What is the right price to pay for this growth?
The positive stock market trend for Asia continued in February, at least until the Chinese New Year in the middle of the month. At most, the stock market was up just over 9 percent. The end of the month was marked by profit-taking and a correction. Carnegie Asia rose in value by 1 percent.
Many positive factors have in short order pushed prices up to new record highs. Low interest rates, central bank stimulus, weaker dollar exchange rates and government support packages. Global vaccination means that economies are opening up and demand is returning. This cyclical recovery is, of course, long-awaited and very positive. And, as night follows day, commodity prices are rising rapidly. Automakers and other industrials are saying that production costs will rise as steel, copper and other materials become more expensive. Profit margins will not be as good as the market has anticipated. The next step will be price increases for consumer-oriented goods, and consumers in turn will want higher wages going forward. This is inflation.
At a time when the pandemic is not over and far from all countries have been able to vaccinate their populations, we do not believe it is time for central banks to start reducing their support. On the contrary, the Biden administration in the United States is launching a new USD 1,900 billion federal aid package.
It is precisely these massive packages of new money that are worrying and that could create inflation. The Fed is offering calm and is signalling that it will keep interest rates low, but rising US bond yields tell a different story. This week came the first warnings from strategists who expect the stimulus measures to start being phased out as early as December, known as tapering, with interest rate hikes from the Fed in 2022. This was not priced in by the market, so there was a correction.
The long-term positive drivers for Asia remain. GDP will increase by double-digit figures in several countries, consumption is returning, exports are doing well, corporate profits look promising and there is a shortage of a number of products where Asian companies dominate, such as semiconductors and batteries for electric vehicles. In addition, there are many companies in Asia with successful digital business models that will grow as people’s habits and behaviours change.
As usual, only one question remains: What is the right price to pay for this growth?