Quarterly investment letter | 4th quarter 2021
Here’s our summary of the markets
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 holds true.
The United States 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 but lagging around six months behind 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.
Political and economic headwinds have increased uncertainties surrounding China’s GDP growth and the earnings dynamics of Chinese companies. These issues 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 are willingly tolerating higher inflation rates and keeping 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 US bond yields rise too fast.