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A positive post-Covid future beckons
Lombard Odier Private Bank
It’s been almost two years since the outbreak of the Covid-19 pandemic. After worldwide lockdowns and an economic crisis unlike anything seen in recent history, what does the next year hold for us?
In short, we believe there is room for optimism. Despite talk of stagflation, we remain constructive in our outlook and see interesting opportunities in risk assets. Thus far, many economies have managed to avoid prolonged recessions, but we must watch out for unforeseen risks that lie just around the corner.
Although we remain wary, the post-vaccine future is encouraging.
Debunking stagflation fears
The biggest market fear today is of stagflation, as concerns about slowing growth continue while inflation remains elevated for now. We are not overly concerned with this, for the following reasons.
The world was hit by a crisis that stalled the economic engine. But the global economy restarted and accelerated out of this crisis, seeing very strong growth along the way. While the worst of the crisis is behind us, so is the best of the recovery. Now the world economies are growing at a more normal, cruising speed. It was not natural for China to grow 9%, nor the US to grow 7%, nor trade to grow close to 30%. We’re simply shifting to a more stationary phase of the economic cycle as it matures.
“Growth will decelerate and it’s going to normalise for various countries,” says our Chief Investment Officer, Private Bank, Stephane Monier.
When the Delta strain emerged, confidence in China’s economic activity, emerging markets, the jobs market and the hospitality industry all dropped. But that wave is coming to a peak and new Covid cases are falling. As the pace of vaccination accelerates, we hope incoming waves will be less disruptive on supply chains. Vaccines are the key to controlling the pandemic.
Crucially, corporate profits are at all-time highs, creating tailwinds in the job market, and giving companies plenty of room to invest and support the investment cycle. The fundamentals still look solid. Governments are launching green recovery programmes, while consumers have built up large buffers of savings. We note that spending on services still has plenty of room to catch up to pre-Covid levels.
Meanwhile, Covid shocks have spiked concern about inflation, including normalising prices after a pandemic lull, disrupted supply chains and energy markets. But we believe these issues are largely transitionary. With the pandemic more under control, they will fade. And while growth is slowing in China, there is ample room for authorities to use fiscal and monetary policy to cushion the shock and avoid a sharp slowdown.
“We do not believe that we’re about to enter a stagflationary regime,” says our Chief Economist Samy Chaar.
Risk on
Where do we see opportunities in 2022? We believe investors should keep their eye on risk assets – including in Europe.
Today, we are in a lower growth environment with lower yields and lower inflation. We see value in European cyclical and value stocks, where we have seen underperformance since Covid. The result of the German election could help this process. A centre left coalition would be a positive for European equities and the euro.
The German election has also boosted confidence that sustainability will remain high on the policy agenda in Europe. Climate considerations are of central importance at Lombard Odier and we believe they should be at the centre of any investment decision.
Indeed, we see a strong focus ahead on the climate transition worldwide. The IPCC’s recent report called the situation a “code red for humanity”. With the COP26 conference taking place in Glasgow in November, climate will be a key focus for politicians and investors. We have developed significant in-house expertise in sustainable investing and see opportunities in companies that are changing their business models in line with the demands of reaching net zero emissions by 2050.
Hope for the future but we must remain cautious
A post-vaccine society has given us positive hope for the future of the global economy. Economies have experienced volatility and strong rebounds in the first half of this year, with many developed countries reverting to their long-term growth trajectory. But we remain vigilant. We continue to constantly reassess and rethink our key assumptions, and identify where potential risks could be coming from. The Evergrande situation in China is a reminder that when you have ample liquidity, low rates and a certain sense of exuberance, risk can quickly crystallise.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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