Rising Inflation And How Can We "Vaccinate"​ it

by finandlife17/06/2021 08:36

Rising Inflation And How Can We "Vaccinate"​ it

Published on June 16, 2021

Long Tran

Head of Research at BIDV Securities Company

Inflation is on the radar of the central banks around the world again, after a half-year stay as low as negative in many countries. Annual inflation in the EU accelerated to 2% in May 2021 from 1.6% in April. In the US consumer prices rose 5% from last May, marking the biggest increase since September 2008.US inflation is nowhere near their target said by Fed Chairman Powell "We do not seek inflation that substantially exceeds 2 percent, nor do we seek inflation above 2 percent for a prolonged period.” Two of the biggest economic powers see inflation close to or tend to pass their long-term target at around 2%.

Well, central banks are focused on controlling inflation, widely considered to be one of the most important macroeconomic indicators. The right inflation spurs (thúc đẩy) the economy by making consumers buy things. But high inflation hurts businesses and threatens to destroy consumers, especially during the healing time after one and a half years of Covid-19 suffering. Since inflation is rising everywhere, the question here is why inflation is so high and how can we vaccinate it?

Graph 01: USA's CPI, PPI and import price inflation (YoY%)

The first question we might ask is as follows: Why is inflation so high? In my opinion, the rising inflation is caused by (1) disrupting supply chains (2) Base effects — prices fell significantly last spring and (3) easy monetary policies.

(1) Disrupting supply chains. After 1 year of disembarking because of Covid, everywhere in the world the supply chain is broken and interrupted. Data show us that used car prices, lumber prices, and food prices increased. For example, lumber prices go up because people stay at home and have more time to upgrade their houses. Historic lumber shortage was spurred by a perfect storm of factors set off during the pandemic. Furthermore, Asia consumers scream for more lumber but container shortage leading to more supply chain headaches (and push the lumber price up even further). The same thing happens with mask prices, VGA card prices, oxygen bottle prices, and even used car prices.

Graph 02: Base effects — prices fell significantly last spring

Notes: C.P.I. of 100 is equal to prices in 1984. Sources: Bureau of Labor Statistics By Ella Koeze

(2) Base effects — prices fell significantly last spring. People say that goods and services' supply and consumption were at their worst in the second quarter of 2020, when China, Europe, and the US was hit by Covid. You remember that the price of crude oil went negative for the first time one year ago. Then, one year later, the price level of commodities jumped the most compared to the bottom of the second quarter of 2020, due to base effects and the fact that demand is recovering faster than supply.

Graph 03: Total Asset of the Federal reserve June 2021

Source: FED

(3) Easy monetary policies. When the recession returned, almost at the same time, the central banks around the globe expressed their concern. They simultaneously eased monetary policy by purchasing long-dated government bonds (in the US), lowering reserve requirements (in China), or reducing operating interest rates. In short, in every country, the government used monetary easing together with easy fiscal policies to prevent recession...

Generally, some amount of inflation is good when it combats the effects of deflation. When consumers expect prices to rise, they spend now, boosting economic growth. When inflation is too high of course, it is not good for the economy or consumers.

The second question is as follows: How can we “vaccinate” inflation? In short, we need every country to be Covid-19 “vaccinated”.

Firstly, the seasonal effect of roaring commodities prices happens naturally and will be here for some time, at least until this second quarter of 2021 ends. Secondly, the easing monetary policies, I believe, will be here much longer, at least until 2022. Even when Fed Chairman Powell said that FED “won’t allow ‘substantial’ overshoot of inflation target”, I think that he rather see inflation rise other than fall.

How's it about disrupting the supply chain? We are living in a globalized and interdependent world where no country can live without demand and supply from others. Take a closer look at your house and all the goods and services that you are consuming. Although you may be buying lumber from local sawmills, you drive cars “made in the EU”, and you eat food “made in Asia”, wear clothes ”made in Africa”, use phones “made in China”. Your phone again, not just made solely in China but has parts from every corner of the world.

Graph 04: The world top export and import 2018

Source: How much

People always say that advanced countries export automobiles, machinery, high-tech products... while developing countries are the main exporter of raw material, food, electronics, fuels, chemicals, clothes, home wares... We are so interdependent that if we want the price level to get back to normal, the economy of not just developing countries but also developing countries should be back to normal. The world that we lived in need to be vaccinated for the supply chain to be healed.

Graph 05: The world vaccination rates by continents

Source: The New York Times - Breaking News, US News, World News and Videos

Now G7 countries have most of their adult population injected with Covid Vaccine. They even have much more vaccine doses than needed while the emerging countries don't have nearly enough. Like in the U.S., there are more than 27 million unused Moderna doses and 35 million doses from Pfizer Inc. and BioNTech SE, according to data compiled by the Centers for Disease Control and Prevention. Moreover, tens of millions of unused Covid vaccine doses are reportedly piling up in Japan and the EU. Vaccinated people start going out and spending when their fellow humans in developing countries still suffer, stay at home, and factories are closed. According to ABC News, the world’s poorest countries are still waiting on vaccines to protect their health care workers and the elderly. Only 0.3% of the vaccine supply is going to low-income countries.

The world economy is running on one engine now. No wonder, the supply chain is disrupted and the price of many goods and services are rising, hurting us all. Lately, US President Biden plans to share 80 million unused vaccine doses (75% of unused COVID-19 vaccines) with the rest of the world. The developed countries should follow the USA and share up doses of its unused vaccines with other countries, and we might all get past this rising inflation together.

Tags:

Economics

PE NGÂN HÀNG, CHỨNG KHOÁN VÀ CÒN LẠI TẠI VIỆT NAM ĐẾN 11/6/2021

by finandlife13/06/2021 09:44

Tags:

Economics

Stock market sectors and the business cycle

by finandlife01/06/2021 13:46

Understanding the cycle may suggest what to expect as the economy recovers.

FIDELITY VIEWPOINTS – 06/19/2020

Key takeaways

ü    Stock market sector returns may be affected by the phases of business cycle.

ü    History can offer guidance as to how sectors might perform during each phase.

ü    Consumer discretionary and industrials sectors tend to outperform in the early cycle.

Corporate earnings, interest rates, inflation, and other factors that change as economies expand and contract can affect the performance of sectors of the stock market. For investors interested in an active approach to managing their stock portfolios, understanding how those sectors have historically performed at various points in the business cycle may help identify opportunities.

Understanding the cycle may enable investors to evaluate and adjust their sector exposure, as the likelihood of a shift from one phase of the cycle to the next increases. This differs from both short-term tactical and long-term strategic approaches to investing because the business cycle historically has played out over an intermediate time horizon with transitions between cycle phases taking place every few months or years on average.

Fidelity's Asset Allocation Research Team believes long-term historical average returns provide reasonable guidance for allocating assets in investment portfolios. However, over periods of 30 years or less, short-, intermediate-, and long-term factors may cause performance to deviate significantly from those averages, so analyzing factors and trends over shorter time periods can also be an effective approach to asset allocation.

Investment performance is driven by short-, intermediate-, and long-term factors

This chart shows that asset performance is driven by a confluence of various short-, intermediate-, and long-term factors.

For illustrative purposes only. Source: Fidelity Investments, Asset Allocation Research Team (AART).

Understanding business cycle phases

Every business cycle is different, but certain patterns have tended to repeat over time. Changes in the cycle reflect changes in corporate profits, credit availability, inventories of unsold goods, employment, and monetary policy. While unforeseen macroeconomic, political, or environmental events can sometimes disrupt a trend, these key indicators have historically provided a relatively reliable guide to recognizing the phases of the cycle. Bear in mind, though, that the lengths of time each phase has lasted has varied widely.

Currently, the US and many other economies are in an unusual recession in which government policy responses to the COVID-19 pandemic have played a significant role in terms of both impacting economic activity and supporting financial markets.

A typical business cycle contains 4 distinct phases.

Early cycle: Generally, a sharp recovery from recession, as economic indicators such as gross domestic product and industrial production move from negative to positive and growth accelerates. More credit and easy monetary policy aid rapid profit growth. Business inventories are low, and sales grow significantly.

Mid cycle: Typically the longest phase with moderate growth. Economic activity gathers momentum, credit growth is strong, and profitability is healthy as monetary policy turns increasingly neutral.

Late cycle: Economic activity often reaches its peak, implying that growth remains positive but slowing. Rising inflation pressures and a tight labor market may crimp profits and lead to tighter monetary policy.

Recession: Economic activity contracts, profits decline, and credit is scarce for businesses and consumers. Monetary policy eases and inventories gradually fall despite low sales, setting the stage for recovery.

How stocks have performed during each phase

Historically, different sectors of the stock market have taken turns delivering the highest returns as the economy has moved from one stage of the cycle to the next.1 Due to structural shifts in the economy, technological innovation, regulatory changes, and other factors, no sector has behaved uniformly through every cycle. However, some sectors have consistently outperformed while others have underperformed, and knowing which is which can help investors set realistic expectations for returns. So far in 2020, the COVID-19 pandemic has had a significant impact on sector performance.

Looking at sectors throughout the business cycle

This chart looks at different sectors throughout the business cycle.

Note: The typical business cycle shown above is a hypothetical illustration. There is not always a chronological progression in this order, and in past cycles the economy has skipped a phase or retraced an earlier one.

Source for sector performance during business cycle: Fidelity Investments (AART). Unshaded (white) portions above suggest no clear pattern of over- or underperformance vs. broader market. Double +/– signs indicate that the sector is showing a consistent signal across all three metrics: full-phase average performance, median monthly difference, and cycle hit rate. A single +/– indicates a mixed or less consistent signal. Returns data from 1962 to 2016. Annualized returns are represented by the performance of the largest 3,000 US stocks measured by market capitalization, and sectors are defined by the Global Industry Classification Standard (GICS®). Past performance is no guarantee of future results. See below for important information.

Stocks in the early cycle

Since 1962, stocks have delivered their highest absolute performance during the early cycle, with an average total return of more than 20% per year during this phase, which has lasted roughly one year on average. Sectors that typically benefit most from low interest rates—such as consumer discretionary, financials, and real estate—historically have outperformed. Consumer discretionary stocks have beaten the broader market in every early cycle since 1962.

Industries that typically benefit from increased borrowing—including diversified financials, autos, and household durables—have also been strong performers.

Economically sensitive sectors—such as industrials and information technology—have historically rallied as recession turned to recovery, with industries including transportation and capital goods gaining in anticipation of economic recovery. Information technology and materials stocks typically have been aided by renewed consumer and corporate spending expectations.

Early-cycle laggards include communication services and utilities, which generally see fairly consistent demand. But while communication services has historically underperformed, its evolving mix of industries raises questions about whether it will do so in the future. Energy stocks also have lagged during the early phase, when inflationary pressures and energy prices tend to be lower.

Stocks in the mid cycle

As the economy has moved beyond its initial recovery and growth has moderated, interest rate and economically sensitive sectors have still performed well, but stocks of industries that see peak demand for their products or services only after the expansion has become more firmly entrenched have also delivered strong returns. Average annual stock market performance has tended to be fairly strong at roughly 15%, though not as strong as in the early cycle.

Information technology has been the best performer during this phase, with industries such as semiconductors and hardware typically picking up momentum once companies gain confidence in the stability of the recovery and become willing to make capital expenditures. We expect the communication services sector to outperform during mid cycle, largely due to the strength of the media industry during this phase.

The materials and utilities sectors have been the biggest underperformers.

The mid cycle tends to be longer than any other stage (roughly 3.5 years on average), and is also when most market corrections have taken place. For this reason, sector leadership has rotated frequently. No sector has outperformed or underperformed the broader market more than 75% of the time, and the magnitude of the relative performance has been modest compared with the other 3 phases.

Because no sector consistently outperforms in the mid cycle, investors may want to consider keeping sector bets to a minimum while employing other approaches to seek opportunities.

Stocks in the late cycle

The late cycle has historically lasted an average of a year and a half, and overall stock market performance has averaged an annualized 6%. The energy and materials sectors have previously done well as inflationary pressures build and the continuing expansion helps maintain demand.

Sectors where revenues are tied to basic needs—such as health care, consumer staples, and utilities—generally have performed well.

Information technology and consumer discretionary stocks have lagged during this phase, as inflationary pressures crimp profit margins and investors move away from the most economically sensitive areas.

Stocks in recession

Recession has historically been the shortest phase—lasting slightly less than a year on average—and stocks have performed poorly (-15% average annual return).

As growth contracts, economically sensitive sectors lose favor, and defensive ones perform better. Among these are consumer staples, utilities, and health care, including industries producing items such as toothpaste, electricity, and prescription drugs, which consumers are less likely to cut back on during a recession. In a contracting economy, these sectors' profits are likely to be more stable than those of others. The consumer staples sector has a perfect track record of outperforming the broader market during recessions.

High dividend yields paid by utility and telecom companies have helped these sectors during recessions. Interest-rate-sensitive sectors—including industrials, information technology, and real estate—typically have underperformed the broader market during this phase.

While every business cycle is different, an approach to investment analysis that identifies key phases in the economy may offer investors guidance as they seek returns from their allocation to stock sectors.

Tags:

Economics

CHO VAY MARGIN TRÊN VỐN CHỦ CÁC CÔNG TY CHỨNG KHOÁN ĐANG MỨC CAO NHẤT LỊCH SỬ

by finandlife28/05/2021 08:39

Tags:

Economics | Psychology

CHI PHÍ ĐẨY THỊ TRƯỜNG CHỨNG KHOÁN NGÀY CÀNG ĐẮT ĐỎ

by finandlife24/05/2021 21:26

Chỉ trong chưa hết 5 tháng của năm 2021, chi phí đẩy VNIndex đã lên mức gần 16 ngàn tỷ đồng, cao hơn 15% so với cả năm 2020 và gấp 3 lần cả năm 2019. Việc nuông chiều đà tăng trong thời gian tới có lẽ là quá tốn kém, đến lúc nên đặt trên bàn cân lợi ích từ huy động vốn mang lại.

 

FINANDLIFE

Tags:

Economics

AUTOFEED

DISCLAIMER

I am an Investment Manager at TOP 2 Securities Co., in Vietnam. I started working in investment field as a junior analyst at a Fund in 2007. I have more than 13 years of experience in investment analysis. I have a deep understanding of Vietnam macroeconomics, equity research, and seeking investment opportunities. Besides, I am a specialist in derivatives, ETF, and CW. This is my private Blog. I use this Blog to store information and share my personal views. I don't guarantee the certainty. And I am not responsible when the user uses the information from the Blog for trading/investing activities. If you have any questions, please feel free to contact me via email thuong.huynhngoc@gmail.com. 

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