Blog: You, us, everyone

Last week, markets entered the phase of consolidation and correction that had been expected to happen for quite some time now. Therefore, while we are still tilting towards growth, we are taking a more defensive stance.

While we have been witnessing the partial death of “goldilocks”, we will continue to support excess liquidity in the market. For the time being, the excess liquidity is supportive for industrials; in fact, since March/April 2020, these conservative value companies have become growth stocks, largely due to the nature of business (close ties with emerging markets, in either direction). Profits are peaking at maximum levels, and forward EPS expectations are still above average. While these companies are quoted on the markets, they should, from a risk/reward perspective, be quoted on a Nasdaq-bis market so that market participants get a real sense of it.

Which markets segments are at risk?

The S&P is expected to have strong support at around 4’000, which will be tested. From a technical point, market participants will untangle risks at around that level, and the next support will be in the region of 3’650 / 3’700. In the same context, European markets, which were outperforming the S&P500, should experience a stronger correction because of expected overseas selling, which by extension will add pressure on the €/$.

While any sector can be at risk, we would expect that providers of basic services such as consumer staples and telecoms are expected to perform better on a relative basis.

We have rediscovered inflation

Yes, inflation is back in the USA, at least on a catch-up basis (when measured year-on-year). This is not surprising since central banks and the government have provided stimulus at any price during the past 12 months, and they are still willing to do even more (the Biden administration is arguing that a third round of support is required for households). This is casting instability into the system; on the one hand it has been podcasted that the system is cruising nicely ahead, while at the same time spillovers occur. In fact, the disadvantages of unrestrained reflation and asset price debasements start to outweigh the benefits at some point. In this context, we note that the main emerging countries have a more prudent approach in place, i.e., implement a policy to stay out of the pain while it is there.

After all, markets, central banks, and governments have to note that the pandemic is over, and right now is about back to the future.