EQUITIES CHAPTER
“THE IMPACT OF MORE PERSISTENT INFLATION ON FINANCIAL MARKETS IS LIKELY TO BE A FED HIKING CYCLE THAT MARKS THE END OF AN ERA OF FREE COST OF CAPITAL.”
BARRY NORRIS
CEO AND CIO, MANAGER, VT ARGONAUT ABSOLUTE RETURN FUND, ARGONAUT CAPITAL
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micron is likely to mark the end of the pandemic, with an overall mortality rate lower than influenza, even for the unvaccinated, which means mass vaccination programmes will likely also be quietly phased out. Countries such as China that continue to follow “Zero Covid” policies will exacerbate ongoing global supply chain woes. Inflation in 2022 will be higher overall than 2021 – averaging above 5 per cent rather than the 2.5 per cent predicted by the Fed. Demand for oil should see a strong recovery in 2022, which oil producers will struggle to meet. The cost of energy decarbonisation will also become clear. Switching off fossil fuels for unreliable renewables has already resulted in structurally higher power prices which has
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not only hit the consumer, but is rendering much of Europe’s heavy industry uncompetitive. Higher food and energy prices will also result in extreme social and political unrest in emerging markets. The effects of this structural energy shock – as with OPEC in the 1970s – will have profound negative consequences. The impact of more persistent inflation on financial markets is likely to be a Fed hiking cycle that marks the end of an era of free cost of capital. We see an abundance of short opportunities in “story stocks”, often with no sustainable competitive advantages, no valuation support, instead only some vague hope that they represent the “future”, which is subject to a high degree of risk and with the prospect
of a rising discount rate, this possibility will now be weighed by a far less patient market. After more than a decade long boom in long duration equities and bonds, our strategy offers investors a unique and valuable hedge on the risk of a 1970s redux.
HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022
