Exposure rates of the Dorval Asset Management Range – 24th June 2022

It has become tremendously challenging to draw up macroeconomic projections in a post-Covid world. In the absence of clear visibility, the likelihood that the various scenarios will materialize changes with every set of stats published and the ensuing reaction from market participants.

The most recent macroeconomic indicators largely point to a scenario of moderation, yet neither a resilience/inflation scenario (with a recession later) nor a recession situation (with disinflation later) can be entirely ruled out at this stage.

 

The first factor pointing to a scenario of moderation is the stabilization in commodities prices, which kicked off in March with industrial metals, followed in May by agricultural commodities and more recently oil (cf. chart 1, top graph). Both the adaptation in supply and a slowdown in demand have supported this drop. However, the worsening gas crisis in Europe is hanging over our heads and seriously threatens the outlook for the continent (cf. chart 1, bottom graph).

 

Dip in commodities prices apart from natural gas in Europe

S&P GSCI Energy / S&P GSCI Agriculture / S&P GSCI Industrial metals
Natural gas futures (Dutch)

 

Looking to macro figures now, we note the deterioration in purchasing managers’ surveys (PMI) in the euro area in June (51.9 vs 54.8 in May) and the United States (51.2 vs 53.6 in May). The index is admittedly expanding (above 50) but the slowdown is clear and should continue, judging by the qualitative information in the comments included in the surveys. However, the reopening of economies in Asia is driving a recovery in the index in Japan (cf. chart 2).

 

Cyclical slowdown and geographical divergence
S&P Global composite PMI

United States / Euro area / Japan

 

These various factors point to a moderation scenario i.e. a slowdown in demand, but not a collapse, and a gradual easing in supply pressures. This landing scenario for inflation at around 3-4% would make the central banks’ job much easier and considerably increase the likelihood of a soft landing. However, the most persistent component of inflation can only be tackled by a sufficiently swift and sharp hike in interest rates to curb demand, thereby ultimately affecting jobs. The road to a soft landing is long and winding.

 

The return of a moderation scenario is good news for the financial markets. We have therefore moderately raised our equity exposure rate in our international funds by unwinding all or part of our hedging.

 

 

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