A perfect storm, a perfect location - for necessary real assets

A perfect storm, a perfect location - for necessary real assets

19 October 2021 from Mikael Syding

In the spring of 2020, the authorities threw themselves at the big red OFF button and shut down the world, when they finally decided to acknowledge that the Covid outbreak, which was first discovered in May 2019 in China, nine months later had developed into a pandemic. Whether it was a good decision or not, and which countries handled the pandemic in the best way, I leave to researchers and historians to judge. It is too early to say, as one usually answers the question of whether the French Revolution was good.

After just over a year of oral protection, and history's largest gathering of forces behind the development and distribution of Covid-19 vaccine, not to mention fiscal and monetary stimuli, it was time to start the world again. However, it turned out to be easier said than done. On the one hand, the world's employees had found new habits, with Zoom, cozy pants and Netflix as essential elements; on the one hand, logistics flows had adapted, i.e. freight forwarders and freight forwarders had reduced capacity.

As the global economy took off, several cramped sectors quickly became noticeable. More than $ 10 trillion in underlying stimuli further exacerbated the situation. Commodity prices and energy prices rushed upwards, while deliveries stood still due to the fact that many truck drivers had found other employment. In England, there was a lack of petrol at the gas stations due to the lack of drivers, and around the world the waters outside important ports were filled with ships that could neither unload nor load containers to continue their journey. Two large cyclones did not make things better. At the time of writing (October 14, 2021), 100 ships are waiting outside the huge Yantian port in China due to the cyclone Kompasu.

During the pandemic, the demand for electronic products for, among other things, communication increased sharply, when everyone who could work from home suddenly had to do so. The demand shock meant that an already incipient semiconductor shortage, as a result of the sharply increased demand for semiconductors for electric cars, developed into an emergency. In the last 12 months, the average waiting time between ordering and delivery of a computer chip has increased by more than 50 percent.

Bottlenecks in both transport and manufacturing, lingering effects of record-breaking stimuli, electric car subsidies, a 1-2 punch of first working from home then quickly back to the office, cyclones and the spread of Covid-19 Delta work together in a perfect storm for rising prices for necessary products. Some of these that have inelastic demand include transportation services, agricultural commodities, industrial metals and semiconductors. They are all essential inputs without which people or companies stay.

Some ship rates (transport prices) have increased by 1000 percent. This is noticeable but doable because the transport cost normally constitutes such a small part of the final price for the transported goods. But many streams small by price increases eventually become a flood of inflation that can be difficult to stop. The IMF has therefore also clearly communicated that central banks must be very vigilant in the face of the inflation threat. The US Federal Reserve also no longer says that inflation is transient but seems to accept that undesirably rapidly rising prices will become inevitable for the foreseeable future.

As a consumer, you just have to bite the bullet and realize that the purchasing puzzle with stagnant wages and rising prices is becoming more difficult to solve. But as an investor, I see several ways to ride the inflation wave. Gold, silver and cryptocurrencies are still the most logical assets to have in your inflation portfolio. Precious metals are lagging far behind, while cryptocurrencies are already approaching record levels. Bitcoin is e.g. already at $ 58,000, but the upside still lacks in practice any limits when FOMO flows pick up speed, which they usually do the two winters after a fourth-year halving.

Shares also have a given place, but it is important to think carefully about which companies and which industries benefit and be prepared to change footing if relative prices change a lot. There is probably more to give in the semiconductor sector, both among chip manufacturers and their subcontractors. Furthermore, the demand for luxury products is a long-term trend that typically benefits from increased economic gaps in the wake of misguided economic policies. Over time, low-cost chains such as Costco and Walmart should be winners, but right now the focus should rather be on the new start in the global economy. Right now, there is a shortage in BBBY's department store, but when the bottlenecks widen within a few months, the quarterly reports can really surprise on the upside. The largest companies could continue to benefit from inflows to index funds.

By opposite, car manufacturers and engineering companies could be pressured by both lower volumes and more expensive inputs.

@Mikael Syding

 

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

06/12/2021 01:11:51

 

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