What to expect from the Year of the Ox

Iain Power, CIO at Truffle Asset Management explores why asset prices have recovered so quickly and continue to set new daily records.


To say that the Covid pandemic has changed our lives would be a huge understatement. The impact of Covid has permeated our lives and society in so many ways it is hard to remember what “normal” was. Not only has Covid led to a huge loss of life and left millions of people unemployed, but it has also changed the way we work, the way we interact socially and unsurprisingly resulted in a huge spike in mental health disease.

Financial asset prices on the other hand have recovered all their Covid losses and have rocketed up, hitting new highs, even though Covid remains real and part of our everyday lives.

So, what gives, why have asset prices recovered so quickly and continue to set new daily records? The reality is that asset prices have been supported by several factors:

  • Governments and central banks responded with an unprecedented amount of fiscal and monetary stimulus. According to BlackRock Investment Institute, the estimated economic impact of Covid is around one-quarter of the loss experienced during the Great Financial Crisis (GFC), yet governments and central banks, despite the smaller economic impact, have responded with fiscal stimulus packages four times the size of that deployed during the GFC.
  • This stimulus has supported businesses and consumers through the pandemic and underpinned asset prices given the huge injection of liquidity into financial markets. Unfortunately, the stimulus is not free and public sector debt levels have exploded, reaching levels not seen since World War 2.
  • Covid infection rates broadly continue to fall at a time when the vaccination process is accelerating. By the end of the year, many of the world’s leading economies will have made good inroads in their vaccination process, creating a pathway for society and the economy to return to normal in 2022.
  • Given the extreme levels of fiscal stimulus there is a significant amount of savings and disposable income which will inevitably enter the economy once Covid is behind us. We assume the economic recovery to be much stronger than expected and we could see an environment like the Roaring Twenties post the Spanish Flu pandemic and the conclusion of World War 1.
  • We expect a powerful earnings recovery for global equities from the low base experienced in 2020. This should be stronger for those stocks which are more exposed to the incoming economic tide, for example, emerging markets and value stocks. This recovery in earnings will create some headroom for PE multiples for these shares to rise given the improving growth outlook. Investors will continue to shift their portfolios out of high-growth shares like the expensive tech sector, and into more cyclical and economically exposed stocks in their search for the best returns.
  • Core inflation levels remain subdued and central banks maintain a dovish stance, which has helped risk assets set record prices.
Iain Power, CIO at Truffle Asset Management

While the above backdrop is positive for equities, more specifically cyclical and economically sensitive stocks, risks are building on the horizon.

Over the next 18 to 24 months inflation will surprise on the upside and real interest rates, which are currently negative, will normalise to at least zero. This will create a headwind for longer-duration assets and high-growth stocks.

Truffle has positioned its portfolios for a world of higher inflation and similarly, has exited most of its high-growth companies which no longer have a significant margin of safety and remain vulnerable to rising long-term interest rates.