24 March 2021

Pascal Blackburne, CIO

It is not just bond investors that are beginning to worry about inflation. Equity indices, too, have been rattled and Mervyn King, former Governor of the Bank of England, recently issued some words of warning to his fellow central bankers, commending them to beware of excessive complacency on the price front and to avoid fuelling expectations that rates will stay durably low. Consensus has it, however, that any inflationary pressure will only be a short-term occurrence, related to the unleashing of massive pent-up demand – in an economy still hampered by supply-side constraints. Can we be so sure?

According to a Bloomberg Economics analysis, based on data from national central banks, consumers in the largest economies saved a whopping USD 2.9 trillion during the pandemic. Forced to stay at home, without physical access to shops, restaurants and other services, households effectively hoarded cash. Of that total amount of Covid-induced excess savings, USD 1.5 trillion pertains just to the US – a full 7.2% of the country’s GDP. But other countries also have big savings cushions: 6.0% of GDP for Spain, 5.9% for Japan, 5.7% for the UK, 5.6% for France, 4.3% for Germany, 3.3% for Italy and 2.7% for China.

Whether and how all this money gets put to use once restrictions are fully lifted is the big question. The optimistic scenario sees consumers go on a spending spree, shopping, eating out, travelling and generally doing all those things that have been near impossible for the past year. The experience, albeit brief, of the summer of 2020, would tend to buttress such an outlook. GDP growth posted a fast and vigorous bounce as governments rolled back lockdown measures – only of course to reverse course a few months later when the second wave of infections hit.

The less sanguine scenario would involve people deciding instead to pay down their debt or simply stay put, worried that the health crisis might not yet be over or that the employment picture could remain difficult for some time.

At this point, our best guess is that, once vaccine campaigns have been sufficiently deployed, there will indeed be a considerable unleashing of pent-up demand. This, together with upward-trending prices in many commodity markets, as well as positive base effects, means that – alongside stronger GDP growth – higher inflation is to be expected during the second half of the year. Whether this will only be a temporary phenomenon, or a major turning point, remains to be seen. It will hinge on central banks’ interest rate policy and on wage patterns going forward. In the US, Democrats are advocating a doubling of the minimum hourly wage, to USD 15. They do not have a sufficient majority in the Senate to push it through – nor are even in full agreement internally – but the seeds have been sowed.

All this has not gone unnoticed by bond markets. Yield curves on both sides of the Atlantic have become decidedly steeper over the past month. Not to the point, in our view, of opening up opportunities to (re)invest in the fixed income arena, but enough to increase the overall riskiness of financial markets.

Source : Bloomberg


As we have repeatedly written, speculative pressures are mounting in financial markets. Equity valuations look very stretched in general, and particularly so in “trendy” areas such as high tech, fintech or cleantech. The appetite for unlisted stocks is huge and Special Purpose Acquisition Companies (SPAC) are becoming a household name – seen as a means for retail investors to gain access to the private equity sphere. Investment decisions are being taken by many not in the idea of buying a stake in a decently priced business with solid fundamental prospects, but with the goal of making a short-term profit – i.e. riding the wave.

Still, now is probably not the time for radical changes in portfolios. A bursting of the asset price bubble is unlikely so long as money remains cheap. Which, of course, goes back to the question of the central banks’ ability to keep yields under control – whether through talk or continued, massive, interventions in bond markets.

Some additional protective measures do, however, merit consideration. In the event that the recent reflation trade reverses and interest rates move back down, this would be detrimental to the relative performance of our portfolios (currently very short in duration, hence strongly performing), hence our willingness to protect this tail risk.

And then, within equity markets, there is the issue of sector rotation. Greater exposure to the battered sectors like the Travel & Leisure, first in line to benefit from the unleashing of pent-up consumer demand, probably makes sense, but only after some form of pull-back.



Energy has been one of the top performing sectors year-to-date, and a strong contributor to the performance of our portfolios. As such, we were obviously mindful of what would come out of the early March OPEC meeting. The short conclusion is that oil production quotas will be left essentially unchanged through April, thus continuing to support the oil price uptrend. Looking at the details that transpired from the meeting, it appears that Saudi Arabia played a key role in convincing its partners to reach this outcome – being determined to bring global oil inventories back down to their 5-year average level. As such, while (non-OPEC) Russia and Kazakhstan will be allowed to pump an additional 130’000 and 20’000 barrels per day, respectively, Saudi Arabia announced that it is extending its first quarter 1 million voluntary output cut indefinitely.

Beyond a still uncertain future path for oil demand, this stance probably also signals that Saudi Arabia sees the US shale industry as less of an immediate threat. In other terms, even as the oil price moves up, it does not expect US shale production to surge the way it did in past years. The sector has indeed profoundly changed: it has improved its financial situation markedly, lowering debt and generating considerable free cash flow, to the point that it is slowly beginning to attract what we would term as “disciplined” investors.

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