Exposure rates of the Dorval Asset Management Range – 4th February 2022
Energy admittedly accounts for half of the 5.1% jump in consumer prices in January (cf. chart 1), but the fact remains that inflation is more lasting than expected, fuelling disruption for economic agents.
However, the central bank does want to act in haste, particularly as inflation is poised to fall again in the second half of the year due to the base of comparison. The ECB is targeting a return to inflation of 2% in the medium term. Additionally, wages in the euro area are rising at a very moderate pace of 1.3%, setting it apart from the United States.
The ECB is set to review its projections in light of the latest developments at its March meeting. While it does not want to act too quickly to avoid hampering the economic recovery, it no longer rules out a rate hike as early as 2022 (cf. chart 2).
This announcement met with a frosty reception from the markets, which were already hit by the consolidation that spanned out from the US in January. Pressure on yields has intensified considerably and the German 10-year has settled resolutely above zero. The euro has also absorbed a hefty portion of the monetary surprise and surged significantly against the dollar.
On the equity markets, this movement has driven a continued consolidation in pricey stocks to the benefit of discounted stocks, and banks first and foremost after they had been broadly hamstrung by the negative rates policy pursued in the euro area over recent years.
This shift in stance from the ECB does not fundamentally alter our scenario for the ongoing economic recovery in 2022. The outlook remains positive, particularly as constraints on activity resulting from the spread of the fifth Covid wave are beginning to ease. Growth in Europe is likely to come out at around 4% this year and the unemployment rate looks set to keep on decreasing. Lastly, the starting point for the ECB’s interest rates is very low (-0.5% for the corridor floor rate), so even if the central bank hikes rates by 25bps in September and December 2022 to return to a zero rate, monetary conditions would still remain accommodative.
However, several factors are denting investor confidence: high inflation in the short term and a slowdown in demand in the first quarter, geopolitical tensions and rising oil prices, downgrade to corporate earnings prospects for 2022. We therefore maintain our moderate equity exposure and feel it is premature to increase it.