Exposure rates of the Dorval Asset Management Range – 30th April 2021

The broad extension of the economic recovery across various geographies and sectors is being confirmed. The business climate is already taking off in Europe with countries only just beginning to emerge from lockdown. Meanwhile industrial commodities prices are climbing higher and higher.

GDP in the euro area dipped again a slight 0.6% in 1Q due to restrictions geared to stemming the massive surge in the pandemic over the winter, but the outlook for the quarters ahead has brightened considerably. Even before the announcement of national programs for emerging from lockdown, the economic climate recovered significantly in April (cf. chart 1). This trend should continue to gather pace in May and June, especially in services on the back of the planned easing in restrictions in retail, restaurants, leisure and tourism. The clear uptick in the vaccination program in Europe points to some optimism in this respect.


Business climate takes off in the euro area
Aggregate national surveys compiled by Eurostat

Overall economic sentiment
Extension / Construction / Industry / Services


These positive indicators helped push up the euro exchange rate and long-term interest rates. Yields on the German 10-year came to -0.20%, their highest since early 2020 (cf. chart 2). Meanwhile the upturn in yield curves in Europe could continue, particularly if the latest political stumbling blocks to the European investment program are removed: this would provide some welcome visibility. Just like in the United States, investors should welcome this surge in long-term yields as it would primarily point to confidence in the sustainability of the recovery. It would also provide a lift for the banking sector.


Bund yields set to move into positive territory again?

Yield on German 10-year bonds



Soaring commodities prices (cf. chart 3) could also have a positive impact on the continued rise in long-term rates. This surge is due both to the very sharp recovery under way in industry and construction, and the energy transition and green deal plans. The swift transition towards a green economy – including the electrification of transport – requires a great deal of copper, cobalt, light metals, etc. This additional demand is often compared to the situation in 2002-2011 during China’s development, although there is no indication that this rise in commodities prices will lead to a significant acceleration in consumer price indices. This so-called second round effect was actually only very slight during the previous boom in the 2000s decade.


Economic recovery and green deals fuel boom in industrial commodities


Composite price index on LME (copper, zinc, aluminum, etc.)


In light of these encouraging developments on the extension of the economic recovery, our portfolios remain strongly invested in the post-Covid and green deal themes. In our global funds, we have taken out a short position on European long-term bonds (OAT), which adds to the existing short position on US Treasuries. In this same vein of the European reflation theme, we have slightly increased our exposure to banks.


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