Slowly but surely, the coronavirus pandemic is being overcome thanks to the small miracle called “vaccine”. Our economy is also returning to full speed thanks to the massive fiscal and monetary stimulus.
Very soon after the outbreak of the pandemic in 2020, we correctly assessed its unavoidable major impact on financial markets and your portfolios. Your portfolio still benefits fully now. Equity markets are around 15% higher than at the beginning of the year and our equity portfolios benefit from this positive environment. And, even though bond market interest rates have risen, our bond portfolios are also holding up well, thanks to the large weight of inflation-linked bonds.
The major topics of the past six months have continued to be the fiscal and monetary stimulus. To these has been added the great debate about inflation. For our views on this, we refer you to the recently recorded video that you can find on our You Tube channel: ‘CapitalatWork Foyer Group SA’ – Market Update Juni 2021.
Another big topic is the discussion around corporate taxes. The United States, under the impetus of Team Biden, is taking the lead here. We are heading for a global minimum tax for companies of 15%. For the top 50 multinationals, this would mean an additional tax bill of €80 billion. The potential impact on these companies is a fall in their profits of between -5% and -10%. On a positive note, these companies will not then be faced with a terrible tangle of national tax rules. The simplicity of approach is a very positive point. A potential trade war between Europe and the USA will also be avoided. In the short term, it is even positive news for the companies in your portfolio.
As far as fiscal stimulus is concerned, the infrastructure plan in the USA is the most important news. We have already pointed out in the past the importance of the famous “checks and balances” in the American political landscape. The Democrats have won the elections. But their majority is wafer-thin. This means that in exchange for the realisation of his infrastructure plan, Team Biden will either have to temper the hoped-for increase in corporate taxes or perhaps even scrap it altogether. In the short term, that is also positive news for the companies in your portfolio.
As for monetary stimulus, everyone is constantly listening out for the slightest comment from central bankers. The tone has changed a little. We could elaborate at length on this here, but the bottom line is that interest rates will continue to remain low for a long time to come. Ultimately, interest rate hikes of even 1% are not game changers. And as for the massive government bond buying programmes of the central banks, these too will continue for some time yet. We will have more clarity on this after the summer. It is guaranteed to be a source of volatility in the financial markets. The bottom line here, even with higher inflation, is that central banks cannot confront our economies and debt mountains with sharply rising bond yields. In our bond portfolios, we stick to inflation-linked bonds which offer protection against higher-than-expected inflation. A strategic choice that has served us well since the outbreak of the pandemic.
Finally, you know that we also like to look at the world through the eyes of the companies in which we are invested. Our companies will very soon be announcing their second-quarter results. That is always an important moment in the context of our investment strategy.
And, in the meantime, we continue to focus on where our expertise lies: liquid listed equities and bonds.