Inflation jeopardizes economic recovery

Free stand

Inflation, silent for decades, erupted on the way out of confinement. Households had accumulated colossal savings during this period and, since then, young and old have had only one desire: to fully enjoy the newfound freedom “whatever the cost”. We spent lavishly on vacations, leisure activities, travel, restaurants, purchases of durable goods… The supply could not meet this unbridled demand following the disorders in the supply chain, in particular in the semiconductors. Automobile factories are at a standstill for lack of components, household appliances are out of stock, production of smartphones is down… Logistics remain disorganized, with sky-high price increases for maritime transport, while containers have fallen. disappeared for lack of being emptied.

These pressures on demand have led to a surge in prices, on raw materials and energy, Opep + producers, including Russia, also taking pleasure in turning off the taps. While we were discussing climate in Glasgow, Xi Jinping ordered coal to be extracted at full speed. What an opportunity for a carbon tax!

After having been close to 0% during the pandemic, inflation has taken off strongly to reach 5.4% in one year in the United States, and even 3.4% in the euro zone. Energy is at work, but also new and especially used cars, hotels and restaurants. Inflation, calculated from loans indexed over the next five years, stands at 2.89%.

Inflation, however, makes some people happy: households in debt to buy their homes will repay their loans more easily. State debt will be reduced in relation to GDP, which increases with inflation. On the other hand, those who hold cash see their wealth quickly melt away. The protection of capital is a real headache, because today there is no investment without risk. The performance of gold, which traditionally plays the role of a safe haven, was disappointing in 2021. Residential real estate, even with its very low yield, remains attractive.

Equities remained the most profitable asset class, with returns of more than 20%, and well beyond for the Digital funds, of Chahine Capital. In addition to long rates which remain very accommodating, quarterly publications have broken historic records. After 88% increase in the second quarter under a depressed base effect, the third quarter posted 34% increase, significantly better than expected. On the other hand, the companies just maintained their forecasts for the fourth quarter.

Overall, the year 2021 will see a profit increase of more than 42% exceeding pre-pandemic profits by 25%. The increase for 2022 is more modest, at 7.2%, with no upward revision dynamic. The corporate margin is peaking at over 13%, with 23% for the IT sector and a record 20% for the financial sector. The return on profits, the inverse of the P / E (price-to-earnings ratio), is 4.7%, of which 1.4% is distributed as dividends and 2% as share buybacks by companies.

The year 2022 is likely to be much more complicated than 2021. Central banks will have to deal with the development of inflation in an economy that is still fragile and still plagued by supply difficulties. American growth is already being revised downwards. The catching up of wages against inflation will become urgent, pushing up prices, which will force the Fed to intervene, which will finally lead to an economic slowdown. When rates rise, financial markets are less attractive, especially as profits risk being revised downwards. The US market already has a tight valuation according to our models, and a false move by the Fed could deliver the final blow. For the moment, the leitmotif “No alternative to actions” remains valid.

>> This article is included in the latest Capital, available on newsstands and on Prismashop.

* Jacques Chahine is Chairman of JAJ Investment Group and Director of Chahine Capital.