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Market Insights – October 4, 2020

Each week, our Investment team shares its market views with you.

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04.10.2021_point-des-marches-investissements-piguet-galland

Essentials

The data published in the US at the end of last week were upbeat. Economic activity picked up again in September after stalling over the summer, probably because of the uncertainty surrounding the Delta variant. Consumer confidence also came in higher than expected, which bodes well for an end-of-year period in which consumer spending will be key. 

Following the sharp increase in oil and gas prices, annual inflation in the eurozone rose to 3.4% in September, exceeding the target set by the European Central Bank (ECB). Excluding energy, however, the rise was much more moderate. Given the medium-term inflation outlook, the ECB is expected to remain more accommodative than the Fed. 

A US government shutdown was narrowly averted after a temporary funding bill was signed. However, this has merely pushed off the question of raising the debt ceiling. A more lasting solution will need to be found by 3 December or US public servants won’t be getting their paycheques

A new phase in the cycle

The global economic recovery has been particularly robust this year. But because economies around the world opened up again at almost exactly the same time, both supply chains and raw materials inventories have been squeezed considerably. The many bottlenecks are starting to affect the global economy and are a clear sign that growth is past its peak in industrialised countries. Growth will almost certainly begin slowing in the last quarter of this year, and the trend will continue in 2022. 

However, this is good news when it comes to inflation, which has been rising in recent months and will prompt central banks to start normalising monetary policy.  Nevertheless, everything suggests that growth in both the US and Europe will remain robust in 2022. Meanwhile, emerging market countries may have to wait slightly longer for their economies to pick up again because of their more sluggish vaccination campaigns. 

China’s troubled real estate sector has been a source of some concern, although the difficulties it faces were probably caused by monetary policy being tightened a little too abruptly. China is likely to ease up now, by loosening lending conditions and slightly relaxing regulations affecting some sectors of the economy. These shifts in both economic growth and monetary policies confirm that the stock market cycle has entered a new phase, which means that equities will be weaker and more volatile. We will soon have to start thinking about reducing risk in our portfolios. 

But for now, we are still overweight on equities – investors are currently very bearish and the last quarter of the year is usually buoyed by seasonal trends. What’s more, equities are still more appealing than bonds. The outlook for bonds has worsened owing to ongoing inflationary pressures and the tapering of asset repurchase programmes by central banks.

The change in monetary policies could also have an impact on exchange rates, with the currencies of countries where interest rates are most likely to rise faring the best. Finally, we have slightly increased our exposure to commodities – which we expect to continue to suffer from supply chain problems – with equal weightings in industrial metals, energy and gold. Gold has not been lifted by the economic recovery but is still useful for diversification and hedging purposes.

 

Commodities – strong fundamentals

Commodity prices are in a very buoyant phase. As the recovery gained momentum, demand in many areas returned to the highs last seen in 2019. Supplies are limited, which is triggering output deficits and causing inventories to fall. 

The energy sector is currently having a good run. Gas prices have soared, mainly in Europe and Asia but also in the US, as a result of low inventories and logistical constraints. Politi-
cal pressure (mainly from Russia) is likely to restore rationality to this market, but prices could still be driven up in the short term if temperatures drop sharply. The same imbalance is apparent on the oil market: despite production increases by Opec, inventories have fallen to a five-year low. 

We think that energy prices will remain high, given the gap between supply and demand and the fact that clean energies cannot yet be counted on to provide a reliable global supply. Industrial metals are also facing shortages. On top of that, they have to meet structural demand owing to their essential role in the energy transition. Copper, for example, is required for our economies to become more electricity-oriented. The optimism on this sector at the end of the first quarter appears to have finally taken in, which should set the stage for the next upward trend.

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