Uptick in Rates… but the Economy chugs along

Michael Rudd, CFA | President, CEO and Portfolio Manager

Last week, we wrote about inflation and noted that expectations and bond markets had been reacting to increasing prices. We reprinted Figure 1 below to remind readers how high inflation has come since the early 1990s. Out of control inflation is viewed negatively by investors (and the general public), but we expect global central banks will begin raising administered rates this spring to help manage this risk. We also thought that we would point out that a strong economy can provide a balancing effect, where many levers can be pulled to help mitigate inflation. While there is data that show economies in general are strong, we find it useful to follow management commentary as they discuss their results during quarterly earnings calls. Below are a few quotes that we found interesting and thought that we would share:

“…broadly speaking, the economy has demonstrated resilience to the impact of Omicron. GDP is growing. Companies are performing well and job creation continues, all of which underpin business, investor and consumer confidence.” – Moody’s (MCO) CEO Robert Fauber

“The US, China, and the EU, as well as Japan and South Korea, are expected to nearly double the industry’s (2021) annual capital expenditures (CAPEX) of $150 billion based on external source data. We are aware that this has created concerns about potential oversupply. However, we believe that the significant growth prospects of the semiconductor industry do require substantially more capacity and that given the high levels of capital expenditure to support all this, industry partners will apply sufficient effort to sustain an accessible and efficient innovation ecosystem.” – ASML (ASML) CEO Peter Wennink

“In terms of the inventory flow, this supply chain situation is going to continue on for at least the next 6 months. We don’t see it actually improving. Many of the ports are quite backed up.” – Capri (CPRI) CEO John Idol

“This means that” while inflation and supply chains are still in flux, corporate managements generally remain upbeat on the economies in general and the medium-term prospects of their businesses specifically.  We view this as ultimately positive if existing inflation can be managed and, as an investor, you have a long-term investing outlook.

Pathfinder Asset Management Ltd. | Equally Invested™
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Sources: Pathfinder Asset Management Limited

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