12th Jun '21 by Edmund Shing

7 comments 1740 reads

Summary:

Podcast: Why Buy Banks?
The big question: Inflation – is the bogeyman back?
The argument for buying Value and Small-Cap stocks
What to keep an eye on this week...

Podcast: Why Buy Banks?

1) Are we moving towards a cashless society and the disappearance of bank branches?

2) What is the risk of bankers and analysts being replaced by machines and robots?

3) Are new online competitors threatening established financial institutions?

4) What are the dangers of investing via online trading platforms?

5) Why are bank stocks back in vogue today?

Why Buy Banks?

You can also listen to our podcasts on Apple Podcasts, Podcast Addict (Android) and Spotify, Just search for “BNP Paribas Wealth Management”

Is the inflation bogeyman back?

This has been a strange week. One thing I have found unusual has been the reaction of the bond market, to the recent run of strong US inflation data.

In fact, not only have inflation numbers risen, but they have hit high levels not only in the US but even in Europe. You've seen headline inflation hit 2% for the month of May in the Eurozone for the first time in a very long time.

Eurozone headline inflation back at 2%

Source: tradingeconomics.com

But the US is what grabbed the real inflation headlines, with a huge May print that outstripped consensus forecasts at 5% in May.

US headline inflation hits a huge 5%

Source: tradingeconomics.com

Of course, this was largely driven by a few key factors such as:

gasoline (56.2% year-on-year),
used cars and trucks (29.7%),
utility gas service (13.5%),
transportation services (11.2%) and
apparel (5.6%).

US gasoline has recovered massively since May 2020

Source: tradingeconomics.com

For the first time in many years we can start to talk about whether inflation could become a serious problem in the months and years ahead.

In other words, has there been a change in the inflation regime from disinflation, which has been in place, really since the great financial crisis of 2008 and 2009? Has this now churned into an inflationary regime of the sort seen perhaps in the 1970s and early 1980s?

Certainly, if we look at some of the headline inflation…

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carvalio

12th Jun '21

Thank you for these posts Edmund, as someone new to investing they are very accessible and informative.

Momoko Miyamoto

thanks Edmund, enjoyed the Podcast and your clear analysis. On balance I think high inflation will be temporary. Labour market bottlenecks will most likely ease when people stop being paid to sit at home on furlough. Disposable income will likely fall once life returns to normal and rents and rail tickets need to be paid for. Seaborne shipping costs will likely subside once the current surge demand eases. The chip shortages for cars are well documented but these tend to be low end chips easily made with cheaper equipment and I've seen anecdotes of car parts suppliers investing in their own fabs, besides the world is unlikely to be buying laptops and iPads at the same rate as in 2020. Despite some protectionist mutterings, we still live in a globalised economy where production will shift to low cost regions.

The mountains of printed money will need to end up somewhere but will likely exclusively end up in asset price inflation as we have seen before.

Edmund Shing

Indeed Momoko,

I also believe that everyone is apt to forget about the profound deflationary influences still in the global economy, thanks to waves of innovation improving the efficiency of all manner of goods like lithium-ion batteries and solar panels, not to mention even the humble internal combustion engine...

In any case, there is also the fact that consumers can vote with their wallets and wait rather than pay crazy prices for whatever goods or services they want. Or substitute the inflation good or service with another that is cheaper. My suspicion is that there is still an element of post-lockdown profiteering on the back of temporary supply disruptions, which competition will take care of in time.

Edmund

Wilkonz

13th Jun '21

Many thanks Edmund. Encouraging observations on inflation. It looks as if £EQQQ is poised for another surge as investors shift cash from value to technology / growth. Semiconductors (SMH) and cybersecurity (HACK) will probably lead the way. Taiwan Semiconductors (TSM) seems to be lagging though, for whatever reason.

Michael Tee

Hi Edmund,

It is pleasing to read that you are leaning towards the idea that inflation is transitory and I hope this is the case. I note you are keen on buying companies / commodities with pricing power that can thrive in an inflationary environment so you are positioned for inflation nonetheless which is sensible.

I also just read the following short piece from Ruffer on inflation which provides an interesting counter-balance:

The Green Line | Thinking | Ruffer | Investment Management

For my part I suspect inflation will come. The Fed say they have the tools to deal with it and speak confidently but I think they will be hard pressed to manage it once it arrives.

Michael.

MontanaDawn

15th Jun '21

Thanks for a great read Edmund!

Anthony127

22nd Jun '21

There does seem to be an emerging US Fed and BoE consensus that inflation will be transitory. The Bond Market also seems to be supporting the consensus with it's modest 10 year rates and I am left wandering whether the Bond Market is an accurate voting machine in these types of matters.

However reading the commentaries in the weekend FT and Sunday Telegraph it seems that the consensus isn't universal and that some commentators think inflation will get out of control. At last weeks Fed meeting the prospect was raised of bringing forward interest rate hikes to late 2022 which was seen as a shift in policy and suggests perhaps the Fed is becoming slightly more concerned.

I think there is a definite connection between inflation and Banks. The podcast gave various reasons for buying Banks. If inflation doesn't prove to be transitory then interest rates will have to rise and this in turn should benefit Bank's Net Interest Margins (the difference between deposit and loan rates) which are normally one of the biggest drivers of Bank profitability, and I think this would be another reason for buying Banks.

I would be interested to hear other views on how inflation plays out and any thoughts on Banks.

Thanks to Edmund for raising these macro issues in another concise and thought provoking article.

Market Musings 12/.06/21: Is Inflation just a flash in the pan?

Summary:

Podcast: Why Buy Banks?

Why Buy Banks?

Is the inflation bogeyman back?

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Edmund Shing

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