Quarterly Investment Review – Q4 2021

by Cedric Dingens

Quarterly Investment Review – Q4 2021

In 2021 while the world wrestled with the Covid virus, and its evolving variants, the financial markets enjoyed another strong performance thanks to the enormous stimulus that Central Banks continued to provide. Authorities’ response to Covid in the last two years has produced the most stimulative monetary and fiscal policies since 1945. In the US, for example the total agreed and intended fiscal stimulus amounts to 35% of GDP, a sum comparable to the cost of the Second World War. Real interest rates are minus 4%, again the lowest since 1945; the economy has never gone into recession when real rates are negative. However, the debate has now turned to whether this gigantic stimulus is starting to stoke structural inflation. Inflation has reached 6.8% in the US, a 40-year high, and has been climbing all year, so Central Banks message that it is only transitory, is coming under scrutiny. The outcome is critical for 2022, because with markets awash with cash, if the stimulus is withdrawn quickly they look vulnerable as they show signs of significant excess. For example, in November the car company Tesla reached a valuation of $1.2 trillion. This was more than the next nine largest car companies combined, and left its founder, Elon Musk, worth more than Exxon. It was also double the value of Warren Buffett’s Berkshire Hathaway which had profits in the first nine months of the year of $50 billion, compared to Tesla with only $36 billion in sales. A tightening of liquidity could dramatically impact companies such as Tesla which have benefited so much from the easy conditions of the last few years. Whether these conditions do change depends largely on the course of the virus and inflation.

As vaccines are rolled out globally, hope is rising that economic lockdowns will end. The scientific achievement in producing the vaccines is extraordinary, and highly profitable for some – the Pfizer-BioNTech vaccine is now the best-selling pharmaceutical product in history. Setbacks were occurred with the appearance of the Delta variant, and now Omnicrom. However, as vaccines armour plate the population, allowing us to live with Covid, the pandemic stage of the crisis will pass. This point is being reached faster in the West than in Emerging Markets but in these too progress is accelerating. New variants are always possible and further reversals cannot be ruled out, but on current information there appears to be a decent chance that Covid comes under control during the course of 2022. What 2021 made clear is that when permitted the recovery has been strong. If the vaccines succeed in a full reopening, then it will release considerable pent up demand, which will further inflame the inflation debate.

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