Good morning, it’s Paul here with the SCVR for Monday.

Timing - I'm hoping to be finished by the official end time of 1pm today. There's not much in the way of small cap news. Today's report is now finished.

Lockdown restrictions

Weekend press reports suggest that the Government is aiming to start lifting restrictions in a phased manner as early as March. Dominic Raab is quoted as saying that we’ll probably be heading back to a tiered system, with partial releasing of restrictions in regions which are seeing covid subside, and vaccinations progress well.

Another vaccine is apparently in the pipeline, from Johnson & Johnson, which is a single shot apparently, rather than two. Good news.

Overall then, the news seems supportive of my current portfolio view, that retail/leisure/hospitality/travel could be getting somewhere near back to normal in April/May. After that, my view is the “roaring twenties” view, that I think we could see a big surge in consumer spending, especially amongst the middle class, who have hoarded cash in 2020, being unable to spend on the usual things like eating out, holidays, etc. Which brings me on to…

Inflation & interest rates

We all probably think we’re brilliant stock pickers at the moment, because so many shares have gone up. However, if you look more closely, “multiple expansion” is a major factor behind that - i.e. shares which used to be valued on a PER of say 13 are now quite routinely valued on a PER of 20-30. That’s a one-off gain, and it could easily reverse (mean reversion). Hence why I’m so wary of high valuations at the moment, a lot of which look very risky to me, and investors seem complacent about this risk.

I think the key driver for current high valuations is the expectation of low interest rates forever. As for inflation, people under 35 barely know what it is, because they’ve never experienced it. People under 30 think that interest rates will always be zero, because that’s all they’ve ever experienced in their lives when they become aware of financial matters (from aged mid-teens perhaps).

All this could be in for a rude awakening, if inflation rears its ugly head again. The conditions are perfect - there’s been massive money-printing in all major economies, and Governments are running huge deficits, pouring money into the pockets of households & companies, both of which…

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