Whatever it takes: Season 3
This summer marked a decade since Mario Draghi uttered his now famous phrase, on 26 July 2012, signalling the start of an operation to save the euro in response to the debt crisis in Southern Europe. And the second part of that statement – “And believe me, it will be enough”¹ – was just as important, because the entire financial community and the markets did indeed believe it.
In Season 2 of Whatever it takes, the countries hit by Covid and the ensuing lockdowns launched fiscal support policies never seen in peacetime – even though, for the French President, we were at war, with a laundry list of expenses including household assistance, consumer support, an infrastructure plan, business subsidies and tax adjustments.
Since the start of 2022, Season 3 has re-focused on most of the world’s central banks, which are doing whatever it takes to combat inflation and aggressively raising their rates. But today’s Whatever it takes is more about the damage inflicted on the economy when trying to curb rising prices.
Admittedly, Europe’s latest inflation figures, which are higher than the United States’, are a headache for more than one central banker. While France may look like the star pupil, with harmonised inflation at “just” 6.5%, the eurozone is sitting at over 9%. Of the Economic and Monetary Union’s 19 Member States, inflation is over 20% in three countries², and above 10% in ten³. Clearly, it’s high time to act, whatever the consequences on activity, with an energy crisis looming over the coming winter and the States’ debt rates at their highest point in recent memory. The central banks’ message is clear: they will fight inflation, even if it triggers a severe economic slowdown or even a recession.
This all argues for caution on the equity markets as autumn begins, as it’s very difficult to predict where US and European rates will land. As such, we are maintaining a strong bias toward quality companies with sound balance sheets in our portfolio, regardless of their style or capitalisation. The major equity markets’ ratios have corrected sharply over the past year, without becoming glaringly undervalued. Keep the popcorn close and see what happens in the next episode.