The virtues of uncertainty

The shock wave unleashed by the latest euro zone inflation figures has forced the ECB to tweak its monetary policy and, most importantly, the sequencing of its asset purchases. We’ll let the economists draw up new rate hike scenarios We are more concerned here with which assets to overweight in this new environment.

What inflation are we talking about?

So far, the wave of inflation in Europe has unfurled mainly through the channels of commodities and supply chains Little of it has shown up on a national level in second round effects, as the output gap remains in negative territory

Hence, for the time being, it makes sense to overweight companies that are situated at an earlier stage of the supply chain, as they theoretically have the greatest capacity to raise prices Accordingly, B 2 B (business to business) and B 2 G (business to government) companies should be overweighted vs B 2 C (business to consumer) ones

As we stated in our investment strategy, we are overweighting industrial companies, as most of them are situated at an early stage of the supply chain These sectors will benefit from the heavier capital expenditure that is being driven by government stimulus plans Keep in mind that these companies are willing to raise their capex because their returns on equity are rising A positive spiral is therefore taking hold, boosted by the operating leverage of these “companies

At the other end of the supply chain, B 2 C companies will have the greatest difficulties in passing on higher input prices In the event of significant wage hikes, the impact on their margins, which are already under pressure, will be even greater.

What about the banking sector?

While this is one of our favourite sectors and the first beneficiary of higher interest rates, keep in mind that financial conditions are worsening with widening credit spreads and declining equity prices. But the parameter that is of greatest shortterm concern is the 10year Italy/Germany spread.

It has widened considerably over the past weeks and is a perfect illustration of investor nervousness, given the ECB’s plans to phase out purchase programmes earlier than expected So, some shortterm caution is in order At the very least, avoid