Exposure rates of the Dorval Asset Management Range – 27th August 2021

The equity markets have been in a state of suspended animation this past week as investors waited for the central bank chiefs’ pow-wow at Jackson Hole.

Observers have been on tenterhooks as they waited for comments from Jerome Powell, although his tone is unlikely to diverge from his stance at the previous FOMC meeting. His simply titled ‘economic outlook’ speech is set to take stock of the support measures rolled out, as well as the economy’s progress in terms of inflation and jobs, albeit watered down by the effects of the Covid-19 pandemic in the third quarter. Once again, the issue is no longer to taper or not to taper: the million-dollar question will be the timing for initiating the program, as well as its pace. Recent comments from a number of voting and non-voting Fed members have prompted brokers to review their projections, as they now expect an announcement in November and purchases trimmed to a moderate pace of $15bn per month from December onwards.


This change in tack towards neutral monetary policy is very gradual, but coincides with a clear reduction in fiscal stimulus in the US, thereby raising questions on the outlook for the months ahead. The flattening US yield curve since the spring sends a signal of caution in this respect, with the dip in long-term yields – give or take the potential technical effects of debt supply and demand – reflecting the downgraded growth outlook following on from monetary policy tightening and presents the question of a possible error of judgment from the Fed: could it be too soon?


The recent swell in Covid-19 infections has borne out these concerns and triggered a downgrade to growth projections for 2021, chiefly due to demoted estimates for 3Q.


GDP growth projections for the US and Europe for 2021 and 2022


However, the growth outlook remains robust, with economies unlikely to revisit potential growth – amounting to 1.5-2% in the US and 1-1.5% in Europe based on our estimates – before 2023.


China’s slowdown is fueling fears on world growth, and the country is ramping up announcements of targeted monetary easing after a period of very clearly curbing its credit impulse as shown in the chart below. These messages herald an upturn in macroeconomic momentum in 4Q 2021 and 1H 2022.


China’s credit growth and monthly GDP projections

Looking now to listed companies, very solid 2Q 2021 earnings reports have driven massive upgrades to earnings prospects for 2021 and 2022, as results have surged respectively 26% and 11% in the US and Europe vs. 2019 figures.


With current supply bottlenecks on some materials and components, investors are naturally harboring doubts on the sustainability of margins for the quarters ahead, and projections for the second half of 2021 have subsequently been downgraded already. However, it is crucial to note that several large groups have taken hedging measures to shield their business from the rise in materials/electricity costs, and they have announced price hikes in the face of strong demand. The effects will therefore likely be more pronounced in 2022.


It is important to bear in mind that solving these supply difficulties will involve greater investment and hence a longer industrial cycle, which is good news for demand trends in the sector.


12-month EPS projections

In short, a number of factors advocate for relative caution on asset allocation and encourage a balanced approach, as monetary and fiscal stimulus is poised to decrease gradually, making for volatility on risky assets, while expectations are high and valuations lofty.


However, growth looks set to remain robust for several quarters to come, cultivating a positive operating environment for companies and the equity markets. A long investment cycle is unfolding in front of us as businesses have to restore inventories of materials required for production, and as a response to the need for massive investment to address climate change challenges. The green deal theme therefore still features strongly in our portfolios.



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