narrowed at the same time. It will only be problematic if corporate bond yields increase by 0.5-1 percentage points too.
Debt increased sharply last year and higher financing costs could trigger market fears of a solvency crisis like the one that occurred last March.
The real estate sector, which plays an important role in the recovery of the economy, cannot tolerate higher mortgage rates either.
6. Are we at risk of soon facing a scenario like in 2013, when fears of tapering or the reduction of securities purchases sent the markets into a tailspin?
We are still a long way away from that. To talk of tapering fears is to ignore the fact that the US Fed's main priority is no longer on inflation but on the job market. The situation remains very tense in that area. More jobs were actually cut in December. So, I don't believe that the Fed will immediately take its foot off the pedal because of slightly higher inflation rates.
7. What does this specifically mean for US Treasury yields?
Yields on ten-year Treasuries will not increase far beyond 1–1.5%. If long-term rates rise sharply, the Fed will buy more long-maturity bonds and implement some form of yield curve control as the ECB did.
8. The rise in interest rates has also caused the yield curve to steepen. To what extent does this help banks?
Many investors consider the yield curve to be the key factor in bank profitability. But if you ask the bankers themselves, you hear something different. A steeper yield curve doesn't solve the banks' problems. At most, it is an essential component in determining their earnings but not enough on its own. For European banks, in particular, the development of bad loans is decisive. When fiscal stimulus is effective, the ratio of non-performing loans decreases. It is only then that banks recover and can pay dividends again.
9. So are bank stocks a 'buy' at the moment?
There are better instruments out there for betting on a cyclical recovery. Mining stocks, for instance, have a low debt level and high balance sheet quality. Bank share prices may recover strongly in the short term, offering near-term opportunities for investors, but I wouldn't want to have such shares in my portfolio for ten years as the sector faces a number of structural challenges.
10. What challenges?
Digitalisation of currency. This move eliminates the bank's role as intermediary. No one will hold money in a bank with counterparty risk anymore when it can just as easily be held directly at the central bank. Banks have become less and less important for payment processing and asset management while fintech companies are increasingly adept in these areas. All that is really left for conventional banks is the low-margin corporate lending business.
11. Energy stocks are sought-after as a value play. But is there any future left for oil stocks given the climate issue?
The situation is comparable to the bricks-and-mortar retail trade at the turn of the millennium. Back then people said that Amazon would displace physical retail with its disruptive technology. But some businesses have adapted and survived. The same thing will happen in the energy sector. The future belongs to renewables, but we will see cyclical recoveries in oil stocks from time to time, with those companies that are swiftest to adapt making a profit. What I would not buy under any circumstances is an ETF on the energy sector. You don't want to be a passive investor in a sector that is being disrupted and ploughed up by new technologies.
12. What do you consider the greatest risk for the financial markets in 2021?
The political commitment to fiscal stimulus, not only until recovery is achieved, but until the transformation of economies is well underway, is a key risk underestimated by markets. In Europe, there is a risk that the EU will not complete its joint effort to stem the economic fallout from the pandemic. The EUR 750 billion in the EU recovery fund is a start, but it is not yet enough. If no further measures are taken, there is a risk of populists gaining power in the next elections.
13. So what does optimal asset allocation look like at the start of 2021?
It is advisable to keep the proportion of equities somewhat higher than strategically planned. Not only because the 2021 earnings outlook is so fantastic, but also because one should underweight bonds. The reason for that is that they offer little or even negative returns, and lose value at the slightest rise in interest rates.
14. What about the evident growth to value rotation?
Simple classification as growth or value stocks is not enough. What is value legend Warren Buffett doing? He has put his money in Apple.
Such transformative growth stocks in the tech and healthcare sectors continue to be a high priority in our portfolio as well.
In response to the cyclical recovery we are now adding more value stocks, like mining and industrials, where you have companies transforming the sector with new technologies. That's why we like Japanese small caps.
15. And what about gold?
Gold is an asset that preserves value, particularly from the perspective of dollar investors.
16. The dollar has recently stabilised and even slightly appreciated. Is the trend about to reverse here too?
No, the countermovement is a good opportunity for selling dollars.
17. And what is your opinion on cryptocurrencies?
I see cryptocurrencies as a call option on a new financial system that is replacing the current dollar-centric system that uses safe havens like Swiss banks. The question is what such a future system will look like. The only thing that is certain is that it will be in a digital environment.
18. Has your clients' interest in Bitcoin increased and, if so, how does it differ from late 2017?
The interest at that time was based on pure speculation and driven by momentum. This is now compounded by the fact that wealthy clients are facing negative interest rates on cash deposits and negative-yielding bonds, and stocks are highly valued. Investors become quite creative in their search for alternatives and come to cryptocurrencies in the process, out of necessity.