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The green green grass of home

The worries in the short term are clear and well expressed. A second wave of infections and an earnings season that sees corporate profits implode keep investors awake at night. Christian Gattiker, Head of Research, explains his view on what's coming up in the markets.

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Key takeaways:

  • Second-wave fears and earnings season concerns triggered a consolidation in risk assets. Beyond the foreseeable future, some investors worry about inflation.
  • Inflation by rising wages would be a blessing. In the meantime, we see profit-taking in leading technology stocks as an opportunity to buy China growth and green utilities. 

We get more and more questions about long-term inflation effects due to the extreme monetary and fiscal money-printing lately. To be blunt: to worry about inflation during a deflationary breakdown is like worrying about obesity during times of famine. Anything like a more normal inflation rate would be a blessing now, since inflation rates in modern societies are mostly about wage increases. Of course, when using the ‘i’ word, everybody has the 1970s in mind or – even worse – the early 1920s, when some monetary bases completely imploded. 

However, those inflation experiences had completely different backgrounds (a supply-side shock hitting rigid labour markets in the 1970s, a very unfavourable post-war deal for the losers of World War I in the 1920s). Today, the concern is about steering against the spectre that has been going around in Japan for almost 30 years: structural deflation in conjunction with low growth. So yes, we can imagine that there will be overstimulation at some stage and yes, gold may spike further as the topic is the flavour of the month. But the real issue of inflation rising structurally is hardly foreseeable any time soon. So far, we have had three decades of the opposite.

We think this is ideal to reallocate some funds to growth stocks in China and Europe.

Christian Gattiker, Head of Research

These longer-term considerations aside, the current setting is ideal for a brief correction/consolidation. Especially so as some of the recent winners look extended, social media faces some headwinds and the issues raised above are not lifting investors’ moods. So we think this is ideal to reallocate some funds to growth stocks in China and Europe. The European green utilities are a structural growth story outside the headlines (see number of the week). Talking of Europe, the execution risks for the European Recovery Fund have diminished. Germany is soon at the helm of the EU Council, so full steam ahead!

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