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The bull in the year of the ox

Client inquiries about asset bubbles and inflation pressure have increased quite sizeably. Overall, we view the valuation concerns as a sign of healthy investor scepticism. Moreover, asset bubbles usually burst at the end of an economic expansion, not at the beginning.

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Key takeaways:

  • Investors worry about asset bubbles and inflation when they should be worrying about deflation or missing out instead. Past ‘Years of the Ox’ show valuable parallels.

  • We raised our oil forecast, but only for the medium term.

The current earnings season shows that corporate earnings are in a recovery mode and will trigger further upgrades (see our number of the week). There is no end in sight here. As for inflation pressure, we see it as temporary, mainly because inflation rates went up due to pandemic-related disruptions in global value chains. And soon inflation will make a temporary comeback, as the base effects after the deflationary breakdown a year ago will have kicked in. Yet supply chain disruptions should be resolved as soon as the health crisis is contained. Not a single machine was destroyed by the virus. The capacity is there and it is plentiful. Central banks will not blink. If anything, investors should worry about higher inflation rates in the scenario of a continued fiscal spending spree into the middle of this decade or even later. In the meantime, we suggest worrying about missing out on the bull run or, in the adverse case, about the deflationary bust if crisis fighting fails.

Parallels between former years
On a different note, the turn of the lunar year is on the agenda this week. Enter the ‘Year of the Ox’. When I look at some of the comments circulating online, the parallels between former years of the ox and the upcoming one are quite striking. The last one was in 2009 – a major recovery year for the global economy – which fits nicely into the ‘contain and heal’ theme that we launched for the solar year 2021. Yet this year the ox will be linked to the element of metal. The last year of the metal ox was 1961, when John F. Kennedy took office in the White House and cosmonaut Yuri Gagarin received the Order of Lenin for his achievements in space travel. This resonates well with the US-China rivalry we see as a key geopolitical theme for driving innovation and consumption in both spheres. So while history will by no means repeat itself, it may eerily rhyme in this year of the metal ox.

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