The economy: Beyond the pandemic… inflation
- The appearance of a new Covid-19 variant has suddenly unleashed doubts about the pace of economic recovery after the slowdown of H1 2020.
- It is too early to determine the exact impact of Omicron, but it appears likely that growth will continue after a period of identifying the appropriate remedies.
- Concerns about inflation and its trajectory seem more pressing, with academics and analysts falling into two camps: those who see it as temporary, and those who believe it is permanent. The debate is more intense in the US, where the economic cycle is further advanced than in Europe.
- The central banks, which have played a pivotal role with their expansionary policies, face the difficult decision of whether to suspend monetary stimulus.
- These factors, coupled with the easing of the Chinese economy by the government, foreshadow positive growth rates for the global economy, though less intense than those of the last 12 months.
- Propelled by expectations of higher interest rates, the US dollar has strengthened expeditiously in recent weeks.
Markets: Maximum volatility and anxiety
- In the last two days of November, the emergence of the Omicron variant caused equity markets to drop sharply, especially among companies linked to mobility (transport, tourism, hospitality).
- This correction must be framed within the context of three years of substantial appreciations, which have driven the main stock indices into peak ranges.
- Triggering the correction were retail investors, the stock markets’ real driving force. Their concerns about 2022 profit growth and the decisions of the central banks explain the volatility.
- As the debate about inflation and a potential upswing in debt yields dominated the markets, the Omicron variant began to subvert the decisions of many investors seeking refuge in debt (risk-off): rising prices, falling yields.
Investment policy: The short and long term
- Current uncertainties explain the high volatility of microeconomic forecasts, to which we must add widespread social and political tensions.
- Investors who wish to protect their assets from inflation should focus on companies whose quality and innovation will enable them to weather years of accelerated changes.
- More so than governments, the best companies will be those that achieve the core objectives of the energy transition. It is also essential to continue to strive to select outstanding companies with quality management.
- In our view, investment in these companies is the cornerstone of asset allocation, given that many have posted profit growth parallel to the rise in share price, meaning, they have not become more expensive. Several are included in the portfolios managed by EDM.
- Setting aside current uncertainties, this selectivity should govern investment portfolios in light of the fact that the short term will be volatile and, as always, unpredictable.
- We continue to eagerly await a recovery in bond yields, so important for the income generation of many investors.
- It is surprising that real interest rates (adjusted for inflation) are in negative territory. Historically, this situation cannot persist in the long term.
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