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Blockification

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Stockholm (HedgeNordic) – After decades of lurking in the shadows, inflation is back with prices rising all around the world. Perhaps surprisingly, inflation rates and inflation trajectories differ substantially across countries – even among developed countries. As Jonas Thulin of Erik Penser Bank puts it, inflation trajectories and economic growth rates will differ across “blocks” due to a phenomenon he describes as “blockification.”

“When we now discuss market conditions, we cannot refer to the market as one whole as such anymore,” says Thulin, Head of Asset Management at Erik Penser Bank. “We moved from globalization to regionalization and now we are into a shift more similar to blockification, if that’s a word,” he emphasizes. “We are going to have distinct economic blocks and depending on where you put your money, you are going to have to think very differently in terms of inflation and growth.”

“We are going to have distinct economic blocks and depending on where you put your money, you are going to have to think very differently in terms of inflation and growth.”

“From a US perspective, we have seen the worst in the sense that the pricing of inflation has been coming down and inflation peaked clearly in March,” argues Thulin. “From a market point of view, inflation has peaked a couple of months ago and has fallen by almost a full percentage point, which is a huge move in pricedinflation,” he elaborates. “If we are going to listen to that side of the bond market, we should be calmer and more relaxed, because we can obviously see the peak is behind us and price inflation expectations are coming down.”

“From a US perspective, we have seen the worst in the sense that the pricing of inflation has been coming down and inflation peaked clearly in March.”

Aside from the impact of significantly higher commodity prices, notably oil and gas, inflation in the US has been mostly driven by strong demand and the consumption boom stemming from the fiscal stimulus in response to the pandemic. The main drivers of inflation in Europe, meanwhile, appear slightly different and more persistent from the ones in the United States. In the euro area, inflation reached 7.4 percent in March, the highest level since the introduction of the single currency. This figure, of course, masks some divergence across the 19 euro area member states, and inflation in Europe is increasingly becoming more broad-based. The effects of Russia’s war in Ukraine added to pre-existing drivers of price rises in Europe related to the effects of the post-pandemic recovery.

“From a European perspective, we have to live with these inflationary pressures for a longer time,” says Thulin. “Compared to the wage-driven inflation in the US, which is most likely good for equity markets, Europe faces more supply-pressured inflation than the US,” he continues. “There is good and bad inflation, and the supply chain-driven inflation that we have in Europe is bad inflation.” According to Thulin, at a hypothetical inflation level of five percent in both Europe and the US, the equity market will reward demand-driven and will punish supply-driven inflation.

“From a European perspective, we have to live with these inflationary pressures for a longer time. Europe faces more supply-pressured inflation than the US.”

Before Russia’s invasion of Ukraine, inflation peaked in October, November of last year, according to Thulin. “The supply bottlenecks started to ease up, price inflation peaked and you could see the headline inflation figure starting to roll over,” argues Erik Penser Bank’s Head of Asset Management. “But then we have the war, which added a second leg of inflationary pressures that triggered a re-acceleration of inflation,” he continues. “In the US today, we are now back to where we were at the peak of October, November last year. This is a good sign, as we have now moved past the war-induced inflationary pressures in the US.”

Energy Transition

The US was quick to impose an embargo on Russian energy imports in response to Russia’s invasion of Ukraine and Europe has made some steps to cut its dependence on Russian energy as well. The case for a rapid energy transition, therefore, has never been stronger and clearer. A speedier transition will add to the already-strong inflationary pressures. “We always knew that the energy transition would push inflation upwards,” says Thulin. “We are going to try to make this energy transition faster, which already comes on the top of the inflationary pressures out of the pandemic, and on top of the effects of the war.”

“We always knew that the energy transition would push inflation upwards. We are going to try to make this energy transition faster, which already comes on the top of the inflationary pressures out of the pandemic, and on top of the effects of the war.”

“We have three layers of inflation,” concludes Thulin. “That does not mean we will back off from the energy transition and from sustainability,” he argues. “If Europe’s dependence on Russian energy taught us anything in recent months, it is that we need to build our own energy systems,” says Thulin. “We have to invest in green and new energy sources.”

Blockification

“As mentioned before, we are passed the terms of globalization, deglobalization and even regionalization. The word we use right now is blockification,” explains Thulin. “We are managing money as if we are in a blockification of the world, which is quite pessimistic,” he emphasizes. The US will create or strengthen its economic block, according to Thulin, and Asia will do the same. “Europe will try to sort this out due to the fact that, for whatever reason, we decided in the past to be energy-dependent on Russia. We have a huge transition to make, which is obviously going to cost.”

“We are passed the terms of globalization, deglobalization and even regionalization. The word we use right now is blockification. We are managing money as if we are in a blockification of the world.”

From an asset allocation perspective, this process of blockification forces money managers to be “very choosy and picky,” according to Thulin. “If you have a more difficult and uncertain environment in Europe compared to the US and Asia with hardships in terms of limited ability to get rid of inflation and other lingering concerns, what will happen to capital flows?” asks Thulin. “We can already see massive capital outflows out of Sweden, for example, we see outflows from Europe that are going to the US or South America,” he continues. “The question of what would happen from a structural point of view in Europe is one of the tougher questions that we cannot model or really grasp at this point. But I really cannot see a positive scenario for Europe just yet.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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