“There’s a wall of worry that markets are trying to climb at the moment. We have an energy crisis, supply chain issues, higher inflation, signs of weaker growth, and lots of talk about stagflation” (Jim Reid, Deutsche Bank investment strategist, 2021/10/03)

After a 75% post-COVID bounce in 18 months, perhaps equity investors should worry. Especially as we are in the month of October, when equity markets have not always been at their best.

Why worry?

Energy crisis?

“The world consumes oil but isn’t ready to invest in it. As a result there is a risk of a severe deficit of oil and gas.” (Igor Sechin, CEO Rosneft 2021 04)

European benchmark natural gas prices have risen 3000% over the same 18-month period as the equity bounce. UK natural gas is +2700% and US natural gas is only +311%. Brent crude oil is +391% and diesel is +270%. Coal is +543%. And there is little chance of additional supply in the event of a colder than usual northern hemisphere winter.

European natural gas price (2018 – 2021)

Source: TradingView

In addition, the global transition from fossil fuels to renewable sources of energy is happening too fast for the economy to adapt, and is amplifying other bottlenecks in the economy. The cost pass-through is causing businesses to shut down. China is paying businesses to shut down in order to divert energy to critical consumers, and the effects are being felt from industrial metals (smelters are heavy consumers of electricity which, as an aside, is why Iscor is no more in SA) to construction (Evergrande).

Supply chain issues?

“Behave normally, don’t panic buy!” UK transport minister tells Britons queuing for fuel as BP shuts gas stations (2021/09/17).

From retail to wholesale, the fuel price squeeze is being felt across the global economy. Around 80% of global trade by volume and over 70% of global trade by value is carried by sea. The Baltic Dry Index provides a benchmark for the price of moving the major raw materials by sea. This index has risen 1170% over the same period.

Baltic Dry index (2018 – 2021)

Source: TradingView

Weaker Growth?

Higher energy prices have a similar effect as a tax on the economy. The result is slower growth.

Talks of stagflation?

As a result of a decade of post-GFC QE and looming post-COVID fiscal stimulus, the global economy has adequate demand. The problem is on the supply-side. Commodity producers have been disciplined as the capital markets have insisted post-2008 GFC and have paid dividends instead of spending profits on capex. This is why the USA fracking industry has not been able to respond to rising crude oil prices as nimbly as they were able to before the price war between Saudi Arabia and Russia bankrupted them in 2016.

The rising energy price volatility will increase the price volatility in other areas of the markets, complicating the monetary authorities role of interpreting what is ‘transitory’ and what is real.

If we have rising prices but underwhelming growth, stagflation – the worst possible result – might not be far behind.

The Wall of Worry should indeed be giving more people sleepless nights.

A note by the author:

This commentary is not a prediction of stagflation or an equity crash. It is simply alerting equity investors to the fact that they have been fortunate to have enjoyed remarkable returns over the last 18 months, and the next 18 months might not be as profitable.


Andy Pfaff

Head of Commodities & Trend Analyst




A note by Roeloff Horne – Head of SA Portfolio Management

We respect Andy Pfaff’s input as a Global Trend Analyst and Commodity specialist within our team. The current energy crisis is part of a ‘heated’ weekly debate within our team. While the risks of an economic slowdown due to the current energy crisis is very real, we are mindful that the current supply & demand dynamics in many global industries can be transitory due to the global lockdown and Covid-19 impact on production, shipping, and inventories. It is also fair to assume that part of the current dynamics in the energy crisis is a realisation that due to a cold January 2021, inventories/orders are driven to stock-up ahead of another expected cold Northern Hemisphere winter at year end. Some commentators also highlight some geo-political ploys of influence (eg.OPEC) in terms of oil/gasoline prices.

Certain resource companies are bearing the fruit from the current scenario and are expected to be even more profitable. Our portfolios are tilted to be overweight SA Resource counters and many of the beneficiaries of the energy crisis are benefiting our portfolios at present. We are very mindful to manage risks within our portfolios and are constantly reviewing the asset class risks within our portfolios and underlying managers.

The current MitonOptimal view in terms of inflation and its impacts is best described as follows: The inflation debate is not as straight forward as “transitory vs structural”. We’ve got so many moving parts here, it’s oversimplistic to suggest that it’s fully structural or fully transitory. The fact of the matter is that a lot of the things that are pushing inflation numbers around are a mixture of both. So, the conclusion from all of this is that, yes, you are going to see higher inflation with a structural element to that. But that doesn’t mean that you are going to have a run-away inflation rate, the truth is probably somewhere in between.


The content of this article is for information purposes only and does not constitute an offer or invitation to any person. The opinions expressed are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith, but no representation is made as to their accuracy, completeness or correctness.

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