Tough Investment 2021: With frequent warnings of global inflation, where are the buying opportunities?

The Fed’s June rate meeting’s over-expected “hawkish” signal once stirred the U.S. stocks, U.S. indices; but European stocks and Asia-Pacific markets seem to be in shock. Perhaps, because the market believes that the Fed will not tighten monetary policy, not afraid of rising inflation; but this time is really different.

Tough Investment 2021: With frequent warnings of global inflation, where are the buying opportunities?


One || Inflation short term or long term? This question blows a wrinkle in the pond; but financial markets see no surprise as global assets rise and fall.

II || Perhaps, because the market believes that the Fed will not tighten monetary policy and is not afraid of rising inflation; but this time is really different.

III || Monetary policy is difficult, and so is investing. The company has been caught in the crossfire of variables, changes, and changes, and some people even call “2021 a tough year for investment”.


Short-term or long-term? This issue is blowing a pool of spring water; but the financial markets are not surprised, global assets up or down.

On June 16, EST, the Federal Reserve announced after the interest rate meeting that the target level of the federal funds rate remained unchanged at 0-0.25%, and raised inflation expectations, although reiterating that rising inflation is mainly from temporary factors, but released the signal that interest rates may be raised more than once in 2023. At the same time, the June meeting point chart shows that a total of seven FOMC (Federal Open Market Committee) members are expected to raise interest rates in 2022, while 13 members are expected to raise rates in 2023.

At the beginning, “as the Fed released a fairly strong ‘hawkish’ signal, the three major U.S. stock indices fell across the board, with the S&P 500 hitting its biggest closing decline since May 18. U.S. 10-year Treasury yields jumped 8.32 basis points to close at 1.57%. The dollar index pulled up sharply by 0.96% on the day, marking the biggest one-day gain since June 2020, while non-U.S. currencies fell across the board, with the euro posting its biggest one-day decline so far this year.” FXTM Fortis chief Chinese analyst Yang Aozheng said. Later, Federal Reserve Chairman Jerome Powell calmed the market in a press conference, and under his efforts, all three major stock indexes narrowed their losses.

Cheng Shi, chief economist at ICBC International, believes that although the market always prefers loose monetary policy, monetary over-issuance always has its own limits and a rational change in monetary policy is taking place. The Federal Reserve made a hawkish adjustment beyond market expectations at the June rate meeting, marking a substantial prelude to the normalization of monetary policy in the United States and even globally under the complex situation.

“The new crown epidemic has brought new supply shocks, and under the pressure of stagflation, U.S. and even global policies are bound to make difficult choices under the challenge of theoretical shackles and practical difficulties. Since the general economic situation is volatile and policy changes are complex, it becomes more important to grasp long-term policy trends and key features in a variety of obscure information.” Cheng Shi said.

Still a “up” word! In the United States, inflation data for two consecutive months exceeded expectations. 5% CPI inflation in May, the highest point since July 2008. Inflation is unprecedented, but Treasury yields have recently moved lower; the market seems to believe that inflation is only temporary?

This is in the view of the chief economist of BUPA Capital Management, Zhiwei Zhang, U.S. inflation climbed further to a new high since the year, but the market once reacted positively, with record high stock market and falling Treasury rates.

He explained that the market voted and believed that the U.S. government made up its mind to tolerate rising inflation. The current unemployed population has also increased by 7 million people compared to before the epidemic began. The fish and the bear’s paw cannot be both, and the U.S. government believes employment is more important than inflation in the current environment. Yellen’s speech shows that even if inflation remains high until the end of the year, the U.S. government will not retreat.

However, Zhang Zhiwei believes that the most important message of the June Fed meeting is that the change in the distribution chart projected by 18 members could be a leading indicator of future changes in the median at a time when fundamentals are undergoing significant changes. As many as seven members at this meeting believe that the Fed should start raising rates in 2022. “That’s why there was more volatility in both the U.S. Treasury and foreign exchange markets, when the yield on the 10-year U.S. Treasury rose from 1.5 to 1.58. The dollar index also appreciated by nearly 1 percent.”

Apparently, April and May U.S. inflation exceeded expectations sharply in a row, making many members of the Federal Reserve Board worried.

For China, the National Bureau of Statistics released inflation data for May showing that the PPI rose 9% year-on-year, an increase of 2.2 percentage points, a new high since October 2008. Jingdong Technology Group Chief Economist Shen Jianguang analysis in this regard, CPI rose 1.3% year-on-year, an increase of 0.4 percentage points over the previous month, less than market expectations; combined with China’s historical experience of the PPI upward cycle and the current global supply and demand gap and policy environment, the current global inflationary pressure is significantly elevated, domestic upstream raw material prices to the downstream consumer goods continue to conduct, triggering the risk of full inflation The risk of full-blown inflation should not be underestimated.

In Europe, the UK CPI data is also not optimistic. Its May consumer price index rose 2.1% year-on-year, compared with an estimate of 1.8%. May CPI monthly rate of 0.6%; previous value of 0.6%; expected 0.3%. The central bank expects inflation to temporarily exceed its 2% target this year. German inflation data is also soaring; data released by the German Federal Statistical Office on the 15th showed that German inflation was 2.5% in May, the fifth consecutive month of positive growth and the highest value since September 2011. Eurozone CPI recorded a final annualized rate of 2% in May, a new high since October 2018.

Is global inflation on the pounce? Since the second half of 2020, Morgan Stanley China Chief Economist Xing Ziqiang has argued that the world will face a comeback of inflation, especially in the US.

Liu Xiaochun, vice president of Shanghai New Finance Research Institute and former president of Zheshang Bank, told the Economic Observer that inflation is hard to anticipate. On the one hand, the U.S. and developed countries have a big release of water, and there are conditions for inflation; on the other hand, the market has expectations and the market absorbs it. But because of geopolitics and the competitive relationship between the two economies, as well as the special demand caused by the restructuring of the industrial chain after the epidemic, the inflation that emerges may be abnormal.


It is clear that “the market has long expected that the June resolution will keep interest rates unchanged at 0%-0.25% and the $120 billion per month asset purchase program will also remain unchanged. So the content of the interest rate resolution will not be the focus of the market, (the focus is) on how the Fed will respond to inflation figures of up to 5%.” Yang Aozheng said.

He explained that the market has long envisioned that inflation and soaring prices may force the Fed to tighten policy early, the vision led to the U.S. 10-year Treasury yields rose sharply since February this year. However, the latest May CPI inflation exceeded expectations to reach 5%, the market vision of inflation to push the Fed to reduce quantitative easing has significantly weakened. U.S. bond yields once fell back to 1.5% below, reflecting that the market has not much expectation that the Fed will change the current accommodative policy in response to inflation.

On June 17, the U.S. 10-year Treasury yield closed at 1.511%, compared with 1.569% in the previous session.

What comes around always comes around. In Cheng Shih’s view, the new supply shock under the Fed policy change as expected. Although the Fed officials have always had a secretive style, but the June 16 Fed rate meeting still conveys multiple important information: First, the Fed has formed a tightening of the Fed’s policy.

First, the Fed has formed a consensus on tightening, the disagreement is only the timing, not the direction, the dotted line forecast implies the possibility of two rate hikes (25 basis points each) in 2023; second, the Fed has launched a monetary tightening action to prepare, maintaining the benchmark interest rate unchanged while raising the excess reserve rate and overnight reverse repo rate, as a hedge against the weir formed in the money market in the early fiscal and monetary policy double loose The Fed will extend its monetary swap mechanism with major global central banks to provide a more effective and efficient way to deal with the global public health crisis. The Fed will extend its currency swap mechanism with major central banks to guarantee unified action under new supply shocks.

Previously, Guo Shuqing, chairman of the CBRC, said that inflation had arrived as expected and was somewhat higher than expected. He pointed out that the monetary policy of developed countries reached an unprecedented degree of easing, which did play a role in stabilizing the market and people in the short term, but the accompanying negative effects need to be shared by countries around the world. Chinese central bank governor Yi Gang said that the recent global crude oil and other commodity prices rose faster. It is a fact that the global inflation level has risen in the short term this year, but there is a huge disagreement on whether inflation can be sustained in the long term.

Undoubtedly, the Federal Reserve’s June rate meeting was more than expected “hawkish” signal once stirred the U.S. stocks, U.S. indices; but European stocks and Asia-Pacific markets seem to be in shock.

Perhaps, because the market believes that the Fed will not tighten monetary policy, not afraid of rising inflation; but this time is really different.

Xing Ziqiang attributed the “very strong policy, very fast vaccine rollout, and very high consumer ‘spare food'” as the three driving forces behind the resurgence of inflation in the United States. Speaking at the “Closed-door Seminar on Economic Growth Analysis” organized by the China Wealth Management 50 Forum, he said that a trilogy of inflation plays out, such as: the rise in commodity prices is the first part of the spillover effect of high pressure economics in the US on the world. The second chapter is the overheating of the U.S. economy, which has brought about a spiral of rising labor costs and inflationary expectations. The final chapter of the inflationary comeback is either the 3T reversal (reverse globalization, reverse platform gigantism, and income distribution equity) driving the Phillips curve to re-steepen and long-term inflation to rebound.

How to deal with global inflation? According to Xing Ziqiang, China can lead to reduce commodity speculation in the short term and ensure supply stability expectations. In the medium to long term, China’s current round of policy has taken the lead in returning to the norm, steadily withdrawing from stimulus, preventing asset bubbles, regulating the “storm” and daring to “gnaw the bones”, in contrast to the easing of stimulus in developed countries, “Chinese economic governance ” has provided the cornerstone of the economic governance mechanism for the global post-epidemic era.

In fact, “over the past 20 years, the United States has also taken some stimulus measures, but ultimately inflation has not risen. But the three dominant forces that have held down inflation over the past 20 years are being reversed. These three forces are the globalization of trade, the platforming of technology, and the corporatization of income distribution.” According to Xing, he summarized them as the “3Ts”.

Zhang Liqiang (a pseudonym), a senior member of the investment community, told the Economic Observer that he feared that the main cause of high inflation and long-term inflation might be China’s supply-side reform and the clearing of excess capacity brought about by the epidemic; and the clearing of excess capacity is not only in China, but also in other major economies in the world. “The clearing of excess capacity has led to a supply-demand mismatch in production that has driven prices up; and secondly, the monetary easing brought about by the epidemic and the flood of liquidity from the simultaneous release of water from countries around the world! This was followed by the ‘3T’.”

Zhang Liqiang said, go look at the capacity data of coal, steel, cement, glass, many chemicals, it will be clear.

Take pesticides as an example, CITIC Securities research report shows that during the period from 2015 to 2020, along with the deepening of environmental protection regulation and increasing industry access threshold, the domestic capacity of glyphosate has dropped from 1 million tons to about 670,000 tons. That is, the capacity of glyphosate fell by 33% in 5 years, and the price rose from the peak of 39,000 yuan/ton in 2018 to 47,000 yuan/ton, with CIMB even looking higher to 60,000 yuan/ton.

Recently, the National Development and Reform Commission said that it is expected that in the coming period, especially before the end of the 14th Five-Year Plan, the domestic demand for crude steel will have some room to rise, will strictly implement the ban on new production capacity, promote the green and low-carbon development of the steel industry, promote the merger and reorganization of the steel industry, adhere to the principle of enterprise main body, government guidance, market-oriented operation, encourage the optimization of the layout of the steel industry, and improve the development of the steel industry Quality and level.

The subtext is “capacity down, and demand is still growing.” Zhang Liqiang believes that the regulation layers, there may be the problem of overkill.

At this time, the market also from time to time, “the price of raw materials rose, but no expansion” of the voice; and double carbon target constraints, the enterprise expansion of power is also insufficient. “Including chemicals, many basic products will still continue to increase prices. Safety and environmental protection, more and more rigid, more and more investment.” Zhang Liqiang said.

But this is not “unique” to China. Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, said that as more economic activity reopens, the pressure on the supply side caused by the continued increase in market demand has become an important driver of price increases. The broad scope of the current price increases means that ongoing price pressures are beginning to surface. In fact, not only are consumer prices increasing, but even wages are continuing to rise amidst high unemployment.

Salman Ahmed believes that the Federal Reserve is framing the recent uptick in inflation as a temporary phenomenon. However, the extent to which inflation has exceeded expectations, and the duration of the high inflation rate, are key indicators to determine whether the current highly accommodative monetary policy is indeed necessary. From a top-down analysis, Fidelity observes that the imbalance between supply and demand continues to increase, and therefore has reservations about the Fed’s repeatedly reiterated position that inflation is only a temporary phenomenon.

However, from the June meeting, it seems that the Fed’s attitude has changed, but is it too late?


Monetary policy is difficult, and investment is not easy. Caught up in the variables, changes, changes, intertwined in one, some people even said “2021 is a tough year for investment.

In Xing Ziqiang’s view, the inflationary environment in the U.S. has a triple far-reaching impact on the investment sector: first, the return of inflation may create an “economic cycle” to make a comeback. Second, the cross-asset class investment framework may change. As inflation returns and interest rates move more, the risk premium for equities may rise, market volatility and rotation may become more pronounced, and the importance of risk management will increase.

And another way to look at it is, “being hamstrung by the stock market, do not dare to adjust the policy significantly. This is also one of the reasons for fueling inflation.” Zhang Liqiang said. As, Powell said, will do everything possible to avoid an overreaction in the market. But it also admits that it does not rule out the possibility that inflation will last longer than expected and fuel rising expectations. “If we see inflation expectations rise, contrary to our base case, we will act to reduce inflation.”

Its statement or imply that high inflation and long-term, gradually recognized by the Federal Reserve and slowly face reality? In this way, how will the global financial markets react? How should investors respond?

But see the dollar index rebounded, June 17, intraday at 91.89; the yuan has fallen, the middle price of 6.4298, 220 BP lower, CNH (offshore yuan) intraday at 6.4629, CNY (onshore yuan) closed at 6.4490.

A shares stabilized and rose, with the Shanghai Stock Exchange Index, Shenzhen Stock Exchange Index and Growth Enterprise Market Index closing at 3525.60 (+0.21%), 14,472.37 (+1.23%) and 3,188.59 (+2.01%) respectively; European stocks and US stocks were mixed.

Perhaps, at this time, the yuan assets own bottom …… “Although China’s May economic data did not meet market expectations, but the data still show unimpressive growth – currency and bond investors are not moved by the data did not meet expectations. The central bank is unlikely to tighten monetary policy further in the near term.” Zhao Yaoting, global market strategist at Invesco Asia Pacific (ex-Japan), believes.

He feels that the recently heated inflationary pressures may not be temporary; and predicts that the Fed will begin tapering its asset purchases sometime late this year or early next year, by about $10-20 billion per month. In terms of investment revelations, the dollar is expected to strengthen in the near term; although there has been a subconscious sell-off in emerging market assets and currencies, emerging markets will be unaffected by the tapering of asset purchases this time unless the Fed tightens monetary policy earlier and more tightly than expected. “Any sustained decline in Asian emerging market risk assets could be a buying opportunity and the assets will rally once tapering expectations have been broadly reflected in prices.”

In the view of Kerry Wong, managing director and head of fixed income for Asia Pacific at Kingmaker, China bonds are attractively valued and offer the benefits of diversification, and there will be continued demand for the asset class from global investors. In addition, the improving fundamental environment will support the medium- to long-term outlook for Asian fixed income markets.

Mr. Wong also noted that global investors’ demand for Chinese onshore bonds is growing. However, he said, the current foreign holdings in the Chinese bond market are still relatively low at 3%, compared with about 30% for U.S. Treasuries. It is expected that the index inclusion of Chinese onshore RMB bonds and the opening of capital markets will continue to drive more capital into the onshore market and further increase the proportion of foreign capital, thus gradually increasing the relevance of the asset class in the world.

And according to Huang Siyuan, Senior Investment Manager of the International Multi-Asset Division of Swiss Bacardi Asset Management, this is a relatively tough year for investments; however, investors still need to be selective to stay invested. He said exposure to potential economic growth will be maintained through a barbell equity structure of long-term structural growth and high-quality economic reboot sectors, as well as real assets.

The S&P 500 is up double digits so far this year despite ongoing market worries. Market worries revolve around fears of austerity, a hedge fund crash, rampant inflation, topping out of economic growth, or any other issues that have arisen during this long-term bull market. “I see these as the challenges of a ‘tough’ investment year in 2021, in stark contrast to the previous ‘easy’ investment environment in 2020, where investors only had to make a few key decisions right last year to deliver returns . This year, we will see repeated decisions by various governments, frequent factor rotations and completely opposite market interpretations. One day, it could be a top in liquidity, a top in economic growth, a top in commodities; maybe the next day, the market will be worried about an overheated economy and warning of inflationary conditions. Sector alternation and market repetition will be commonplace.” Huang Siyuan says bluntly that 2021 could see frequent factor rotation and changes in market leadership. The discussion may shift between overheated and slowing economic growth, or temporary and structural inflation. Risk factors such as cyber attacks, geopolitics, and hedge fund crashes will emerge from time to time, and we will avoid following market hot spots too closely. We will not be influenced by these fast-changing factors, and will instead focus on medium- to long-term trends. “We tend to pick equity barbell strategies between high-quality reopenings and long-term structural growth stocks. As the economy continues to grow, stocks are more attractive than cash and bonds.”

What is a barbell equity strategy between long-term structural growth and economic reopening sectors? It consists of long-term structural growth, high-quality economic reboot sectors and real assets (an important part of the allocation), explains Siyuan Huang. The former includes opportunities in China’s mobile game and short-form video sectors; the intermediate covers transportation, travel, restaurants, services, consumer, banking, tools, beauty/care, healthcare, etc., with a common focus on quality, brands and strong competitiveness; the latter, such as “gold and commodities”.

However, in the short term, on June 17, COMEX gold futures fell below $1,770/oz, falling 4.83% during the day.

And “whether inflation is short-term or long-term is difficult to prove within this year. Therefore the attitude of the U.S. government is difficult to change within this year. At the same time there is too much money in the financial system, a large amount of cash piled up on the Federal Reserve’s reverse repo account, the balance of this account has exceeded $500 billion, a record high. Financial institutions are not getting any interest on their money in this account. Such a flood of liquidity in the financial system pulls down interest rates on U.S. Treasuries and pushes up the U.S. stock market. In this case, the market chose ‘don’t fight the fed’ don’t fight the fed,” said Zhang Zhiwei.

This article is from WeChat public number: Economic Observer (ID: eeo-com-cn), author: Ouyang Xiaohong

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