The Strategist

Long-term adaptation

Before the outbreak of the corona crisis, the leading central banks were confronted with deflationary tendencies. Now market participants have to adjust to an environment that will be characterised by higher price pressure. Not all companies will succeed in this adjustment.

Thomas Wille
Reading time
10 minutes
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The United States and Europe have now been battling the highest inflation rates since the 1970s for more than two years. Prior to that, the eurozone in particular had been facing deflationary tendencies and only just reached the European Central Bank's (ECB) inflation target of 2% between the global financial crisis and the Covid-19-pandemic. Not surprisingly, both the ECB and the Federal Reserve (Fed) waited a long time before raising interest rates. We now know that they both waited too long.

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Globalisation dampened price pressures

The G7 countries have been fighting deflationary tendencies since the late 1990s, not just since the global financial crisis. The main reason for this is globalisation. The establishment of the North American Free Trade Agreement (NAFTA) in 1994 and China's joining the World Trade Organisation (WTO) in 2001 contributed to a significant slowdown in global wage inflation. More than a billion Chinese have been integrated into the global labour market, which has had a huge impact. For example, core goods inflation in the US was only 0.04% per year between 1997 and 2019. In the 1970s, by contrast, it was above 3% a year for most of the time, and twice above 10%. In our view, these globalisation effects have declined sharply in recent years and will not return.

Consequences of the energy transition

Climate change will require a major global energy transition in the coming years. A study by the consulting firm McKinsey predicts an investment volume of around 275 trillion US dollars by 2050, equivalent to an average annual expenditure of 7.5% of global economic output. The International Energy Agency (IEA) also estimates investment of more than 100 trillion US dollars over the coming decades, although the figures can vary widely depending on the study and the period considered. However, it is already clear that the energy transition will tend to have an inflationary impact, if not on core inflation, then at least on headline inflation.

Equities offer partial inflation protection

In the long run, the question for investors is which asset classes will generate the highest possible risk-adjusted real return. In the medium to long term, equities offer some inflation protection because there is usually a very close correlation between corporate sales growth and nominal economic growth. But adapting to the changing environment over the long term - less deflationary tendencies and persistent price pressures - is a challenge that not all companies will be able to meet equally well. We therefore believe that stock selection can add value to a portfolio over the coming years.

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