• A political and economic scenario is taking shape and is significantly different from that of recent years.
• The weight of various factors and diverse nature can be significant: recovery of the post-pandemic world economy exceeding the best expectations; job market reshaped by digital transformation; geopolitical tensions; commodity prices; new role for governments in the allocation of capital
• It is plausible that the expansion of monetary policy change direction, for example through a tapering of central bank purchases
• Market prices imply both the prompt full recovery from the pandemic. A further rise in prices will only occur in the presence of astonishing economic performance or the reopening of service business
Approaching the end of the health emergency, trends are emerging which configure a scenario significantly different from that of recent years. Let's see what is happening and why.
The first: the labor market, the American one in particular. In the first three months of 2021, the gross domestic product of the United States roughly equaled that of the first quarter of 2020: about 1.9 trillion dollars. With one substantial difference: it was achieved with ten million fewer workers. During the lockdown, with the acceleration of digital transformation, companies have discovered that they can do without a lot of workforce. Reabsorbing this workforce will take a long time because the recovery of the economic cycle will not be enough. Professional requalification (which, in fact, is one of the main expenditure items of President Biden) will be needed. The Federal Reserve (Fed) has pledged to continue an expansionary monetary policy until a return to full employment which, however, in the post-pandemic economy of the 21st century seems destined to become an academic concept rather than an actual possibility. Hence an anomaly of the current situation: a fast growing economy and the prospect of a long accommodative policy of the Fed. If this simple analysis is confirmed, the inflationary consequence is obvious.
The second factor is the re-emergence of geopolitical tensions. The Trump presidency was marked by a neo-isolationist policy entirely focused on national economic issues and the United States has suspended playing the historical role of gendarme, or at least has been less active, hence the widespread perception of a lesser importance of global geopolitical tensions. The first signs of the Biden presidency indicate a different orientation while the imminent end of the health emergency brought back to the spotlight regional conflicts with a potential global impact (China-Taiwan, Russia-Ukraine, Israel-Palestine).
A third factor, an unknown unknown though, is that the growth of the economy seems bifurcated: the manufacturing sectors are moving at full speed while services, particularly those that involve social contact such as travel, catering and entertainment, are still running idle. It will now be necessary to evaluate the direction of the various economic sectors and their contribution to the generation of value, because the pandemic has affected and redesigned prospects in an uneven way. The manufacturing sectors have regained strength but it will be necessary to understand which companies will be able to better withstand the competitive pressure increased by digital efficiency, now the dominant paradigm. In services, starting with travel and tourism and related industries, the calendar of reopening is uncertain and this is reflected in various degrees in the course of the titles.
Last but not least, the price of commodities. The forecasts on the recovery of the global economy and the trend in prices seem to indicate the beginning of a new growth cycle that will fuel inflation. The upward trend, meanwhile, will reduce profit margins until companies are able to pass the increases on to the end user (with a potential inflationary push).
There is a final factor of uncertainty that feeds the predictions of a future different from the recent past. The need for systemic responses to the social effects of the pandemic has led to a return to the leading role of states in the allocation of resources. Governments will decide how to allocate the huge resources of the Biden and Next Generation EU plans to preventing the natural role of the market. If we accept what has become an axiom in recent years (market efficiency), this neo-statism increases the risk of inefficient allocation, with related inflationary potential tail risk.
We are entering a new phase and forecasting is risky. Something, however, can be said. First of all, it is plausible, considering the intensity of the economic recovery (at the end of 2022 the American and global ones are expected to grow, compared to today, respectively by 12% and 6%) the conviction of a less emergency and expansionary monetary policy. It is also plausible that central banks will consider the tapering option. Finally, it should be noted that market prices already seem to discount rosy growth scenarios. A further rally will only occur in the presence of continuous positive surprises in company profits. Focusing on specific investment ideas and keeping a certain amount of cash for future investments seems to be good and right.