The Covid-19 crisis that we have been experiencing for a year now has had and will continue to have many repercussions. The current technological transition has been greatly accelerated in the face of the need to find new ways of making our economies work while, moreover, the deindustrialization that has been in place for decades in most of the countries of Europe has brought to the fore. our dependence on large emerging production centers.
Beyond these realizations, this crisis will also have shattered the dogma of Brussels concerning budget deficits. What the European Central Bank has been calling for for many years is now a reality with budget support on an almost unprecedented scale. This is true in the vast majority of developed countries, led by the United States. Another dogma did not stand up to the crisis, that concerning the mutualisation of debt in the Euro zone. Indeed, the “Next Generation EU recovery fund” will participate in the European recovery by targeting the areas most affected by this crisis, to the chagrin of certain Nordic countries.
Thanks to the extremely strong action of the public authorities (much stronger than at the end of 2008), the macroeconomic situation is now clearly improving, with global growth expected around 6% in 2021. In terms of also health, the situation is improving with vaccinations whose pace is accelerating, which should allow a gradual reopening of economies between the 2nd and 3rd trimester. And if we consider the savings available to consumers, there is a good chance that these growth forecasts will improve further in the coming months. This good news has logically had a significant impact on the financial markets, with sharply advancing equity markets, commodities also rising sharply and bond markets which have seen their rates rise in recent weeks.
The big question today is whether or not the increase in inflation forecasts will be sustainable. Inflation will increase sharply during the year 2021, in connection with very positive base effects (Q2 in the USA, Q4 in the Euro zone), but beyond the temporary effects, what will be the price dynamics in the service sectors when they reopen? Will the relocation of industries be real and will it lead to inflation? Difficult to answer these questions today and difficult to have a clear opinion on the valuation of breakeven inflation points.
In this context, the outlook for the equity markets seems favorable to us, with a clear preference for “value” sectors which benefit from the rise in interest rates (including banks). We are more cautious on technology stocks whose valuation levels will find it increasingly difficult to justify themselves. We are also cautious on government interest rates and good quality credit because of the still very low interest rate levels, particularly in the United States. European bond assets should fare better (much less inflationary pressure in the Euro zone, less fiscal stimulus, less growth, etc.). Assets with large spreads (in particular high yield securities known as speculative “high yield”) should benefit from the macroeconomic improvement, with a spread tightening effect that will offset the negative effect of the rise in rates. Finally, we are very negative on real American rates: with growth of 7% in 2021, a fiscal stimulus of 10% of GDP (not counting the one voted in December) and a consumer in an insolent form, the Federal Reserve (FED) does not in our opinion need to maintain conditions also accommodating financial.