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Reyl Quarterly Compass - Q2 2021

On the back of the huge USD 1.9 trillion new stimulus plan, economists have revised their US growth forecasts upwards in Q1. The US economy is now expected to grow significantly above pre-covid levels by 2021, i.e. a “V” shape recovery (the Fed now forecasts 6.5% GDP growth, above consensus at 6.2%). Aside from fiscal and monetary stimulus, the US economy should also benefit from a rapid vaccine rollout that has become a new key economic driver.

The Fed reaffirmed its commitment to maintain a supportive monetary policy with no interest rate hikes until the end of 2023 as it expects inflation to remain under control. Whilst we acknowledge that inflation will pick up in coming quarters for many valid reasons (base effect, supply chain disruption, strong economic growth, rising commodity prices, “unionisation”), we remain sceptical about a more persistent rising trend given that the current medium term deflationary forces in place (slow money velocity, lower economic growth potential, acceleration in digitalisation, slower demographic growth, capacity underutilisation, slack in labour market) are headwinds for a structural increase in inflation.

European GDP will struggle to rebound and is only expected to be above pre-covid levels by late 2022, i.e. a “W” shape scenario. A new technical recession is around the corner, the second in twelve months, leading to a widening growth gap vs the US. Moreover, the Eurozone is lagging in the vaccine rollout and the region is now facing a third wave of infections, leading to new lockdowns in France, Italy and Spain. Should Eurozone vaccination take-up slowdown from the current low level, herd immunity might be reached only in 2022, vs July 2021 for the US, i.e. a lag of several months.

Meanwhile, the Chinese economy has recovered in the aftermath of the crisis. The export sector has been a pillar of strength for China, driven by the surge in global demand for goods, inventory restocking, and China’s quick reopening of its manufacturing facilities. Retail sales have been a laggard this year, mainly due to renewed restrictions around the lunar New Year holidays. We expect consumption to pick up now that restrictions have been lifted.

In this context, we remain in a risk-on environment but attention is quickly turning to interest rates, as any hints about a tightening of monetary conditions would probably put a break on the rise in risky assets, ending the “goldilocks” scenario. Whilst the investment clock is moving fast, it is too early to remove our allocation tilt towards an overweight stance on risky assets, equities in particular.

Cédric Ozazman, CIO at Reyl & Cie


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