The exhaustion of cyclical themes paves the way for a new phase - Dorval's Macro Corner (July 2021)

"Adapting economic knowledge to market realities and breaking free from the tyranny of indices"
François-Xavier Chauchat
Member of the Investment Committee, economist and strategist.

After more than a year of strong recovery, investors have stopped being positively surprised by the strength of the economic recovery. The recovery is indeed largely priced in. In addition, certain factors limit the activity, including the Delta variant and bottlenecks. But beyond these short-term uncertainties, faith in the pursuit of fundamentally positive dynamics should prevail. This will indeed be nourished by generalized vaccination, the gradual relaxation of supply constraints, the exceptional financial situation of Western households and public investment plans. After a year of good surprises, a scenario of disappointment ala 2011/2012 therefore seems rather unlikely.

As for central banks, their goal remains to support the recovery by stimulating reflationary psychology. IF it succeeds, this strategy will eventually lead to a gradual rise in long-term rates, a sign that growth and inflation expectations have been re-anchored to a higher level. This is not yet the case: on the contrary, long-term rates have recently fallen. One of the conditions for reflation to succeed is the maintenance of near-zero short-term rates for a long time to come. However, asset purchase policies will be adjusted carefully and gradually.

In the equity markets, the cyclical / defensive axis on which the relative performance of stocks has been played for over a year is becoming less and less significant. The conviction in the recovery is indeed both solid and largely priced in. Waiting for new axes of performance dispersion to emerge, it seems relevant to us to balance portfolios by re-exposing ourselves to clusters of stocks whose valuations have fallen significantly in recent months. This is the case of the GAFAMs, whose P/E has fallen by nearly 7 points since September 2020, while other superstars, such as the French luxury and cosmetics champions, saw their valuation soar. A long position in favor of the GAFAMs is also a hedge in the event of renewed Covid waves, the champions of digitization being more resilient in the event of persistent activity restrictions.

Finally, and even if the debates rage on its modalities, there is little doubt that the energy transition will be the big business of the decade to come. This theme could be one of the discriminating factor of stock market performances in coming quarters. But the energy transition theme must be played out subtly to avoid the pitfall of speculative bubbles that, for example, Greentech stocks were the object of at the end of last year. We advocate exposure to this theme through geographically and sectorally diversified equity baskets, and by favoring companies whose level of governance is sufficiently convincing.

 

Download Dorval’s Macro Corner of July 2021 in PDF version here

Let us provide you with a customized discovery by giving us some clarification.

Choose your profile