Cazenove's Chris Rice says extreme policy will lead to rising bond yields in the West and rising inflation in the East.
Cazenove’s Chris Rice says extreme policy will lead to rising bond yields in the West and rising inflation in the East.
If 2010 was the year extreme policy worked, my hunch is 2011 will be a year marked by the unintended consequences of that policy. The world economy entered 2011 in decent shape, and, in the case of the corporate sector, in positively rude health.
Many of the businesses we monitor are at or exceeding the peak margins of the previous cycle. So apart from the slight inconvenience of the euro sovereign crisis, we enter 2011 with boardrooms bullish and market strategists forecasting another very good year for equities.
The two unintended consequences of extreme policy we can expect to dominate over 2011 are rising bond yields in the West and rising inflation in the East. In the case of the former, different Western nations are experiencing rising yields for ostensibly different reasons. Is the US yield rising as a result of further fiscal pumping or rising fears over the deficit?
Are German yields rising as a result of strong growth or a perception the bund will be sullied by a fiscal union with its troubled neighbours? At least we know why Spanish and Irish yields are rising - the more traditional increase in premia is a result of the fear of default. Whichever ex-post explanation one chooses, global bond yields are picking up - clearly not the intended consequence of QE.
So, 2011 starts with extraordinary policies and perhaps we may see extraordinary consequences, intended or not. But let us think of this business cycle as perfectly normal, if somewhat magnified. The outperformance of industrial and commodity cyclicals started in November of 2008, so the recovery phase of the cycle has been running for 26 months now.
By any analysis, we have passed from the recovery phase to the expansion phase of the cycle. The investment clock now ticks from these early leaders towards consumer and growth styles as industrial recovery leads the way to higher employment and household incomes. There are sound reasons for this classic link to be muted in this cycle in the Western economies, though perhaps less so in the emerging economies. However, it is still the right part of the market in which to fish.
Chris Rice is manager of the Cazenove European fund