Sunny side up

Around 16 months after the outbreak of COVID-19 in March 2020, Burkhard Varnholt paints a positive assessment of the financial markets. Most stock exchanges have developed into high-pressure areas that have brought plenty of sunshine to equity investors. And there are multiple factors that suggest the outlook for the financial market remains bright.

August 6, 2021

Economic outlook with Burkhard Varnholt

Chief Investment Officer of Credit Suisse (Switzerland) Ltd. Vice-Chairman of the Global Investment Committee

We could argue about what type of weather is best until the cows come home. Some people prefer it cooler, some people prefer it warmer. Some like to seek shelter from the wind, while others have a passion for sailing and long for good wind conditions. The consensus, however, tends toward sunny without too much wind – no cold snaps, no storms, and definitely no storm damage.

The performance of the stock markets since the COVID-19 low on March 23, 2020 comes very close to the ideal scenario favored by the majority. Fears of a persistent period of bad weather proved to be unfounded; that much is clear, looking back. And as far as the outlook for the future goes, prevailing meteorological conditions give plenty of reason for optimism.

Let’s take a closer look at a few factors that are currently determining the weather in the economy and especially in the financial markets.

Inflation more of an apparition than a nightmare

Let’s start with inflation, which for months now has repeatedly been painted as a specter of doom, but ultimately has turned out to be more of an apparition than a nightmare. The threat of rising inflation is very low, not least because the economy remains extremely competitive. Aside from the cyclical bottlenecks affecting, for example, shipping containers, semiconductors, or crude oil, companies have no cause to raise their prices. In fact, most companies have been able to bolster their margins so much since the outbreak of the pandemic that they have easily been able to shoulder higher prices for commodities, transport, and logistics services, or increased salaries for specialists.

In addition, pressure from competitors is preventing many providers from hiking prices. While furniture companies such as Ikea are currently facing significantly higher transport and logistics costs, they still have not passed this on to their customers.

The situation is extremely different when it comes to assets, such as securities, real estate, or works of art. Here, prices have climbed sharply, which is mainly attributable to low real interest rates and the dearth of investments. In the case of real estate, the COVID-19 crisis has pushed demand through the roof. The additional space required for home offices, the need for a modern IT and building infrastructure, the desire for a personal vacation home as an escape from COVID-19 and an alternative to traveling – all of these factors combined have propped up the real estate market and caused local house prices to skyrocket. That said, this represents asset price inflation and should not be considered inflation in the narrower sense because it does not have an adverse effect on the purchasing power of money. If a Monet or Picasso fetches 30% or 40% over asking on the art markets, this is of little consequence to the consumer price index.


The bigger picture

The most important attributes of successful investors include the ability to capture the determinants as a whole and link them together. This produces the big picture. It shows the entire investment spectrum and creates transparency to make investment decisions easier.

Deglobalization canceled

As the COVID-19 pandemic upended societies around the globe, more and more people began to predict the end of globalization (or hoped that would be the case). Some of the arguments put forward seemed thoroughly plausible. Shorter supply chain = higher security of supply, so went one of the frequently cited equations. But this is easier said than done. Indeed, the numbers tell a completely different story. Never before have so many goods been shipped around the globe.

Companies kept a firm grip on their global supply chains and even had to contend with backlogs following the COVID-19 shock. A personal and non-representative survey of a dozen Swiss companies revealed, for example, that Chinese suppliers were only replaced in isolated cases. The global division of labor still remains one of the most effective measures to combat poverty in developing and emerging countries, wrote one columnist in the Swiss newspaper NZZ recently.1

Private individuals played their role in this globalization as well. They used the money they would have normally spent on traveling and eating out on buying more physical goods, which gave a further boost to global trade.

Globalization as an opportunity for climate change

A common refrain is that globalization is incompatible with sustainability and compliance with ESG criteria. To date, however, there is no convincing evidence that a localized world is more sustainable than a globalized one. It is unclear and up for debate what impact globalization has on climate change. There is broad consensus, on the other hand, that comprehensive measures are needed to stem the tide of climate change. The re-signing of the Paris Agreement by the US has given additional momentum to the call for action.

The simplest and fastest way to bring globalization and climate change under one roof is to step up CO₂ pricing. Europe – which operates the largest market for CO₂ certificates in the world – is spearheading developments in this area. However, we are still at the very beginning of this process, because to date only electricity producers have been subject to CO₂ pricing. The next step, international approval permitting, is to extend CO₂ pricing to freight by sea, air, or road. The construction and agriculture sectors will likely be the next to follow.

The power of the financial markets

The extent to which industry is rethinking and re-imagining itself can be seen in the energy sector. Leading companies from the industry have used the profits made from the crude oil business to diversify their exploration of renewable energies. The fact that this move away from fossil fuels has been prompted by pressure from investors does not make it any less significant. If the planet were able to pick its patron saint, the financial markets would make the shortlist. They influence companies’ capital costs and thus help set the strategic course for the future. Indeed, the energy sector has listened to the financial markets and protected itself against losing any more significance on the stock exchange than it already has. Let’s remember, 15 years ago the energy sector still constituted around one-third of companies in the S&P 500; last year, its share had shrunk to just 5%.

Another example: Every Opel that leaves the plant is valued by the financial markets at CHF 9,000 on average. In the case of a Tesla, the average valuation is CHF 1 mn. Such a striking difference in market value must set the alarm bells sounding in boardrooms in Detroit, Wolfsburg, Munich, and Stuttgart. At the end of the day, all automotive manufacturers should strive for a valuation of Tesla proportions. Here, too, the power of the financial markets will leave indelible traces on the report cards of the established players.

Economy in upswing

While it is not immune to political or pandemic-related setbacks, the global economy is once again exhibiting impressive rates of growth. In April 2021, the International Monetary Fund (IMF) forecast global growth of 6.0%. The key drivers are immeasurable liquidity and private savings, as well as the billions state governments have doled out for infrastructure and other relief programs. The successful rollout of vaccination campaigns is likewise propping up growth.

Leading the pack in terms of regional growth are Asian emerging and developing countries such as China, India, Malaysia, and the Philippines. The World Bank has projected their growth at 8.6%. This is momentum the euro zone can only dream of (+4.4%).

Percentage change in real gross domestic product (GDP)

Last data point: April 1, 2021
These forecasts are not a reliable indicator of future performance.
Source: International Monetary Fund (IMF)

Infrastructure as driver of growth

Shortages of skilled workers, rising prices for construction materials, long delivery times due to supply bottlenecks for semiconductors – these and similar developments are currently being felt by normal people as well.

At the macroeconomic level, however, the increased number of infrastructure projects ongoing in many regions of the world is responsible for the strong growth spurts. The European Recovery Plan from the European Commission and the Build Back Better (BBB) Plan from the Biden government promise fundamental “rebuilding.” Both plans intend to harness collaboration between public and private organizations within the scope of public private partnerships (PPPs).


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The American Rescue Plan, which has a price tag of USD 1.9 trn and saw 75% of all US households receive stimulus payments of USD 1,400 per eligible individual, is set to be followed in October 2021 by the Build Back Better Plan. At USD 2.3 trn, the plan, which also includes the Green New Deal, would be the largest US fiscal project since Franklin D. Roosevelt’s New Deal. It is intended to create attractive new jobs in the US and to improve infrastructure for mobility, energy and water supply, and education. And, of course, it aims to promote the competitiveness of the United States.

To finance the plan, the government wants to take out additional loans, raise corporate taxes from 21% to 28% – under President Obama, the corporate tax rate was 35% – and introduce environmental incentive taxes and a global minimum tax rate for corporations. This would affect corporations that generate large profits abroad but pay practically no taxes to the US treasury.

The plan represents nothing less than a fundamental transformation of the US economy. The intention is to reduce the ecological footprint to a significant degree, for example by laying the groundwork for the US to procure more than 80% of its energy requirements from renewable sources by 2035. Washington wants to take a leading role in global environmental policy – an ambition the world will have to get used to first.

Burkhard Varnholt

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1 “Es lebe die Globalisierung” (Long Live Globalization!), Gerald Hosp, NZZ of May 8, 2021.