Quarterly investment letter – 4th quarter 2021
Our view on the market at a glance
Global GDP growth is reaching peak levels and inflationary pressures are building. After outstanding returns in equities and bonds, investors will have to adjust their long-term return expectations if the principle of “mean reversion” holds true.
- The US is the first major developed economy with GDP returning to pre-pandemic levels. Although consumer sentiment has dipped, the “wealth effect” from rising house values and stock prices provides plenty of dry powder for consumers to become an economic engine again.
- The European reopening process is well underway and has around a 6mth time lag to the US. If Europe’s fiscal stimulus plans are well implemented and boost the EU’s growth outlook, global fund flows could return to the old continent on a larger scale again.
- Uncertainties to China’s GDP growth and companies’ earnings dynamics have increased because of political and economic headwinds. The issues in China also mean problems for investors in other emerging markets and the valuation discount is justified.
- Conclusion: In a “normal” economic cycle peak GDP growth would be inflationary and central banks would start a new interest rate cycle. However, today’s economic cycle is far from normal and Western central banks willingly tolerate higher inflation rates and keep interest rates depressed. As end-demand remains robust, we expect equities to outperform long duration bonds. At the same time, equities’ upside is somehow limited, and a setback could be triggered should the market conclude that inflation is not transitory and should US bond yields rise too fast.
Please have a look into our complete quarterly investment letter here.