CFM INDOSUEZ Wealth Management - 2020 Annual Report

17 - Accommodation: the current situation is unusual, with the very rapid rebound of the US economy on the one hand, while on the other hand the US Federal Reserve (Fed) has the intention to extend its accommodative stance up to 2023. The real fear for the markets would thus be that the recovery overheats, leading the Fed to abandon its zero-rate policy. Behind this acronymtheremay lie a change in regime, or at the least a new equilibrium determined by the most pro-cyclical economic policy ever seen, in a US economy already expected to growby 6% this year. In substance, no one can say at the present moment if this recoverywill lead to a faster andmore sustainable acceleration in wages and inflation. One thing is certain: a stronger recovery would result in a faster decrease in unemployment, which could again raise the question of a more rapid normalisation of short- term rates by the Fed, which has ruled out this prospect before 2023 for the time being. Regarding long-term rates, they did not wait either for the Fed or for an answer from the economists, and the yield curve has been steepening since last summer. Two discoveries lie behind this steepening. Firstly, more a painful reminder than a discovery: the Fed does not control everything, and especially not 10-year yields. Secondly, long-term rates not only reflect inflation expectations (which could stabilise), but also the strength of the recovery (which is boosted by the stimulus plan). Investors therefore find themselves faced with a complex equation: remain inbonds, which are starting to level off, or sell them to buy equities, with more attractive return prospects, but more volatile, and some of them are not immune to a rise in rates. This context indeed signifies a significant repositioning by investors, frombonds into equities, and on the equity markets, from growth stocks to cyclical and discounted stocks. The surprise could also come from the Forex market, where a pause in the weakening of the dollar during this phase could weaken some of the less solid emerging countries if this appreciation were to gain strength. In this complex and changing economic and financial environment, our experts are at your side to offer you their knowledgeable viewpoint and support you in achieving your ambitions. Written on 11 March 2021