Exposure rates of the Dorval Asset Management Range – 1st October 2021

Successful efforts to get a handle on the pandemic are obviously very good news for the world economy, but there is also a downside, with severe tension on prices unsettling investors and some central banks poised to take a slightly less accommodative stance.

The current rush to build up inventories along with a range of various shortages have turned out to be the price to pay to bring the Covid-19 crisis to an end. The ensuing prices hikes are sometimes impressive, yet this kind of hit is in no way uncommon post-crisis. We witnessed a similar situation in 2010/2011, once the devastating 2008/2009 recession had passed (cf. chart 1). Features of these phases include falling real wages and weaker output growth – particularly in manufacturing – while logistics chains also take some time to normalize. This situation is not an indication of macroeconomic – or self-sustaining – inflation but reflects a readjustment in relative prices as a result of bottlenecks in some sectors. With a shock of this extent, it can sometimes take quite some time for supply and demand to balance out again, so we are set to see lofty inflation figures for several more months to come.


Inflationary shock as we emerge from the crisis, similar to 2010/2011
Inflation and wages in the euro area

Inflation excl. food & energy / Wages / Inflation


This is particularly true in the automotive industry, which is experiencing an unprecedented shock as a result of electronic component and semi-conductor shortages. Vehicle inventories have plummeted to remarkable lows at car dealerships in the euro area (cf. chart 2), although the average situation in other sectors is more reminiscent of the scenario in 2010/2011 – at least for now.



In retail, unprecedented shock from low inventories in the automotive sector, but not elsewhere
Assessment of inventories in retail sector (euro area)

Retail excl. auto / Car dealerships



Looking to Asia, bad news from China has dominated the headlines over recent weeks, as an electricity shortage has hit the country for various reasons – coal shortages, limitation on CO2 emissions from thermal power plants, etc. – hot on the heels of the Evergrande affair, which is set to dent the real estate sector. This power shortage will have short-term negative consequences for some power stations that need to curtail their operations, creating further stress on world production chains. However, this poor turn of events is offset by an easing in the pandemic in Asia, where headway has driven a sharp upturn in the Chinese services PMI and the manufacturing PMI for ASEAN countries in September (cf. chart 3), providing a lift for production chains and world GDP.



Double whammy of good news in Asia on the back of grip on Delta variant


Manufacturing PMI for ASEAN countries / Services PMI in China


Volatility on the financial markets has surged in the midst of this series of contradictory events and as US budget discussions drag on. All eyes are on the central banks’ attitude as they tackle current higher-than-expected inflation: these institutions quite naturally see inflation as a passing phenomenon and keep hammering home the message that monetary policy is not designed to address supply-side shocks. The ECB’s miscalculation in 2011 – tightening monetary policy too soon – remains fresh in many minds. However, the Federal Reserve has already announced that it would soon start tapering its asset purchases, thereby sowing the seeds of doubt for some investors. We have tactically trimmed our flexible funds’ market exposure to address market volatility, while also remaining consistent with our positive scenario for the world economy and moderately positive outlook for the equity markets in the medium term.



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