Blog: You, us, everyone

For the time being, we consider that the most recent spike in the rate of inflation is transitory. But what if it is more than just a glitch?

The post-pandemic business cycle is indeed at full speed, and this comes with some issues such as the supply-chain bottleneck in the semiconductor business and the lack of containers boxes in China, amongst others. The market dynamics at work at present can lead to a higher rate of inflation.

They are:

• Deglobalization: In previous notes we discussed the benefits of globalization; in fact, it has helped that more than 1.8 billion individuals have left the status of absolute poverty. With the world more balanced at present, it is most likely that the economic benefits, especially when ESG factors are accounted for, are evaporating. Now, COVID-19 has likely helped companies to rethink the supply-chain concept and a return to more local production could contribute to a surge in the consumer price index.
• Deficits: On the back of non-conventional Central Bank policies, government debts and deficits are exploding. The unprecedented amounts of stimulus and spending plans could lead to inflation, especially if funds are released within a short period of time.
• Debasement: More stimulus to keep long- and short-term rates low would likely drive inflation through further declines in the value of various currencies.
• Demographics: More Baby Boomers are retiring, and the hiring of Millennials and Gen Z has accelerated. The lack of experienced workforces could lead to higher global salary levels which by definition can be inflationary.
• Digitization 2.0: Contactless business models, the roll-out of which has accelerated the pandemic, comes along with IIoT and other maturing technologies that call for even more capex in the fields of AI, robotics, and blockchain.

While we are in a mid-cycle transition, the outlook for a further EPS expansion is somehow limited. Typically, we would expect that during this moment of the cycle, earnings multiple would tend to fall by up to 20%; at present they have adjusted by about 5% only.

These factors, when combined with an expected pressure on margins, could lead to a valuation reduction in the region of 10% to 15%.