Travel restrictions and the transition from recovery to expansion
Travel restrictions are gradually being lifted around the world and there are signs that we are beginning to transition from recovery to expansion. The first sign to support this transition is that global growth has exceeded the previous peak reached in Q4 2019, indeed global real GDP is expected to grow at its fastest rate since 1973 this year. Growth thus far in 2021 has been incredible both in terms of economic output and company profits. Whilst global and US GDP are likely to have recovered to pre-Covid levels, not all are recovering at the same rate however. The US posted annualised growth rate of 6.4% in Q1 but the Eurozone contracted by 0.6% over the same period. It should be noted that leading indicators point to optimism in the region and it appears that there has been strong rebound in the Eurozone economy in Q2. Some surveys suggest that employers in the region are hiring at the highest rate for 20 years and economic sentiment is at a 21 year high. Travel restrictions have been impacted by a number of countries being on target for vaccination rollout especially in the UK and the US with the Eurozone catching up after a somewhat slow start. The region is likely to be 3 months behind therefore there is potential for strong returns there, mirroring those of other regions albeit with a 3 month lag.
There are those who ask whether we have come too far already, well Q2 earning season is underway and it is widely expected that companies will deliver growth of around 60% compared with last year. Q1 earnings were 21% stronger than forecast and US earnings have exceeded pre-Covid levels. US earnings have beaten forecasts by around 20% for each of the last four quarters
So where does this put us? There appears to be strong growth, ample liquidity support, low interest rates, comfortable levels of inflation and elevated equity multiples. There are also some lingering effects putting upward pressure on inflation. The rises in commodity prices, supply chain disruptions, unemployment benefits and labour shortages are causing an increase in wages. With a typical non-financial company having 65% of their total cost base being labour costs this could yet impact. This has already been seen in China where it has been reported that producer prices going into factories are climbing at 9% per annum!
There will likely be some volatility along the way and lets not forget about other factors. We have already seen authorities in China tighten policy in order to crackdown on financial risk. The heightened scrutiny of technology companies in the region has impacted on their share prices massively. We would caution against being over complacent and also about feeling that markets have come too far.
