Exposure rates of the Dorval Asset Management Range – 3rd December 2021

Recent investor position indicators point to soaring stress levels, as a result of bad news on the pandemic front, alongside a shift in tone from the Fed: however, neither aspect looks particularly dire at this stage.

These past few weeks have been characterized by spiraling volatility, waning individual investor optimism and elevated risk premiums on the financial markets (cf. chart 1), with growing wariness driven by the fifth Covid-19 wave, the emergence of the Omicron variant, and the Fed’s tougher stance on inflation.

 

Investor positioning becomes more cautious

Risk appetite (GS indicator)
US individual investor sentiment (AAII survey)
US fund managers’ equity exposure rate (NAAIM survey)

 

The pandemic situation is still up in the air with the new Omicron variant, although increasing uptake of the third booster shot does point to a degree of optimism. Roll-out has proven highly effective in Israel and the UK, which have a few weeks’ advance on the rest of the world on administering this renowned third shot to boost antibody levels. As a result, the UK has reported a steady drop in hospital admissions, despite a fresh outbreak in cases since the second week of November (cf. chart 2).

 

Third dose very effective in combating the fifth wave
Boosters, cases and hospital admissions in the UK

Number of third booster shots
One-week Covid cases
Number of patients hospitalized

 

The fifth wave is admittedly set to put the brakes on the economy in some countries, such as Austria, but the dent should be smaller and more short-lived than with the Delta variant, at least in developed markets. However, to be totally sure, we will need to hold on a few more days until more research is published on the Omicron variant.

 

Nevertheless, investors have run up against another hurdle in the shape of US monetary policy. The latest job stats out of the US point to a continued drop in unemployment, with 4.2% in November, along with an ongoing upturn in the labor force participation rate, further establishing the Fed in its new stance as defender against inflation risks. The central bank now looks very likely to completely halt its asset purchases from early spring, while it is already beginning to raise the possibility of hikes to short-term interest rates from the summer onward.

 

The financial markets had already broadly priced in these events, and there is no indication that the Fed has massively altered its inflation projections. Like the ECB and the OECD (cf. chart 3), it expects the situation to ease somewhat in 2022, although it probably believes that it will need to hone its communication to curb the risk of projections soaring excessively. Low long-term rates (1.45% on 10-year Treasury note) indicate that it does yet need to take drastic action, so a gradual approach is still on the cards, albeit at a somewhat faster pace. However, we should bear in mind that the Fed’s revised stance – and the resulting flatter yield curve – could continue to fuel unease on the financial markets.

 

 

OECD inflation projections
(Source: OECD, November 2021 projections)

Advanced economies / United States / Euro area / Japan
Emerging market economies / India / Brazil / Mexico / China

 

The balance between growth projections and interest rates does not appear to have deteriorated significantly overall, in our view. Investors have now adopted cautious positions, so reassuring news on the Omicron variant could even trigger an upturn in the more cyclical stocks, such as financials, industrials, tourism, leisure, etc.

 

 

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