Exposure rates of the Dorval Asset Management Range – 4th June 2021

With economies in the west opening up again, the economic upturn is accelerating at a record pace and should soon reach its peak. However, economic policy is set to continue propping up growth for quite some time to come as a result of the roll-out of investment programs. In Europe, the initial amounts from the €750bn plan finally ratified by all countries will be paid out from July.

World business climate should soon hit peak
Composite PMI – survey with world companies


The world business climate – now fueled by the services sector – continued to improve in May, hitting its highest point since 2011 based on composite PMI figures published by Markit (cf. chart 1). It is obviously difficult to improve much more beyond this point, so concern of a market correction is growing among some investors, or the so-called peak PMI scenario. The maturity stage of the economic cycle can also be assessed via the normalization of job stats in the US, although figures are stabilizing at a slower pace than expected, with jobless figures coming to 5.8% in May, vs. a pre-crisis showing of 3.5%. This normalization will lead to a slowdown in the Fed’s asset purchases sooner or later.


However, this risk scenario should be put into context as the Fed’s tapering is already flagged in advance and will come as no surprise to anyone, unlike the events of May 2013. Additionally, the risk of a major slowdown in growth once the euphoria of economies reopening is past should be put into context: new sources of growth can be expected beyond the summer, including the acceleration in vaccination programs in Asia and emerging markets, spending of savings reserves built up by western households, as well as massive investment programs.


In this respect, the latest political moves have enabled the full ratification by all European Union countries of the famous €750bn plan (5% of GDP). This milestone will be applauded at the next European Council meeting on June 24 and 25, paving the way for the first borrowing operations, and subsequently the payout of initial funds in July. A figure of around €100 billion is set to be spent this year (0.7% of European GDP), before ramping up to a maximum of €160bn in 2024 (cf. chart 2). While the extent of the plan’s multiplier effect on economic growth is a subject for debate among experts, there is no doubt that the impact will be positive. Meanwhile, the plan will first and foremost benefit peripheral southern and eastern European countries, which is also reassuring for a continent threatened by fragmentation and populism.


Imminent roll-out of the European investment program


The US equivalent of the European plan is still undergoing discussion, and Joe Biden has indicated that he is willing to trim initial figures to ensure bipartisan support. However, he still wants the plan to include at least $1 trillion in fresh spending over a period of several years, or the equivalent of around 4.5% of GDP in total. Democrats hold a majority in both chambers, so approval of a very substantial infrastructure plan by the fall is very likely.



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