Much has been written about the inflationary consequences of the Covid-19 crisis and the end of globalisation. What we observe, however, is a disinflationary shock. Incoming consumer price data tends to miss even the low expectations.
This is consistent with a world where production and supply have rebounded faster than domestic demand. We therefore currently see no argument for inflation protection, which also means that there will be no room for rate increases for a long time to come. Eventually, investors seeking income will have to exit the money market and accept higher credit risk or shift into a balanced portfolio strategy.
The private sector has hoarded cash
The need for public sector spending and the disinflationary forces can be traced back to the same root: the weakness of private demand. Households in the US and Europe have received generous compensation for lost income, but they do not spend the money – at least not all of it – as long as they view their job situation as challenging. The same holds true for companies that hoard cash instead of investing in times of uncertainty. The available data on deposit growth and company liquidity confirm this savings glut in the private sector.
To break out of this ‘paradox of thrift’, the classic vicious spiral from higher unemployment to lower spending and even higher unemployment, we need a credible mix of fiscal push and monetary financing, as described above. The more credible and sustainable the policy push becomes, the faster households are happy to spend and companies to invest. The potential for such a rebound next year is tangible, given the excessive level of cash hoarding. For 2021, we expect a strengthening of private demand and keep a selective focus on cyclical stocks.
This is an extract of the ’CIO Weekly’. If you want to learn more about our investment approach, get in touch with us.
From the long-term perspective to short-term explanations of what is going on in the economy and markets – our Group Chief Investment Officer shares his views.