By Johan Van Geeteruyen,
CIO Fundamental Equity at DPAM

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  • Growth will remain above trend
  • No lockdowns expected, but targeted restrictive measures
  • Relative valuations have become more attractive
  • Households’ improved wealth will lift demand in a structural way
  • Supply bottlenecks a.o. push towards more capex
  • Monetary policy remains accommodative
  • Fiscal stimulus still flowing

After three daunting years with excellent performances, investors rightly wonder: ‘what’s next’? What’s left in the tank for the future now that tapering is near and inflation is shooting up. The dark clouds on the horizon are blurring the positive view investors had towards the summer.

COVID is, rather unfortunately, still taking centre stage. The discovery of vaccines started a massive reflation trade back in November 2022. With the arrival of vaccines, the world saw a clear way out; a light at the end of the tunnel. 2021 started off well too – some strategists were even comparing it to the roaring twenties that followed WWI. But soon, the slow roll-out of vaccinations put a lid on people’s enthusiasm. In the meantime, while vaccination gained momentum, the world had to deal with the new Delta strain and more recently with the Omicron variant. Today, vaccination in the developed world reaches 70%. However, the developing world still has to catch up due to inadequate distribution channels and infrastructure. Lockdowns are still in place in places like China, Malaysia, Vietnam, exacerbating the supply chain issues for the rest of the world. Today, vaccination is widely available, and governments are contemplating a third jab, a so-called ‘booster’, to keep the economy open at maximum capacity. Ultimately, we might have to learn to live with COVID like we have done with the flu.

The global supply-chain bottlenecks are a second key challenge and partly linked to the first. In 2020, consumers slowed down their consumption. Companies used their existing inventory to service their clients while production slowed down due to lockdowns. Inventories reached historical lows because of the uncertainties ahead. Companies also wanted to preserve cash and liquidity to weather future storms. However, in November, it was clear that in order to fulfil future pent-up demand – the V-shape recovery – companies needed to evolve to full production again. Still, the shortage of labour and low inventories throughout the value chain put a lot of strain on the production. The bottlenecks were felt throughout the value chain, and especially affected companies at the end of the value chain. You can compare it to a chain collision on the highway – at the end of the traffic jam, you see more accidents than in front. Hence delivery times increased and everybody tried to get a hold of as much raw material as possible, leading to over-ordering. Many companies also realised they were too dependent on a select few suppliers. Although this can sometimes be an advantage (e.g. better buying terms), it generally leads to longer delivery times and higher prices.

And this brings us to the sharp increase in prices due to this herd mentality. Everybody is ready to pay the higher price for the necessary supplies and components in order to be able to serve their clients. Indeed, companies are afraid to lose market share. The result is over-ordering in some cases and, consequently, soaring input prices for commodities, semi-conductors, food, logistics and wages. It’s a typical chain reaction that is now visible across multiple value chains. In the case of energy prices, the rise is not the result of exploding demand but rather the result of a perfect storm (i.e. bad weather, flooding, disruption of coal supply, decarbonisation, political row with Australia, ….) Hence, soaring natural gas prices trickled down to the rest of the world.

There is a lot of stress on the system. Still, tight labour markets and supply chain bottlenecks are not exactly new. In the past, the world economy has witnessed these issues before, though not to this extent. All this will ultimately get resolved. Even so, it is difficult to put an exact timing on it. That would amount to a wild guess. However, if these issues take a long time to get resolved, if people are not ready to pay the high prices or if they have to wait too long to get hold of their products, it could ultimately impact consumer demand. A slump in demand could have a positive effect: less stress on the system. Corporates would have more time to replenish inventories, adjust the production, recruit and train people. In the end, demand will get restored as households have accumulated more wealth during the pandemic. With regards to energy, we can expect that prices will come down after the winter period when demand slows down.

This brings us to the fourth challenge: China. Xi Jinping is determined to establish a consumer-led economy instead of an industrial-led one. In a first phase, he aims at increasing the average income in China. This policy was not flawless and left room for excesses. At the start of the year, the government started dealing with these excesses by putting emphasis on common prosperity. In order to increase birth rates, Chinese citizens had to make sure households had sufficient means to raise kids in a comfortable way. Excesses in gaming, education and property were tackled in a direct and unforgiving manner. This can cause a ripple effect across the global economy: if China increases consumption by 1 unit and reduces investments by 1 unit, its GDP will remain unchanged. However, the consequences will be felt across the rest of the world.

Three major economic agents need to make a hard decision that will shape markets in 2022 & beyond.

Central banks have to make up their mind: ‘Is high inflation transitory or structural’? The FED moved from a dovish stance in Jackson Hole to a more hawkish stance during the latest Federal Open Market Committee meeting. Tapering was already in the cards and well anticipated by the market. The market focused on the speed of tapering and the timing of potential interest rates hikes. The markets are worried, as illustrated by bringing forward the number of hikes in 2022. Investors already anticipate 2.5 hikes in 2022. The main danger for the markets is a policy mistake. Whether the FED hikes too soon or too quickly makes quite a difference.

Companies have to deal with disruptions and an acute shortage of supplies. They have to decide whether to continue paying high prices for supplies, logistics, etc. Furthermore, they have to assess their capacity to push these price increases on to their clients. This capacity to increase prices will impact future margins and market share. An exaggerated price increase might slow down demand and lead to an entrenching of consumers. For some companies, it’s easier to pass through these additional costs than for others. Upstream and niche companies are best placed to weather the storm.

And finally, we end up with the consumer. Will he be ready to pay up for his shopping needs? Will he have the patience to wait a full year to get a hold of his new car? The outcome of all these choices will tell us how markets will behave next year.
In conclusion, we see number of elements that support us in our case that markets will continue to deliver positive results in the next year:

    • Growth will remain above trend

    • No roaring twenties effect, but at least increased demand from households going forward

    • Capex intentions will increase inspired by the lack of labour force and supply chain issues

    • Support from central banks and policy makers will remain in place

    • Earnings estimates for the next quarters are too low

    • China will continue to grow thanks to selective monetary and fiscal impulses


With regards to positioning, one should favour sectors that will contribute to solving the current issues like supply bottlenecks, lower productivity, disruptive changes, ESG. We especially like those companies with strong pricing power, a focus on disruptive technologies, as well as solid corporate and green Capex. These companies are ideally positioned to benefit from the main trends in 2022.


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