César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
Lucky loser
US consumer price inflation stole the show last week, with a 7% CPI print for December, in line with expectations and a four-decade high. Small companies reported some easing of labour conditions, but incomes paid also reached a new high, according to one survey. Meanwhile, Chinese consumer and producer price inflation figures came in lower than expected, providing some room for the Chinese central bank to further ease its monetary stance. At the same time, China’s trade surplus widened last month due to declining imports growth. This reveals weak domestic demand, adding further support for the implementation of stimulus measures. With only a marginal improvement in the Chinese credit impulse, the risk to Chinese economic growth appears to the downside, amplified by the recent decline in housing sales. High-yield Chinese property developers continue to fight for their survival with many facing closed markets as investors lose confidence. We are underweight emerging-market equities.
Back in the US, still more Federal Reserve officials are turning hawkish. Following a Fed board governor’s speech that referenced a possible interest rate hike in March, markets sold off. Investors anticipate monetary tightening at a moment of slower economic growth (the latest retail sales and consumer sentiment data showed deterioration). The Fed seems to have abandoned its average inflation targeting framework and markets fear the central bank will be behind the curve. We are short duration. Meanwhile, President Biden faces strong resistance on multiple fronts after the Supreme Court rejected his plan to compel workers to vaccinate against Covid and Congress refuses to change the electoral laws in certain states. Overall, the president’s Build Back Better plan is at risk, implying a potentially lower fiscal push in 2022. Controversy over Covid vaccination requirements clearly extend beyond the US, as Serbian tennis star Novak Djokovic was expelled from Australia and excluded from the Australian Open on his anti-vaccination position.
After the Q4 2021 US earnings season started with mixed large US banks’ earnings, the market will pay special attention to which companies are able to maintain their margins and which cannot. We like pricing-power companies. Finally, in geopolitics, last week’s Russia-US-NATO discussions ended without progress, increasing the risk of conflict in the Ukraine. Europe is exposed to further escalation as it relies on Russia for half of its thermal energy. At the same time, shares in French utility EDF sank last week as the French energy price cap hurts its margins. This falls in line with our Who Pays the Bill theme, as the challenge of funding expansive government policies and spending impacts corporations.
