Exposure rates of the Dorval Asset Management Range – 24th September 2021

The transition from “whatever it takes” to self-sustaining economic growth is running up against supply glitches of unprecedented proportions, primarily in manufacturing. Tackling these supply-side constraints – which are affecting both prices and output – will be the major challenge for the quarters to come.

The economy’s normalization has been held back by the disorganization of world production chains since the start of the Covid-19 crisis, along with the impact of the energy transition and other specific factors. The severe shortage of inventories (cf. chart 1), rising prices, delivery delays, labor shortages and the scarcity of electronic components are the main characteristics of this bumpy period. Meanwhile in Europe, surging electricity prices due to a wide range of factors – primarily soaring gas prices – are adding to these difficulties.


Insufficient stocks in the manufacturing sector: a historic shock
European manufacturers’ view on stocks of finished products (too high/too low)




World manufacturing output has been fraught by constraints, leading to some nasty economic surprises (cf. chart 2), which are unprecedented during a period of fast recovering demand. These constraints are particularly harsh in the automotive industry, which has taken a simultaneous and structural hit from the transition to electric vehicles. Car sales are in danger of hitting a fresh low of the year in the US in September (-25% yoy), while German automotive production remains 30% short of 2019 output, at a time when orders are hitting fresh highs. Automotive production is fettered by delivery delays for electronic components, and these will take time to iron out due to semi-conductor shortages, which may not be fully resolved until 2023.


Supply-side constraints seriously dragging down economic momentum
Citi Economic Surprise Index (difference between published figures and projections), developed countries

Surprises on inflation / Surprises on economic activity


These various complications took a serious turn for the worse over the summer of 2021 as the Delta variant wreaked havoc in Asia, a key region for manufacturing production chains. However, the current command over the epidemic points to a clear upturn in the situation (cf. chart 3): experts at Goldman Sachs have calculated that the improvement in manufacturing supply would make a positive contribution to world growth as of 4Q 2021 and right through until end-2022, after slicing around 1% off world economic growth over the first three quarters of 2021. Similarly, inflation in developed markets should fall back considerably over the period for the same reasons.



Grip on the Delta variant in Asia will help iron out supply difficulties
New weekly Covid-19 cases

India / China / Indonesia / Thailand / Malaysia / Vietnam / Japan



Lastly, we note that supply and demand in manufacturing will also balance out again as a result of a relative fall-off in demand for goods, as economic growth in the post-Covid era is set to be driven primarily by an acceleration in the services sector. In this respect, the US administration’s announcement that it would open its borders again is clearly very good news for the tourism and airline sectors. Similarly the uptick in the services PMI in Japan in September is heartening, hitting 47.4 after a low of the year at 42.9 in August.


Against this backdrop, we expect economic indicators to put in more positive showings over the months ahead, and we therefore maintain our moderately positive scenario for the equity markets, despite uncertainties surrounding the Evergrande affair in China.



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