Exposure rates of the Dorval Asset Management Range – 15th October 2021

The growth downgrade/inflation upgrade process has popularized the stagflation concept, although this theory seems fairly unfitting against a backdrop of falling unemployment and reopening economies.

Economic indicators lower than expected and inflation higher than anticipated since the start of summer


The combination of nasty economic surprises and inflationary pressure have driven observers’ talk of stagflation over recent weeks (cf. chart 1). According to proponents of this scenario, the world economy is facing a negative supply-side shock – bottlenecks, recruitment difficulties, inadequate inventories, energy shock, etc. – which is set to slow the economy and even push up unemployment, accelerate inflation and put the central banks on a sticky wicket.


The economy’s supply side is admittedly a stumbling block for the recovery, although this is a standard post-recession scenario as companies have had to trim their inventories and production capabilities during the downturn, but demand subsequently picks up sharply again. These various factors are clearly aggravated after Covid-19 shut down the entire world economy. Other more structural aspects are likely at play too – scanty investment in the past, the energy transition, new ways of working, and changing spending habits. In a market economy, these constraints lead to price rises, which are the result of robust demand running up against limitations and are not the product of a negative shock that dents output capabilities.


However, with the investor community worrying about limitations in the goods sector, it sometimes overlooks the services business. Yet the recent grip on the Delta variant not only in Europe and the United States, but probably also in Asia (cf. chart 2) will help galvanize the services sector, which provides a much greater number of jobs than goods, and is less exposed to the restrictions of globalization. In the United States, the recent easing in the pandemic crisis could also help alleviate difficulties on the labor market.


Control on Delta variant will underpin the world economy
New cases on a 7-day basis

United States / Malaysia / Vietnam / Japan



What about inflation against this backdrop? Firstly, we have probably already hit the peak in price acceleration, at least in the United States (cf. chart 3). However, the latest price stats are admittedly confusing, with certain metrics picking up – such as median CPI – and others slowing, such as core CPI and producer prices. Additionally, the risk of inflation settling at a faster clip than before the Covid crisis will depend on whether wage rises persist. For now, these are visible in some sectors in the United States, but much less in Europe, not to mention Japan.


Peak in US inflation seems to be behind us
Monthly % changes


Lastly, the central banks have been coveting slightly faster inflation for a long time, so there is no question of giving up at the first opportunity as soon as the target seems within reach. Additionally, the central banks are not remaining passive, particularly as long-term inflation projections have increased over recent weeks. In particular the Fed’s tapering is now relatively clearly set out with an announcement in November, the beginning in December and the end in summer 2022. Meanwhile some central banks have already slightly hiked their rates, and others could do so soon (Bank of England).


It is difficult to know how soon bottlenecks are set to ease. The grip on the virus in Asia – the factory of the world – will probably help, but other limitations are more persistent, while some are unpredictable i.e. natural gas and oil prices during the winter. However, even if inflation turns out to be stronger than expected, this does not point to a very negative outcome for world growth in our view. We therefore maintain a positive view on the equity markets, although this is moderated by the effects of the trend towards rising interest rates.



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